October 13, 2017
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The Story Kik, a chat app popular with teenagers, launched in 2010. Users flocked to it, and within a few years it was valued at a billion dollars. Then a new competitor came on the chat scene: Facebook. When Kik started struggling to grow their revenue and find new investors, they landed on a wild new idea. Now they’re betting their company’s future on creating their own cryptocurrency.
The Facts Mark Phillips wrote and performed our theme song. Build Buildings wrote and performed our special ad music. Additional music by Golden Gram, Dream Junkies, Bobby Lord, Polyrhythmics, and Takstar. David Herman and Ian Scott mixed this episode.
LISA CHOW: From Gimlet Media, I'm Lisa Chow and this is StartUp. What is it like building a social media company in a world dominated by Facebook? Facebook could copy your idea, distribute it to their billions of users, and in an instant, they've killed your business. So, what do you do if you’re trying to compete with one of the giants? One company has come up with a radical plan. Kik launched in 2010, and within a few years, it was worth a billion dollars. But its growth did not last, and things got tough for the company. So earlier this year, it decided to embrace a new trend—raising money and betting on a brand new currency through something called an I-C-O. An Initial Coin Offering. Producer Bruce Wallace has our story.
BRUCE WALLACE: If you’re not a teenager, or the parent of one, you may not have heard of Kik. It’s a chat app, kind of like WhatsApp. And when it first came out, kids loved it.
DAVID: Yeah it was awesome dude!
BRUCE: David was a sophomore in high school when Kik launched in 2010. Suddenly, all of his friends were talking about it.
DAVID: Everybody was like, ‘What’s your Kik, what’s your Kik?’ You know people ask for Kik’s before they gave you their phone number. It was great; it was really kicking.
BRUCE: Did you just say ‘kicking’?
DAVID: Yeah it was real kicking, yeah.
BRUCE: David was a big online gamer. He spent hours every day playing World of Warcraft, and he used Kik to send messages to people he was playing with: to tell them to hop online, and discuss strategy.These were the days when people got charged per text, but Kik worked on Wi-Fi instead. That was a big reason kids started using it.
DAVID: My mom would yell at my sister, ‘They charge you 30 cents a text.’ And my sister was like, ‘So what?’ She's like, ‘But you send a thousand texts a month’. That was the genius behind Kik, you know, I can talk to my friends. I don't have to get yelled at by my mom for using too much text messages. Kik's awesome, you know?
BRUCE: A lot of other teenagers thought Kik was awesome, too. When the app launched, user growth was exponential across North America. Ted Livingston, who founded Kik, watched it all happen from the company’s headquarters in Waterloo, Canada.
TED LIVINGSTON: We went zero to a million users in 15 days. And then we went from a million to two million users in seven days. There's eight of us in a room and the whole world was adopting Kik; it was pretty amazing.
BRUCE: Ted’s an unassuming guy, he’s affable, laid back. He grew up in the suburbs of Toronto. He hadn’t counted on this kind of success. But pretty soon, Kik said nearly half of all teens in the U.S. were on the app. They swarmed to it for groups chats, abundant emojis, and chatbots—that's a bot that's programmed to have simple conversations with users. Kik grew to 150 employees and opened offices in Toronto, Tel Aviv, and New York. In five years, they raised $120 million. Two years ago, when they raised their last round, the company was valued at a billion—elite territory that few startups reach. But then Kik started to sputter. The company saw a small but worrying dip in users. And damaging articles started to come out, about sexual predators using Kik to meet young people. But their biggest problem? Facebook. As chat exploded, the social media giant went all in on it, building out Messenger, and using its huge user base to become dominant in the space. When Facebook saw a feature doing well in another app, it would roll out something similar. People who follow the company call this strategy “copy-and-crush.” In 2014, the company bought WhatsApp, one of its biggest competitors, with hundreds of millions of users worldwide. By last year, things were looking pretty bad for Kik. Their user growth had slowed, and revenue was far below where it needed to be. Investors weren’t stepping up with more money. But none of their trouble was public knowledge, until Ted, with a frankness that makes him kind of unusual among CEOs, admitted it to a reporter.
TED: The reporter said, ‘Hey, we heard that there’s struggles in the space. Nobody's commenting on it. What about you guys?’ And you know I was like, ‘Yeah we're struggling.’ And I think the reporter said, ‘What, really!?’ It was sort of not the answer he was expecting.There was a lot of articles, it was big news that this unicorn company, Kik, is struggling with growth.
