How five friends turned $250,000 into $304 million in just 5 years

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In 2009, after almost a decade at Yahoo!, a couple of (very smart) friends decided to quit their jobs and look for something new. After some time off, they applied to interview at Facebook but both were rejected (the irony of this will become clear later). That same year, one of the two friends, Jan Koum, bought his first iPhone. He was fascinated by the launch of the app store and immediately saw its enormous potential. He thought it would be cool to create an app that let you show a “status” to your contacts, so they knew what you were up to. If you haven’t guessed it already, this was the moment WhatsApp was born.

The first months were a real slog! Koum struggled with app crashes and battery drainage issues constantly, leaving his friends who helped him test the app feeling unenthusiastic about it. Jan had considered dropping the project completely but long time friend Brian Acton persuaded him to stick with it. Fast forward to 2009 when Koum released version 2.0 which included a messaging feature so users could communicate with each other. Only 3 months earlier Apple had launched push notifications. This enabled WhatsApp users to communicate in real time. Messaging combined with push notifications turned out to be a big hit. Within a very short period they went from a small group of early adopters to more than 250 thousand users!

Koum struggled to cope with the newfound growth and asked Acton to come on board as a co-founder. Importantly, Acton brought with him $250,000 of investment. Sourced from 5 of their old Yahoo! colleagues, this critical funding helped Koum and Acton navigate the exponential growth they were experiencing and laid the foundations for their success.

In 2011, Jim Goetz, an investor at world renowned venture firm, Sequoia Capital, discovered WhatsApp. He immediately saw its potential and set about meeting the founders. The founders were somewhat wary of venture capital and it took Goetz almost 8 months to get a meeting… That's persistence. Eventually, the founders agreed to take an $8 million investment in return for ~15% of the company. And it didn’t take long for Goetz and Sequoia to double down; investing another $50 million in April 2013. At the time of their investment, WhatsApp had almost 250 million active users with almost a million people downloading the app, every day 🤯

Rewinding slightly to 2012, Koum received a rather mysterious email to his inbox. The subject line read “Get together?”. The sender? No other than Mark Zuckerberg. It was this email that started a two year courtship that ended in the $19 billion Facebook acquisition of WhatsApp.

Now, let’s look back on that initial $250,000 angel investment and attempt to make a hypothetical calculation of how that worked out for those investors. If we assume they invested $250,000 at a $10 million valuation, they would have purchased 2.5% of the company. 2.5% of $19 billion would be equal to $475 million, or $95 million for each investor (assuming they invested $50,000 each). But we also need to account for dilution. Each time a company raises capital, existing shareholders have their shareholding diluted. Existing investors can expect around 20% dilution during each subsequent round of funding. So their 2.5% would have been diluted to 2% during the $8 million round. Then down to 1.6% during the $50 million round.

When the dust settles, each investor would have walked away with an eye watering $61 million. That’s a 121,600% gain on their initial $50,000 investment. This is maybe the truest example of the limitless upside that can be found nowhere else but venture capital. Of course, this example is also one of the truest examples of an outlier company. Only a tiny fraction of startups become this successful. This is what's known as the power law.

You see, in venture investing, only a tiny number of investments will make up the bulk of your returns. We’ll dive deeper into this phenomenon another day but the power law is a clear lesson in just how important diversification is. Spreading your investments evenly over a long period of time is always a great strategy. The more shots you have on goal, the higher your chances of scoring an outlier.

The Unsophisticated Investor is brought to you by Scott & Rob, the founders of PitchedIt. We were both sick of private markets being a playground exclusive to the ultra-wealthy. So… we started a company to challenge the status-quo. PitchedIt’s singular focus is to unlock private markets for Millennial and Gen Z retail investors and help them build wealth through the highest performing private market opportunities.

Scott & Rob
PitchedIt Co-Founders