Feb. 20 (Bloomberg) -- The $19 billion deal to sell WhatsApp Inc. to Facebook Inc. started at Yahoo! Inc. more than five years ago, when Jan Koum became disillusioned at the way Internet companies were fixated on advertising.
He left Yahoo in 2007 with one of the company’s other engineers, Brian Acton, and started a company by 2009 that shuns advertising altogether. The strategy allowed them to concentrate on creating an easy-to-use messaging product instead of developing new ways to glean customer information for their marketing pitches, Koum said in a 2012 blog post.
“No one wakes up excited to see more advertising, no one goes to sleep thinking about the ads they’ll see tomorrow,” Koum said in the post. A hand-written note on the his desk reads: “No Ads! No Games! No Gimmicks!”
Their approach paid off. WhatsApp amassed 450 million monthly users -- twice as many as Twitter Inc. -- who send billions of messages a day. Yesterday, Facebook Chief Executive Officer Mark Zuckerberg bought their five-year-old company in the largest Internet deal since Time Warner’s $124 billion merger with AOL in 2001, a deal that will almost certainly make Koum and Acton billionaires several times over.
For Koum, 38, the windfall would stand in stark contrast to his years as a teenager, when his family relied on food stamps after emigrating from Ukraine. The experience of living in a country where phone lines were often tapped, instilled the importance of privacy in him, said Jim Goetz, a partner with Sequoia Capital Ltd., WhatsApp’s lone venture capital investor.
WhatsApp doesn’t collect information like name, gender, address or age. Instead, users are approved after their phone numbers are authenticated.
“It’s a decidedly contrarian approach shaped by Jan’s experience growing up in a communist country with a secret police,” said Goetz in a blog post yesterday on Sequoia’s website. “Jan’s childhood made him appreciate communication that was not bugged or taped.”
Koum will join Facebook’s board of directors once the deal goes through. Facebook declined to make him or Acton available for an interview.
The partners are old enough to remember the first dot-com bust. Acton, 42, grew up in Michigan and was employee No. 44 at Yahoo, working on advertising, shopping and travel services, according to Wired. He invested during the boom and lost millions of dollars when the market imploded, according to Forbes.
He later hired Koum at Yahoo and served as his mentor, inviting him over to his house and taking him skiing, Forbes said. After exiting Yahoo, Acton said on Twitter that he was turned down for a job at Facebook in 2009.
The two founded WhatsApp later that year with the idea that smartphone users should be able to easily message each other without incurring fees from phone carriers. The service is free for a year, then costs 99 cents per year after that.
They eschewed marketing and didn’t employ a public relations person, relying on the word-of-mouth recommendations of its users instead. The service became popular with friends and family communicating in different countries, especially in Europe, because it circumvents the fees charged by phone carriers.
“While others sought attention, Jan and Brian shunned the spotlight, refusing even to hang a sign outside the WhatsApp offices in Mountain View,” Goetz said in the blog post. “As competitors promoted games and rushed to build platforms, Jan and Brian remained devoted to a clean, lightning fast communications service that works flawlessly.”
In addition to avoiding advertising and self promotion, the two founders also mostly avoided Silicon Valley investors, and were adamant that they didn’t need any funding in 2010, according to Yoav Andrew Leitersdorf, a managing partner at YL Ventures GP Ltd. WhatsApp’s offices in Mountain View, California, were almost empty, with less than 10 desks atop stained carpeting, making the space look large, said Leitersdorf, who pitched an investment. While he met Koum and Acton and discussed the app’s growth for an hour and a half, he didn’t get the opportunity to invest.
“I was one of the few very lucky investors ever invited into that office, if you can call it that, and what I saw in Jan and Brian which I remember very clearly to this day was the most humble, intelligent, determined, in-love-with-their-baby, understated pair of entrepreneurs I have ever come across,” Leitersdorf said.
Venture capital firm Sequoia Capital invested $8 million in WhatsApp in 2011, for a more than 15 percent stake that is now worth about $3.5 billion, according to people with knowledge of the deal.
Koum’s aversion to advertising contrasts with Facebook’s efforts to make more money from people using its service on mobile devices. He said in a statement on the company’s website that WhatsApp will remain autonomous and operate independently.
“There would have been no partnership between our two companies if we had to compromise on the core principles that will always define our company, our vision and our product,” he said.
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