ENTREPRENEURSHIP

Exclusive: The Rags-To-Riches Tale Of How Jan Koum Built Whats App Into Facebook's New $19 Billion Baby Jan Koum picked a meaningful spot to sign the $19 billion deal to sell his company Whats App to Facebook earlier today. Koum, co-founder Brian Acton and venture capitalist Jim Goetz of Sequoia drove a few blocks from Whats Apps discreet headquarters in Mountain View to a disused white building across the railroad tracks, the former North County Social Services office where Koum, 37, once stood in line to collect food stamps. Thats where the three of them inked the agreement to sell their messaging phenom which brought in a minuscule $20 million in revenue last year to the worlds largest social network. Koum, who Forbes believes owns 45% of Whats App and thus is suddenly worth $6.8 billion (net of taxes) -- was born and raised in a small village outside of Kiev, Ukraine, the only child of a housewife and a construction manager who built hospitals and schools. His house had no hot water, and his parents rarely talked on the phone in case it was tapped by the state. It sounds bad, but Koum still pines for the rural life he once lived, and its one of the main reasons hes so vehemently against the hurly-burly of advertising. At 16, Koum and his mother immigrated to Mountain View, a result of the troubling political and anti-Semitic environment, and got a small two-bedroom apartment through government assistance. His dad never made it over. Koums mother had stuffed their suitcases with pens and a stack of 20 Soviet-issued notebooks to avoid paying for school supplies in the U.S. She took up babysitting and Koum swept the floor of a grocery store to help make ends meet. When his mother was diagnosed with cancer, they lived off her disability allowance. Koum spoke English well enough but disliked the casual, flighty nature of American high-school friendships; in Ukraine, you went through ten years with the same, small group of friends at school. In Russia, you really learn about a person. Koum was a troublemaker at school but by 18 had also taught himself computer networking by purchasing manuals from a used bookstore and returning them when he was done. He joined a hacker group called w00w00 on the Efnet internet relay chat network, squirreled into the servers of Silicon Graphics and chatted with Napster co-founder Sean Fanning. He enrolled at San Jose State University and moonlighted at Ernst & Young as a security tester. In 1997, he found himself sitting across a desk from Acton, Yahoo employee 44, to inspect the companys advertising system. You could tell he was a bit different, recalls Acton. He was very no-nonsense, like What are your policies here; What are you doing here? Other Ernst & Young people were using touchy-feely tactics like gifting bottles of wine. Whatever," says Acton. "Lets cut to the chase. It turned out Koum liked Actons no-nonsense style too: Neither of us has ability to bullshit, says Koum. Six months later Koum interviewed at Yahoo and got a job as an infrastructure engineer. He was still at San Jose State University when two weeks into his job at Yahoo, one of the companys servers broke. Yahoo co-founder David Filo called his mobile for help. Im in class, Koum answered discreetly. Filo had a small team of server engineers and needed all the help he could get. I hated school anyway, Koum says. He dropped out. When Koums mother died of cancer in 2000 the young Ukrainian was suddenly alone; his father had died in 1997. He credits Acton with reaching out and offering support. He would invite me to his house, Koum remembers. The two went skiing and played soccer and ultimate Frisbee. Over the next nine years, the pair also watched Yahoo go through multiple ups and downs. Acton invested in the dotcom boom and lost millions in the 2000 bust. For all of his distaste for advertising now he was also deep in it back then, getting pulled in to help launch Yahoos important and much-delayed advertising platform Project Panama in 2006. Dealing with ads is depressing, he says now. You dont make anyones life better by making advertisements work better. He was emotionally drained. I could see it on him in the hallways, says Koum, who wasnt enjoying things either. In his LinkedIn profile, Koum unenthusiastically describes his last three years at Yahoo with the words, Did some work. In September 2007 Koum and Acton finally left Yahoo and took a year to decompress, traveling around South America and playing ultimate frisbee. Both applied, and failed, to work at Facebook. "We're part of the Facebook reject club," Acton says. Koum was eating into his $400,000 in savings from Yahoo, and drifting. Then in January 2009, he bought an iPhone and realized that the seven-month-old App Store was about to spawn a whole new industry of apps. He visited the home of Alex Fishman, a Russian friend who would invite the local Russian community to his place in West San Jose for weekly pizza and movie nights. Up to 40 