AGILEVC My idle thoughts on tech startups

February 20, 2014

Like most folks in the tech ecosystem, I’m still slightly slack-jawed this morning by the announcement late yesterday that Facebook is buying WhatsApp for approximately $19 billion in total consideration.  There are so many remarkable aspects of this event… from the sheer size, to founder Jan Koum’s personal story, to the way it caught most people by surprise, to Sequoia’s stunning return (more on that below).

As a thought exercise though I thought I’d try to put the valuation in perspective.  Clearly Facebook is buying WhatsApp for both offensive reasons and defensive/strategic reasons, as described by others.

But what if Facebook decided to monetize WhatsApp through advertising as the core Facebook service is?  I realize this may never happen and is an imperfect analogy even if it did.  WhatsApp was conceived and operated with a deep conviction opposed to interruptive ads.  Facebook has committed to keeping the WhatsApp service and brand, plus Koum will now be a meaningful shareholder and board director of Facebook so he retains far greater influence than most acquired companies.  Also there’s a number of reasons why even if Facebook inserted ads into WhatsApp that they may monetize at lower rates… straight messaging services have historically monetized worse than content sharing (think ICQ & AIM).  Furthermore WhatsApp users are predominantly in markets which have lower mobile ad spend, though Facebook similarly has a large portion of it’s base in these markets.

With that said, Facebook’s acquisition price is <10x the conceivable revenue for WhatsApp.  In it’s most recently announced quarterly results (for Q4 2014), Facebook generated approximately $5B in annualized revenue (1) from mobile ads across 945 million MAUs (monthly active users) on mobile.  This works out to $5.25 in annual mobile ad revenue per MAU.  If you apply that to WhatsApp’s 450 million MAUs you’d get $2.4 billion in annualized revenue.  Viewed through this lens, Facebook’s acquisition price of $19 billion is something like 8x conceivable revenue.

Again I’m not predicting that Facebook is just going to insert its existing ad formats into WhatsApp, and it may never monetize the service to this degree.  I’m also not suggesting that we should apply Facebook’s revenue/user as a “conceivable” revenue metric to every mobile messaging service… most will never monetize at anywhere near that high a level.  But a lot of people also underestimated Google’s ability to monetize YouTube when they paid $1.5 billion for it.  That’s no longer the case… estimates range from $3-5+ billion for YouTube’s ad revenue in 2013.

Lastly, hats off to the folks at Sequoia.  Not just for backing an exceptional team or generating a stupendous return (>$3B proceeds).  They had conviction about this company and concentrated their capital in it, and as a result no other VC had the opportunity to see it after Sequoia’s initial investment.  It would have been easy to let another firm lead the $50M round at a $1.5B valuation and still have a hugely valuable stake in WhatsApp, but Sequoia just tripled down on a company they believed in.  This takes deep conviction and the willingness to do what some others may not.  Kudos to them.

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(1) $2.34B in quarterly revenue, of which 53% was mobile is $1.24B, which is $5.0B on annualized basis

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