What can founders actually take away from Whatsapp’s massive exit to Facebook?
Last week, a question was asked at a panel discussion in which I took part. It was another variant of the same question that has been asked by a lot of people in a lot of places:
- What do you think of Facebook’s $19 billion acquisition of Whatsapp?
- Did Facebook overpay?
- Is Whatsapp really worth $19 billion?
- Does Whatsapp prove that we in a valuable bubble?
- Nineteen billion – are you kidding?
My answer is simple: I don’t know if Whatsapp is worth $19 billion or not. Like most people, I’m not privy to Whatsapp’s internal metrics or to Facebook’s strategic calculations. So why am I blogging about Whatsapp?
I think the real question for most of us is this: What can I learn from the Whatsapp transaction as an entrepreneur or a VC that might be relevant for my day-to-day work?
When we look through that lens, I think there are three main lessons for the rest of us:
First, Whatsapp reminds all of us of the adage that great companies are bought and not sold. Whether or not the valuation of Whatsapp was too high or not, part of what drove the valuation for Whatsapp was certainly that it had become deeply strategic to the company that bought it. The same is true of Google’s Waze acquisition, Google’s Nest acquisition, Rakuten’s Viber acquisition, and nearly every other big headline-grabbing acquisition. Every entrepreneur and investor in every startup ignores this observation at their peril.
One of the many paradoxes of entrepreneurship is that great CEOs need to simultaneously never think about the exit (to concentrate on building) and always think about the exit to make sure they don’t miss an opportunity to maximize enterprise value for their shareholders.
I’m not advocating an obsession with building for an exit – not at all – but Whatsapp is an unmistakable reminder that the value of your startup (in an acquisition) is the value that an acquirer sees in your business, your technology, your team, your promise, etc. It’s not just the value of your EBITDA that gets acquired (and certainly not your “revenue” as Bill Gurley has passionately pointed out). By thinking carefully about the dynamics of an acquisition scenario, you can maximize your exit by taking concrete steps to position your companies in someone else’s sweet spot – ideally that of several potential acquirers.
For more thoughts on the “bought vs. sold,” see here from Ed Sim (parts 1 and 2), Fred Wilson, Raju Reddy, and (a contrarian view) from Ryan McFadden.
Second, Whatsapp illustrates the shift in financing patterns brought about by the global IP infrastructure roll-out and the ever-increasing power of software to create value. To explain what I mean by that, let’s look at what Whatsapp managed to do, and lets focus on some of the four numbers that Sequoia used to explain the acquisition. In short, Whatsapp managed to build a user base of 450 million people with only 32 engineers (55 employees), zero marketing spend, and around $60M in total venture investment. For a sense of scale, let’s look at the world’s top three mobile carriers by subscriber volume:
- China Mobile has 763M subscribers.
- Airtel (India) has 487M subscribers.
- Vodaphone (UK HQ) has 453M subscribers.
So Whatsapp built a user base equivalent in size to the third largest mobile carrier in the world. In five years. With $60M in financing. And 55 people.
“But wait!” you’ll argue. “That’s not a fair comparison. Whatsapp is an app and the mobile carriers are infrastructure providers. They have to build and manage a very expensive network of base stations and cable and servers…”
That, I think, is exactly the point. Twenty years ago, if you wanted to build an application (say voice calls, or SMS or pagers) that would connect 450 million people, you would have had to spend billions of dollars on spectrum, right of way, equipment, manpower, etc. And it would have taken years to get up and running. Not to mention the expense of explaining to people why they should allow new technology into their lives and pay for it.
Today, all of that infrastructure has been built already. The “dumb pipes” which carry our smart applications exist. Ubiquitous internet connectivity in our homes, offices, cars, and hands is the infrastructure on which applications get built. Not unlike the roll out of the first nationwide electrical networks (a technology revolution in which my great-grandfather played a role in the 1930s). You can’t sell a GE lightbulb or microwave until enough houses are wired up with electricity. And you can’t roll out a Whatsapp (or a Waze or a Viber or an Uber or a Hotel Tonight or even a Nest) until everyone has a smartphone in the palm of their hands, Wifi, and a 3G connection. But now they do. And now you can. So the second unambiguous lesson from Whatsapp is that we live in a world of ubiquitous IP infrastructure – and there are tremendous rewards for those that can leverage it with software and new devices applications.
The third lesson from Whatsapp is that as software eats the world, the working capital required to grow a tremendous business is sometimes far less than what it has historically been. Whatsapp built a kind of (OTT) telecommunications company with only $60M in investment. The existence of app stores, low operational costs, increasing comfort with new technologies, and the fact that we are all turning into early adopters dramatically eased Whatsapp’s path to growth. True, average revenue per user is only $1/year, but marketing costs are close to zero – and I’ll take that CAC/LTV ratio any day. I think this general observation applies to a great number of companies – and not just in the consumer world. Salesforce pioneered the SaaS model and showed that if adoption frictions were lowered far enough, a whole new generation of business users would be willing to try-and-buy enterprise software from the grassroots up as opposed to from the CIO’s office down. For example, I met an Israeli company last week that had reached over $6M in annualized recurring enterprise revenue with only $6M of investment and was approaching breakeven. We are talking about enterprise sales here – but far more efficiently than was previously the case. SaaS payment structures, cloud-delivered software, and open-source/freemium penetration strategies have revolutionized marketing, even for some of the hardest enterprise applications. We live in a world of increasing marketing and sales efficiency. The primacy of technology has led to a widespread realization that you either adopt new technology early or get left behind - and that shift in mindset is a technology marketer’s best friend.
So yes, some of the insane valuations we are seeing in the valley are a result of a bubble mentality and a fear of missing out. But some of them actually reflect the fact that the best software companies in both the consumer world and the enterprise world have been able to scale their businesses far more efficiently than previously. This means that when a company raises capital to enable further growth, they may be further down their growth curve than one might assume. In the 1990s, enterprise software companies might raise a $5M A-round in order to secure their first handful of paying customers. In the 2010s, we are seeing enterprise software companies raising $10M A-round after having achieved $2-3M in recurring revenue and an installed base of thousands.
As a caveat, we must guard constantly against the utopian belief that technology has created “new economics.” This cognitive error contributed to the first dotcom bubble and crash around 2000. But, at the same time, we must recognize that technology has, in fact, changed the landscape on which companies compete. It may be harder to find true barriers to entry, and harder to differentiate – but for companies that have achieved the beginnings of scale – growths seems to happen faster and more efficiently today than ever before.
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17th March 11:36 AM