people sometimes showed up. The two of them stood for hours talking about Koums idea for an app over tea at Fishmans kitchen counter. Jan Koum signs the $19 billion Facebook deal paperwork on the door of his old welfare office in Mountain View, Calif. (Photo courtesy of Jan Koum) Jan was showing me his address book, recalls Fishman. His thinking was it would be really cool to have statuses next to individual names of the people. The statuses would show if you were on a call, your battery was low, or you were at the gym. Koum could do the backend, but he needed an iPhone developer, so Fishman introduced Koum to Igor Solomennikov, a developer in Russia that hed found on RentACoder.com. Koum almost immediately chose the name Whats App because it sounded like whats up, and a week later on his birthday, Feb. 24, 2009, he incorporated Whats App Inc. in California. Hes very thorough, says Fishman. The app hadnt even been written yet. Koum spent days creating the backend code to synch his app with any phone number in the world, poring over a Wikipedia entry that listed international dialing prefixes he would spend many infuriating months updating it for the hundreds of regional nuances. Early Whats App kept crashing or getting stuck, and when Fishman installed it on his phone, only a handful of the hundreds numbers on his address book - mostly local Russian friends - had also downloaded it. Over ribs at Tony Romas in San Jose, Fishman went over the problems and Koum took notes in one of the Soviet-era notebooks he'd brought over years before and saved for important projects. The following month after a game of ultimate frisbee with Acton, Koum grudgingly admitted he should probably fold up and start looking for a job. Acton balked. Youd be an idiot to quit now, he said. Give it a few more months. Help came from Apple when it launched push notifications in June 2009, letting developers ping users when they werent using an app. Jan updated Whats App so that each time you changed your status Cant talk, Im at the gym it would ping everyone in your network. Fishmans Russian friends started using it to ping each other with jokey custom statuses like, I woke up late, or Im on my way. At some point, it sort of became instant messaging, says Fishman. We started using it as Hey how are you? And then someone would reply. Jan watched the changing statuses on a Mac Mini at his townhouse in Santa Clara and realized hed inadvertently created a messaging service. Being able to reach somebody halfway across the world instantly, on a device that is always with you, was powerful, says Koum. The only other free texting service around at the time was BlackBerrys BBM, but that only worked among BlackBerries. There was Googles G-Talk and Skype, but Whats App was unique in that the login was your own phone number. Koum released Whats App 2.0 with a messaging component and watched his active users suddenly swell to 250,000. He went to see Acton, who was still unemployed and dabbling in another startup idea that wasnt going anywhere. The two sat at Actons kitchen table and started sending messages to each other on Whats App, already with the famous double check mark that showed another phone had received a message. Acton realized he was looking at a potentially richer SMS experience and more effective than the so-called MMS messages for sending photos and other media that often didnt work. You had the whole open-ended bounty of the Internet to work with, he says. He and Koum worked out of the Red Rock Cafe, a watering hole for startup founders on the corner of California and Bryant in Mountain View; the entire second floor is still full of people with laptops perched on wobbly tables, silently writing code. The two were often up there, Acton scribbling notes and Koum typing. In October Acton got five ex-Yahoo friends to invest $250,000 in seed funding, and as a result, was granted cofounder status and a stake. He officially joined on Nov. 1. (The two founders still have a combined stake in excess of 60% a large number for a tech startup and Koum is thought to have the larger share because he implemented the original idea nine months before Acton came on board. Early employees are said to have comparatively large equity shares of close to 1%. Koum wont comment on the matter.) The pair were getting flooded with emails from iPhone users, excited by the prospect of international free texting and desperate to Whats App their friends on Nokias and BlackBerries. With Android, just a blip on the radar, Koum hired an old friend who lived in LA, Chris Peiffer to make the BlackBerry version of Whats App. I was skeptical, Peiffer remembers. People have SMS, right? Koum explained that peoples texts were actually metered in different countries. It stinks, he told him. Its a dead technology like a fax machine left over from the seventies, sitting there as a cash cow for carriers. Peiffer looked at the eye-popping user growth and joined. Through their Yahoo network, they