BRUCE: Ted says that, looking at some of the competitors out there, it’s no wonder Kik was losing ground.
TED: As a consumer. If I have a choice, you know, should I use Kik or should I use WhatsApp? WhatsApp, Facebook funds it probably to the tune of hundreds of millions of dollars per year. There's not a single ad in it, and absolutely everything in it is completely free. How are we going to make money in a world where consumers have that as an alternative?
BRUCE: Before long, Kik wasn’t the only chat company struggling publicly. Even Snapchat—with its massive user base and tons of investment—ran into challenges.
TED: Here's Snapchat. You know they've raised $2.5 billion. They have 2,000 employees and they've executed perfectly, this amazing company. And yet Facebook turns on Stories in Instagram and just overnight completely cuts off their growth. And so we said to ourselves, ‘If Snapchat can't take on these big companies who can?’
BRUCE: Ted says it’s not just rival companies that lose out in a world where Facebook owns basically every type of social media. He thinks it’s something we should all be worried about.
TED: We're going to get to a point I think where, if one company or just a few companies controlled that platform it could one day become dangerous to society. It would give one company or a handful of companies too much power to influence where society was going, should be going.
BRUCE: Ted’s a little vague about this broader threat he sees from Facebook. And at first, I wasn’t sure what he meant. But as the news has started to come out about how Russia-linked groups bought Facebook ads to try to sway the U.S. election, or when you realize that Facebook’s two billion users make it larger than every continent except Asia, that vague future Ted says he's concerned about comes into focus. Plus, there’s the fact that Ted thinks chat is going to become a bigger part of our everyday lives. He thinks before long, people will use chat for most of their day-to-day interactions. You’ll use a chat app to send emails, buy concert tickets, split the check at a restaurant, book doctors appointments. This isn’t farfetched. In China, there is already an app that does all this. It’s called WeChat, and millions of people use it. Seeing Kik under threat, and believing that it was not only in the best interest of his company—but also of the world—that it stay alive, Ted started to think about what they could do. They’d already tried to grow revenue through advertising and brand partnerships, but none of it worked. And so last year he landed on a pretty radical idea—something called an ICO.
TED: We looked at all of the options, but one by one it became increasingly clear that not only was this the best option but it was also the only option.
BRUCE: ICO stands for initial coin offering. It’s a new way of crowdfunding that’s blown up this year. In the last nine months, over 100 projects have raised a total of about $2 billion this way. That’s on par with the amount of VC money raised by early stage companies in that same time. In an ICO, people put up money to help fund some kind of project, usually a tech project. It’s a bit like a Kickstarter. Except in an ICO, what the the people who are crowd-funding the project get back is a digital currency, called a cryptocurrency. Right, so what does that mean? You may have heard the term cryptocurrency. There are a lot of them today. And to explain how they work, we’re going to look at the biggest and most successful one to date—Bitcoin. It’s the first cryptocurrency, the model for all the others, including the one Ted’s company is launching. And to help us understand Bitcoin, we have this guy.
PETER VAN VALKENBURGH (singing): ‘Wonder of wonder miracle of miracles, I took a chance and it paid off.,’ or something like that.
BRUCE: Peter Van Valkenburgh. That song is from Fiddler on the Roof, from a role he once auditioned for. He’s an actor turned cryptocurrency expert.
PETER: I’m here to talk about fake money. And other things related to Bitcoin.
BRUCE: Is it really fake, level with me?
PETER: No. Well all money is fake; it’s a mass hysteria.
BRUCE: He’s kind of joking about mass hysteria. But what he’s saying is no currency—dollars or rubles or whatever—has any inherent value. Its value comes from people agreeing that it’s valuable.
PETER: I’d say a common question is, ‘Why does it have value; it has nothing behind it?’ Well nothing actually has value behind it. Even gold, or food for that matter, has value because people want it and there's only so much of it.
BRUCE: Gold doesn’t have innate value. It would be worthless if no one wanted it. Same thing goes for dollars. And gold and dollars would also be worthless if there was an infinite supply of them. That’s why we care if people counterfeit money. So here are the first rules of creating any new currency. You need scarcity. And you need demand. The breakthrough Bitcoin’s creator made was devising a way of capping the total number of Bitcoins—here’ll only ever be 21 million of them—and tracking every single Bitcoin, so that it could never be counterfeited. So, scarcity: check. But, there wasn’t yet demand.
