WhatsApp Doc — Jim’s take on it.

By now, everybody in the galaxy is aware that Facebook is paying some $19 billion in cash and stock for chat application vendor WhatsApp. Congratulations, Sequoia. Great exit for a great group of venture guys. Congratulations to the WhatsApp team as well, $355 million per employee is a terrific outcome. There will be a metric TON of folks opining on this deal from the win/loss perspective, so there is no need for me to belabor the point here. I’d pay particular attention to anything thatMark Shuster writes on this topic, or anything that Dave Kellogg writes. From the middle market, I look at this as a cautionary tale for several reasons.

For Founders — it matters who owns you and who buys you.

There is no doubt that Sequioa was going to take this deal, $19 BILLION for a company that was MAYBE generating $350 million in revenues (best case) and no profits. Did the founders want to sell? Probably. However, they famously eschewed advertising dollars, public marketing efforts and anything else that made them look like everybody else in the social media space. They gave their users a free year of usage for WhatsApp and then charged $1/year after that. Seems like they were very strong in the international market where SMS charges were expensive and WiFi access was cheap – so $1/year is a GREAT price. But they weren’t making any profits at a $1/year. They sold the company to Facebook and you can bet your “likes” that Zuckerberg has plans for WhatsApp well beyond charging a dollar per year to those customers. Zuck gave the WhatsApp founders a seat on Facebook’s board as part of the deal. That way they’ll get a front row seat for the show. The WhatsApp software has access to ALL OF YOUR CONTACTS. The ultimate social graph. Let the monetizing begin. As founders they may no longer care what happens at a price of $19 Billion. If they do care, well, the emperor knows that the rebel fleet ain’t on Dantoine.

For Middle Market Customers

WhatsApp isn’t really a business-to-business software application – although it could be used that way. The parallel here is that as a customer you need to be really careful about which applications you build your business around, especially venture-backed businesses. Once the venture guys sell the company to a Google or a Facebook or an Oracle, things are going to change. And they are going to change for the better of the new owners, not the customers. So make sure that you have a backup strategy in place, because you may not be hapy with the new boss. In real life it’s not like the Who promised that it would be — the new boss AIN’T ALWAYS LIKE THE OLD BOSS.

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