found a startup subleasing some cubicles on a converted warehouse on Evelyn Ave. The whole other half of the building was occupied by Evernote, who would eventually kick them out to take up the whole building. They wore blankets for warmth and worked off cheap Ikea tables. Even then there was no Whats App sign for the office. Their directions were Find the Evernote building. Go round the back. Find an unmarked door. Knock, says Michael Donohue, one of Whats Apps first BlackBerry engineers recalling his first interview. With Koum and Acton working for free for the first few years, their biggest early cost was sending verification texts to users. Koum and Acton were using cutthroat SMS brokers like Click-A-Tell, who'd send an SMS to the U.S. for 2 cents, but to the Middle East for 65 cents. Today SMS verification runs the company about $500,000 a month. The costs werent so steep back then, but high enough to drain Koums bank account. Fortunately, Whats App was gradually bringing in revenue, roughly $5,000 a month by early 2010 and enough to cover the costs then. The founders occasionally switched the app from "free" to "paid" so they wouldn't grow too fast. In Dec. 2009 they updated Whats App for the iPhone to send photos and were shocked to see user growth increasing even when it had the $1 price tag. You know, I think we can actually stay paid, Acton told Koum. By early 2011 Whats App was squarely in the top 20 of all apps in the U.S. App Store. During a dim sum lunch with staff, someone asked Koum why he wasn't crowing to the press about it. Marketing and press kicks up dust, Koum replied. It gets in your eye, and then youre not focusing on the product. Venture capitalists didnt need the press to tell them Whats App was going viral. Koum and Acton were batting away all requests to talk. Acton saw VC funding as a bailout. But Sequoia partner Jim Goetz was persistent, spending eight months working his contacts to get either founder to engage. Hed met with a dozen other companies in the messaging space like Pinger, Tango, and Baluga, but it was clear Whats App was the leader, and to Goetzs surprise the startup was already paying corporate income taxes: The only time Ive seen that in my venture career. He eventually sat down with Koum and Acton at the Red Rock Cafe, answered a barrage of their questions and promised not to push advertising models on them but act as a strategic advisor. They eventually agreed to take $8 million from Sequoia on top of their $250,000 seed funding. Two years later in Feb. 2013, when Whats Apps user base had swelled to about 200 million active users and its staff to 50, Acton and Koum agreed it was time to raise some more money. For insurance, says Acton, who recalled that his mother, who ran her own freight forwarding businesses, used to lose sleep over making payroll. You never want to be a position where you cant make payroll. They decided to hold a second funding round, in secret. Sequoia would invest another $50 million, valuing Whats App at $1.5 billion. At the time Acton took a screenshot of Whats Apps bank balance and sent it to Goetz. It read $8.257 million, still, in excess of all the money, theyd received years before. Now with an even bigger number in his bank account, Acton went to a local landlord, interested in leasing a new three-story building around the corner. The landlord didnt know who Whats App was, but the money talked. The new building is now under construction, and Whats App will move in this summer as its staff doubles to 100. In early February 2014, Koum zooms past the new building in his Porsche on the way to a boxing class that he often misses, and is now late for. Will, he finally put up a Whats App sign? I cant see a reason for there being a sign. Its an ego boost, he scoffs. We all know where we work. Later he pulls up to nondescript block building in San Jose, grabs a gym bag and walks into a dimly lit gym for a private lesson with a diminutive, gum-chewing coach standing next to a boom box blasting rap music. He likes Kanye, the coach says smiling. He holds two mitts up high as Koum throws slow but powerful punches. Every few minutes Koum sits down for a break, slipping the gloves off and checking for messages from Acton about Whats Apps servers. Koums boxing style is very focused, the coach says. He doesnt want to get into kickboxing like most other students but just get the punching right. You could say the same for a certain messaging service that wants to be as straightforward as possible. Its true, Koum says, ruddy-faced as he puts on his socks and shoes. I want to do one thing, and do it well. Ryan Mac and Kerry Dolan contributed reporting for this story.

1.1 Identify some of the key lessons Koum learned whilst owning What App. How have these lessons impacted on him? (10) 1.2 What would you consider to be the key characteristics of an entrepreneur that Koum possesses (10) 1. 3. Discuss the concept of disruptive innovation using examples from the article. (15)