PETER: When Bitcoin first launched it was worthless. They were 21 million units of funny money that nobody wanted.
BRUCE: So, how do you create demand? In the case of Bitcoin, little by little. There were early adopters, people deep into internet technology and privacy. Legend has it that the first person who actually got a real thing with the currency was a guy in Florida. He paid someone 10,000 bitcoins to order him two pizzas. Pretty soon Bitcoin wasn’t only being used by anarchist types, People who loved that idea that an alternative currency could undermine big institutions like banks or, you know, the government. Bitcoin became the currency of choice for buying drugs on the dark web. Exchanges were created that made it easier for bitcoin to be changed into dollars or euros or yen. And speculators got into it. People started buying bitcoin, hanging onto it until it was worth more, and then selling it off. David, that Kik user we met before, is actually one of those people. He’d discovered Bitcoin when he was a teenager, and convinced his parents to let him use some of his college fund to buy some. Later, as more cryptocurrencies came onto the market, he invested in those, too. He’s 23 now, and trades cryptocurrency full-time. He actually asked us to only use his first name in this story, because he felt weird talking publicly about all the money he is making. And it’s kind of a crazy way to make money—spending your days following every dip and jump in a really volatile market. David told me about this one time a few months back, when he’d put some money into a cryptocurrency called Bitcoin Cash, which is kind of like Bitcoin’s younger sibling.
DAVID: I was like, ‘Wow, I could make some money off of this.’ So I bought 50 Bitcoin Cash at $300, and I got, I was sick in the hospital, and I went there. I had, like, pneumonia. It was real bad pneumonia. In Florida, right? Who would’ve guessed?
BRUCE: While he was in the hospital, the Bitcoin Cash price started to drop—from 300, to 280, to 270. He’d lost $1500, and was worried that the price was about to crater.
DAVID: I was like, ‘Oh crap, what am I doing here at the hospital getting sick, losing this money?’ And I was like, “Mom, you need to come bring my computer to me, or I can tell you how to get rid of this bitcoin cash. But I have a couple brothers and sisters still in high school, and she's busy with them—you know, band practice. It was the worst feeling in the world. I really don't know. I'm sure there are worse feelings in the world, but it's like if I was strong enough, I would have got out of my hospital bed and went to a library or borrow a hospital computer, ‘Yo can I see that real quick?’
BRUCE: One night, right before he got out of the hospital, his mom finally brought him his computer. He was asleep, so she left it on his nightstand.
DAVID: When I woke up, you know, I got on to sell it, and it shot up like $770. I was like, “Oh my god, oh my god.” I just sold it. I was just like, “OMG.” Lemme see what the calculation for that was. Hold on. So that was $470 difference times 50. I made $23,500 on that. Yeah. The previous day I thought I had lost you know $2,000 on that transaction. But I was able to pay my car off the next day, so that's a pretty good feeling.
BRUCE: Trading like this was another thing building demand for bitcoin. As that demand has grown, and as the value has grown with it, the currency's gone more mainstream. You can pay for a hotel room on Expedia with it, or buy Xbox games from Microsoft. Overstock says that people spend about $50,000 in cryptocurrency on its site each week. And all this real-world use is driving up the value of Bitcoin. As of this recording, the value of one bitcoin is over $5,000. Which means that, if the person who bought those two pizzas back in 2010, had held onto their bitcoin instead? They’d have over $50 million. Which brings us back to Kik and its CEO Ted Livingston. Seeing the success of Bitcoin and other cryptocurrencies made Ted wonder: could there be a way in here to solve our problems? Could Kik raise money by creating its own cryptocurrency? And could that be the way to keep the company alive. So earlier this year, Ted announced the startup world’s equivalent of a hail mary pass. He was on stage at a tech conference in New York City, being interviewed by a venture capitalist.
VENTURE CAPITALIST: So what did you announce at eight a.m., and who are you?
TED: I’m from Kik. Kik is one of the largest chat apps in the world, and the thing we are announcing today is a new cryptocurrency called Kin.
BRUCE: Kik’s big plan. That’s after the break.
BRUCE: So, by late last year, Ted Livingston was ready to forge a future for his company, Kik, through an ICO. The first step: creating a cryptocurrency. Kik decided to call it “Kin.” Yes, ‘kin’ like family. It would be a lot like Bitcoin, but the way of creating demand for it would be different. More deliberate. Ted decided they would make Kin useful in the app. People would be able to buy and sell things with it, creating a whole separate financial world. Ted was inspired by an experiment they’d done a couple of years earlier with something they called Kik points.
