Facebook’s Diamond Engagement Ring

Most likely, everything that’s interesting about Facebook’s acquisition of Whatsapp today has been said (or tweeted), but here’s how I analyze the significance of the deal, particularly on a personal level:

From Zuckerberg’s perspective:

What a bold move, giving up 10% of his company and a board seat. He is sacrificing today for the chance to be stronger tomorrow. It’s like an athlete who changes a part of their technique, knowing they’ll experience a reduction in performance in the short-term, but believe it will benefit in the long-run. I also like Zuck’s pitch — keep the app independent, let it grow, and entice the new team with the lure of scale, of teaming up to continue to distribute social products to users around the world.
So many early-stage founders overvalue the equity in their startups. This is reflected, in part, by how easy it is in today’s environment to raise funds but how hard it is to build a team. Given that context, Zuckerberg’s move is extremely bold, to assign such a value on his target and to concede that value for the long-term. Even many founders who have paltry user numbers for products wouldn’t make such a move.
Idealism aside, Facebook’s stock price is soaring now, and I think it will hit $200bn market cap this year, if not more. It’s a good time to convert some of that goodwill into buying powerful assets. By giving up mostly stock, a decent chunk of cash, and then some restricted stock units, Zuck ensures he doesn’t break the bank for the acquisition, ensures the team will be around for a while, and effectively sells company stock at a high in order to lure in a big fish.
Whatsapp’s signature success isn’t really scale — though their scale is impressive. The signature success is mobile engagement. There are three important “-ments” in mobile: Installment (you have to get on the phone), Engagement (you have to get users to open and use the app), and Attachment (users who use the app many times in a day). Whatsapp is one of the few apps that had all three in spades.
From a product perspective, Facebook cares most about pictures (Instagram) and messaging (Messenger). With Instagram, they have access to your mobile photo rolls, and now with Whatsapp, they can leverage your phone’s address book and your networks from other email addresses.

From the Whatsapp founders’ perspective:

(Their rationale seems pretty obvious! I still get can’t over how one founder was on food stamps at one time, and the tweets of rejection from the other. Too good to be true.)

From the perspective of current Facebook employees:

When Instagram was acquired, there was some chatter about then-current employees being miffed that this small team of 13 people would come into Facebook pre-IPO. What now? All of a sudden, 10% of the company is now implicitly a reflection of this new acquisition, the incoming employees are likely going to be filthy rich, and own a good chunk of Facebook stock. Could this precipitate people at Facebook who are maybe disgruntled as a result to leave the social network? Does an acquisition this big affect company culture and knitting?

From Wall Street’s perspective:

We’ll see in a few hours how the street likes the deal. I think they will because Facebook is stockpiling arms for the mobile race with Parse, Onavo, and Instagram, and now they add one of the crown jewels of the mobile app world. My belief is that this will give them a bump and push them closer to their $200bn target for this year I’ve been anticipating.
Unlike many other technology executives, Zuckerberg is listening to the street when it comes to mobile. Their mobile app installment solution is crushing it, and they haven’t even gotten into engagement ads for apps already on our phone.

The investor’s perspective:

In venture, firms want home runs. The bigger funds want a grand slam. For Sequoia, this deal was like hitting two grand slams in one inning.
Speaking of Sequoia, many people don’t realize, but the firm is huge and extremely sophisticated — they have a full-team hedge fund, and now through this transaction, they are a large owner in Facebook, a company they were never able to invest in as a private company, but a company that is on pace to grow 4x as a public company, and the more liquid environment of a public tech hedge fund, could pay off yet again for the Sand Hill firm.
I can confirm that many big time hedge funds wanted to pump money into Whatsapp over the last 18 months. The company rebuffed all of those overtures.
Everyone knows Whatsapp is a big deal, but I’d doubt informed people knew (1) just how much it could be valued at and (2) who the founders are. In reading through their stories and tweets, I’m in awe of their quiet resolve. The tone of their tweets and personal stories are a delight to read in these heady times.
Network effects on the web are incredible (LinkedIn, eBay, etc.). Network effects on mobile platforms are insane!

Miscellaneous:

People will naturally now ask about Line, Kakao, Path, and WeChat, etc because they’re all in the same category. I don’t know the details for each one, but there is decent speculation that some of these apps have grown in ways that are very different than Whatsapp’s path despite their engagement — that is, there are lots of institutions funding the customer acquisition numbers and those users potentially are not organic and therefore some may not be fully engaged, if opening the app at as much as Whatsapp, though some certainly are.
Lots of speculation about Snapchat, now that one big bidder may be off the table. Will Google or another player scoop them up (and that will compared and benchmarked endlessly to this deal), or will they try to monetize their app, or will a conglomerate like Tencent go after them?
Speaking of Tencent, which owns WeChat, which dominates China and other markets — it’s known that Whatsapp had a strong foothold in India, a market Facebook cares about and cannot access through the web as easily. What about China? That’s a much tougher nut to crack.
What will happen to the user experience inside Whatsapp? For now, I’m guessing nothing will change, but then again, eventually Instagram on the web was connected to our Facebook pages. We’ll have to wait and see if Facebook integrates Whatsapp back into their core systems, and if so, how and when.
Bloggers will love this story for weeks. It’s extremely rich in many ways. And, it will sink in, over months, just how huge and unusual this deal is, like Haley’s comet, perhaps.
To me, this deal is all about one thing: Mobile Engagement. A small handful of apps truly have engagement, and Mark Zuckerberg found the app with the most and put a ring on it.