Chat N' More

Everything that can be counted does not necessarily count; everything that counts cannot necessarily be counted.
— Albert Einstein (?)

I decided to start my first venture capitalist writing in the most clichéd way, that is, with a seemingly intelligent quote and backward fitting the content to it. To show my determination and sincerity, I even did due diligence on the quote and gave a writer's equivalent of "Buy Recommendation" to it by adding a question mark.

Before you praise or bash my revealing of the secret behind many posts du jour by famed bloggers whose stakes are apprently high in to keeping the site traffic up, I do have a good reason for using this quote rumored to be by our dearest Albert.

My associate Mark Bivens (Truffle Capital) and I have been debating over the merits of the various chat apps on the market for quite some time now. Even prior to the acquisition of Viber by Rakuten in February, the good nose with which Mark was blessed already smell blood.

Born an American but later self-transformed into a quintessential cosmopolitan, he is a loyal user and big fan of LINE — he did ask me not to reveal his passion for Anpanman (アンパンマン) to preserve whatever American machoness that's still left in him — while I split my time between the fabulous Japanese app and Wechat, which I use to stay in touch with my Chinese friends in the mainland. I had used Viber before and still have Whatsapp on my iPhone, but neither figures much in my daily life today.

When the Viber deal was announced, our sentiment here in the French VC industry was definitely mixed — French chat app, anyone? But the conversation quickly spiraled into valuation of various chat apps naturally and hence my quote of Einstein:

Everything that can be counted does not necessarily count; everything that counts cannot necessarily be counted.

This summarizes my sentiment about valuing an internet startup. It's a constant debate of which KPIs should be used for valuation and why. That's also how tech investment banks make their living — compared to the more mundane IPOs of PE-owned firms, it takes a lot more practice of art to sell a negative-cash-flow endeavour to the general public.

Note that not all hotshot internet startups today derive their valuations from such an art practicing. Some of them, like Uber and Airbnb, should already have positive operational cash flow. This is probably also why TPG Capital, a giant Private Equity group, recently invested $450m in Airbnb to give it a valuation at $10bn — PE funds in general don't invest in companies that will only generate positive Free-Cash-Flow in a uncertain future. Still, with chat apps it's 100% fun game for the sell side — telling a convincing story with selected KPIs.

Name Users Geography Revenue Valuation
Whatsapp 450m India: 40m
Brazil: 38m
Germany: 31m
USA: not disclosed
$20m $19bn
LINE (ライン) 300m Japan: 50m
Taiwan: 17m
Thailand: 22m
Indonesia: 20m
Spain: 16m
India: 16m
Mexico: 10m
Korea: 10m
$338m ??
Wechat (微信) 272m Non-China: 100m ??
KakaoTalk 140m S.Korea: 84m $203m ??
Viber 280m $1.5m $900m

Above is a summary table of the main chat apps in the world. The KPI most talked about in chat app valuation this year, thanks to the Viber and Whatsapp deal, has naturally been the user numbers. The respectable CEO of Rakuten, Mikitani san, talked about Viber's almost 300 million users in the deal annoucement. And when the shocking valuation of Whatsapp surfaced, all media fussed over the NPV (net present value) or the CLV (customer lifetime value) of each Whatsapp user — note to oneself: make sure to use as many abbreviations as possible when writing about something that one is not very certain about.

While there have been and always will be debates around the user numbers — active or not, new or returned, monetizable or not — the interesting thing is no one really talked about revenues. This is probably because the two deals closed so far happen to be the two apps with many users but pathetic revenues. However what seems even more bewildering to me is when the media (especially Western ones) talked about the two other apps that do have respectable revenues, LINE and KakaoTalk, they tended to downplay the revenue figures, or even dismissed the revenue sources as unsustainable.

While I have my theories about this inclination, that's not the subject of this article. As the title suggests, I'm here to talk about Wechat, the dominant and hyper-growing chat app in China.

For the overall analysis, it's important to recognize the fact: chat app is a social networking service, not just a messenger replacement. What separates a quintessential social networking service from a mere tool is the network deepens its stickiness once it gets to critical mass. Put it simply, as more of your friends use a certain service, you will be more inclined to use the same. Chat app fits perfectly in this definition, and more. To name just one among the surprisingly numerous factors that add to the chat app stickiness: keeping mulitple chat apps on your smartphones drains the power very quickly. Before long you realize you only want to keep one, at most two of them alive. 

The force of exclusion seems to be confirmed as one inspects the geography column of the table above: despite the acclaimed reliability and efficiency of the network of Whatsapp, in different geographies different chat apps dominate. LINE dominates in eastern Asian countries such as Japan, Taiwan, Thailand and Indonesia. KakaoTalk pratically monopolizes the South Korean market, just like Wechat in China. On the other hand, the supposedly most dominant of all, Whatsapp, chose not to disclose its user number in the United States while disclosing for the other countries. Viber also did not specifically break down its constituency.

This particular geographical fragmentation is particularly interesting because you don't see that in Facebook or Twitter, which follows the good old winner takes all logic. I won't say that in the future there won't be one chat app that rules them all but it's worth looking into the possible reasons behind this grand fragmentation.