TED: Kik points was a digital currency that we created and built an economy around inside of Kik. So it started out, there was one way to earn Kik points, which was to watch ads, and there was one way to spend Kik points, which was to buy smileys.
BRUCE: Smileys were a kind of emoji that you could only get with Kik points.
TED: From there we built more and more ways to earn Kik points and more and more ways to spend Kik points. And we got millions of mainstream consumers earning and spending in this digital currency.
BRUCE: This idea probably isn’t totally unfamiliar to you. It also happens in video games, or social network games, like Farmville. Anyway, with Kin, Ted thought he could take Kik points a step further. He could make it a cryptocurrency, which meant it would have value outside of Kik. It would trade on exchanges, and sell for real US dollars. Just like Bitcoin, there would be a limited supply of it. And so, it would rise in value over time, assuming there was demand. So how would they get Kin into the hands of Kik’s millions of users in the first place? Well, just like with Kik points, there would be ways to earn it. For example, the company could give users a few Kin in return for moderating a group chat, or posting a video that gets a lot of traffic.
TED: Today, as a consumer, you know, we're providing value to all these huge services. You know, we're posting photos and we're liking stuff and we're commenting. We're creating all this value but we're doing it all for free.
BRUCE: Ted says that under the new system, developers—like the ones who built the chatbots that helped make Kik a hit early on—they’ll also be getting paid in Kin. They’ll get some from Kik, and the hope is that users will start to pay developers too—giving them Kin in return for using a popular chatbot, or for special stickers or emojis.
TED: You create this amazing place for consumers to come together and to provide value to each other, whether that's around sports or games or livestream, it doesn't matter what it is. If you do that, you will get compensated. We think there could be a future with thousands—tens of thousands, hundreds of thousands of digital services that are all catering to a very specific audience around a very specific interest, and making a living from it.
BRUCE: So this is Kik’s plan. Jumpstart this chat universe where developers are making money building different ways for users to interact, and users are buying those new things and getting paid for their activity, too. It will be like a little economy, inside the app. And as all these new features get created, Kik gets more users. That use drives up the value of Kin, just like the value of Bitcoin rose as people found more ways to use it. Kik will capitalize on the rising value by holding onto a certain amount of Kin. 30% of it. This is what Kik envisions as the long term solution to their money problem. They reap the rewards as their stack of Kin climbs in value. So instead of making money in ad revenue, or subscriptions, or fees, Kik is betting on its currency. Ted first started talking about this grand theory of how to save Kik a year-and-a-half ago. And at the time, his investors thought it was pretty crazy.
TED: The investors, I tell them about this, and they’re like, ‘So we're going to build an economy around a new cryptocurrency, and we're not going to make any revenue. Is that what you're saying?’ I’m like, ‘Yeah yeah yeah, that’s what we’re gonna do. ’
BRUCE: Not long after that, though, startups began to raise the first eye-popping amounts of money through ICOs. One raised $35 million in less than 30 seconds. A few months later, a project that was pretty early-stage and theoretical raised $230 million. Soon, Kik’s investors were on board.
TED: Today you know you see these companies raising hundreds of millions of dollars, and it’s just four or five guys in a room, you know, all of a sudden it doesn’t look so crazy.
ROD MCLEOD: Cool, can you hear us?
TANNER PHILIP: We can hear you.
BRUCE: In early September, preparation for Kik’s ICO reached a fever pitch. They had thousands of applications to review—collecting social security numbers, and double-checking scans of passports, making sure people were who they said they were. In the days leading up to the sale, teams in Waterloo, New York, and Tel Aviv were in touch constantly, working out kinks.
ROD: In terms of registrations, like numbers and under review, like how are you doing there?
TANNER: Yeah, so. Registration numbers. I haven’t checked the site in a minute but it's quite close to 16,000 I guess. So, yeah, we're feeling pretty healthy.
BRUCE: Ted, the CEO, was in the thick of things too. A few days later he told a crowd at a tech meetup about it.
TED: I jumped in, and I reviewed passports. I reviewed 200 passports, took me two hours. I got the training, did the passports. So cool. It's like, here's their passport, here’s their selfie, here's all their information. And I'm like ‘OK…’ Like the customs guy. I’m like, ‘Welcome to Kinland.