First we start with the much-analyzed Whatsapp. The app and the company have proved that it does offer incredible reliability and simplicity in its services. While the old revenue model remains questionable, the loyalty of its huge amount of users at this moment is unquestionable. What's interesting is in all the announcements of performance matrices after the acquisition by Facebook, Whatsapp chose not to disclose its USA user base. This caught my eye since my experience living in US was that telephone companies make tons of money in SMS fees and I had thought that most of my American friends use Whatsapp simply to replace the ridiculously charged SMS services. This deliberate omission of data disclosure could go either way: either LINE has a scarily high percentage of US market and they've something big in the pipeline to monetize that so they do not want to disclose this piece of information, or their number is an uh-huh and the company would lose more if it's released. We will see maybe before the end of the year when Mark Zuckerberg's supposed grand plan of synergy between Facebook and Whatsapp materializes.

For LINE and KakaoTalk, one should definitely give them credit for leveraging the passion for cute things in Asia. The LINE stickers — or "stamps (スタンプ)" if you are conversing with Japanese friends — have no doubt been a huge success, accounting for 20% of the revenue. It also creates a switching cost for users — while passion for certain mobile games ebb and flow, users hold on to their favorite stickers like girls hold on to their favorite bags. While it's not clear now whether the sticker licensing rules will develope into a XBOX-PlayStation type of exclusivity for user attraction thing, LINE has at least successfully developed its proprietary rabbit-bear combo into a formiddable asset. It's entirely possible that certain LINE users would be reluctant to switch to other chat apps just because of the exclusivity of rabbit-bear stickers. Even more, as my fellow associate pointed out, real stickers inspired by the virtual couple have even showed up in the physical stores — this is the modern Disney in its original form!! Imagine if somehow LINE pulls this off and creates a franchise selling physical products that cannot be easily copied and sold? If that's a possibilty, valuing LINE would be even more difficult job, no?

Everything that can be counted does not necessarily count; everything that counts cannot necessarily be counted.

Now onto our subject: Wechat.

Some western readers might jump into conclusion and claim that Wechat only became dominant because the Chinese government selectively ban the services by its opponents. For this kind of discussion, we could ramble on all day. However, there's no questioning that Wechat as of today, is way more than a chat app — more than LINE and Kakaotalk and much more than Whatsapp.

To start with, as a venture capitalist, I follow the articles of several popular news websites such as 36kr (36氪) and huxiu (虎嗅网). Both integrate perfectly inside Wechat in the sense that you subscribe to its services and it pushes new articles to your Wechat. This sounds like a fairly ancient idea but somehow no one else got it right. Specifically, the updates pushed by, say 36kr, show up in my Wechat along with the messages from my dear Chinese friends. Wechat has been careful in lumping all such "subscription" into one account, not flooding the chat list. Still it feels as if I have a virtual friend who's been updating his thoughts to me. And all these websites seize the chance to optimize the presentation of contents — HTML5 and mobile web, anyone? — inside Wechat. These websites also all facilitate subscription on Wechat with QR codes shown on their websites. A simple scan by putting your smartphone in front of the computer screen and voilà.

And like LINE, Wechat also offers Facebook-like Timeline feature, called Moments. But the difference with LINE is the access to Moments on Wechat is more prominent than similar feature on LINE. With the banning of Facebook in China, it seems Moments is embraced keenly by my Chinese friends living in Mainland as a genuine Facebook substitute as they updated Moments actively.

Wechat further takes advantage of the affinity of Chinese to match-making and implement its easy-to-use People Nearby feature as a toned-down version of Tinder. While I don't have any first-hand experience of having any "luck" with this feature, I wouldn't be surprised if some Wechat users spent considerable amount of time scrolling through the list generated in this feature when they they checked into the hotel at a business trip destination.

There's an even more fun version of this implicit match-making features called Shake. The idea is you shake the phone and the system will find someone who is shaking his or her phone at the same time and allow you two to connect with each other!


For the part that I have yet had the chance to really try out myself, Wechat is also more aggressive in integrating the professional aspects of the users as explained in this brilliant article by Paul Bischoff on TechInAsia, "Guanxi 2.0: how WeChat groups are changing the game in China’s tech and startup scene". I like especially that he pointed out that in Chinese cultures, there's no intention to separate personal life from professional life as in the western countries. Not only does Wechat allow users to connect LinkedIn to its account, the Group function seems to play a big part in channeling more focused discussion and even mediating business conflicts.

What piqued my interest particularly is this anecdote recounted where a mediator created two separate groups first for the two parties in business conflict. After acquiring and absorbing information, he then proceeded to make initial proposals to each side before eventually merging to the two groups. The conflict was resolved in 48 hours and everything said and promised was well documented in the group conversations for possible legal follow-ups. In any case, it seems to be to be a classical example of users finding ingeneous applications to a well-designed function and it shows how far Wechat has gone ahead of the competition, at least application-wise.

As for other distinct successes that Wechat and its functions enjoy, such as the success of several flash sales on Wechat, there is enough coverage out there both on tech-centric platforms and normal press outlets that I won't repeat them here.

All in all, it's hard to shake off the idea that when Facebook started contemplating buying Whatsapp, Wechat's veritable success wasn't on their mind even if they would never admit that. While it is a simplistic argument to say Wechat has been a veritable Facebook-Whatsapp combo before there was even one such combo, there's no dismissal of its sheer momentum and limitless creativity.

Bottom line is: the battle is on and this time we might not have a global winner. What we are about to witness might be the b-school Marketing professor's dream come true — a highly fragmented user behaviors from different cultures on a simple application, leading to veritable geographical fragmentation. And the valuation of these different chat apps when one by one they hit the IPO market? Maybe we ought to reflect again on Einstein's wisdom:

Everything that can be counted does not necessarily count; everything that counts cannot necessarily be counted.

Chinese VC investments in France?