BRUCE: The day of the sale, employees huddled in Waterloo in what they were calling the War Room. They live-chatted with buyers as questions poured in from people confused by the process, or trying to make sure their purchase had gone through. Tanner Philip was managing things.
TANNER: We kept having to call our service provider and up the amount of bandwidth that we had on the actual service, because they go by individual conversations. And we kept guessing as to what it would be, and then we'd have to call them and tell them to up the amount. So I think we started out the day with we thought we might hit 5,000 conversations, and then within about an hour we had to call them and then up to 20,000.
BRUCE: The ICO raised millions of dollars out of the gate. By the time the sale closed, two weeks later, Kik had raised $100 million. The company had thought it was out of options. Now, all of a sudden, they had the money they needed to stand a chance against Facebook. Not long after the ICO closed, I caught up with Ted to see how he was feeling.
TED: I think if you had asked me back in the winter when we decided to do this, you know, ‘Hey, if you were to make a new cryptocurrency, how much money do you think people would give you for that?’ And if I had said $100 million, I think everybody would have called me completely crazy. I mean, how could you ever expect that or foresee that. And so to be sitting here today, what if you actually gave us a $100 million for this new cryptocurrency is pretty surreal.
BRUCE: There’ve been a lot of ICOs this year, but Kik is the first big, established company to try to fund itself this way. Which means a lot of people have been watching to see how they do. And a lot of questions remain. Kin won't succeed as a cryptocurrency unless Kik, the app, has lots of users trading lots of Kin. It’s not clear, yet, whether that will happen. David, that Kik-user-turned crypto-trader, says he’s skeptical. Because he doesn’t really use Kik anymore.
DAVID: It's almost embarrassing sometimes to be like, “Oh, do you have a Kik still? It was just a fad that died out, honestly. Maybe it was the ease of use, but I really, I personally just stopped using it because everybody else either started texting me or using Facebook Messenger.
BRUCE: David doesn’t think people will start using the app again just because there’s now a cryptocurrency attached to it. And there’s a bigger reason to doubt Ted’s plan. Most people—even the real crypto believers—think the explosion in ICOs and the skyrocketing value of cryptocurrencies is a bubble, headed for a correction. What that means for all the projects like Kik that have gotten money through ICOs, is anybody’s guess. Here’s cryptocurrency expert Peter Van Valkenburgh again.
PETER: With the dot-com boom you had all kinds of embarrassing failures like the pets.com Super Bowl ad. Once the bottom fell out of the dot-com market, you had a lot of people thinking like, “Oh, this was just a flash in the pan. It's going to go away. And then it took years to crawl back to a position where everyone was thinking like, “OK, no, never mind, the internet is a real innovation. It's going to change everything.”
BRUCE: Peter predicts that cryptocurrencies, or tokens, as he calls them, will follow a similar path.
PETER: I think when the wind falls out of the sails of the token boom there'll be a lot of embarrassing stories of like somebody raising an absurd amount of money and with no product behind it, and it will erode public confidence in the usefulness and true nature of the innovation of this space. And so that's bad. The upside is, just like Google rose out of the ashes of the dot-com bubble, this bubble in tokens will burst some of the companies that might have been initially funded by the bubble will keep their heads down and emerge out of the ashes of that collapse and build the real products, the true innovations that will radically change the way we live our lives, do commerce. Interact with other people socially. Everything.
BRUCE: If Kik’s gamble pays off, they may be one of those companies that emerges out of the ashes. And they may end up sketching out a way for other companies like them to exist alongside players like Facebook, Amazon, and Google. They won’t be the next Facebook, but they won’t need to be. They’ll have created an economy inside their app. Written their own rules, to a different game.
LISA: Bruce Wallace is a producer of StartUp. Coming up on the next episode of StartUp, the multibillion-dollar driverless car industry got off the ground with a race called the Grand Challenge. And to build the vehicles, people made all kinds of sacrifices, big and small.
MATT JOHNSON-ROBERSON: There was not enough beds in the RV for even all the people. I was the youngest guy, so I guess I got the short straw, and so I remember I was sleeping on a table in one of the RVs.
MATT: Yeah, I think my legs were off it, maybe my head. It was not comfortable.
LISA: Find out how a team of sleep deprived, hungry, and grease-covered engineers helped launch the driverless car industry. Next time on StartUp. And a reminder: our next season is going to focus on just one company. We’re looking for a company in the Bay Area, so if you know of one that’s doing interesting stuff, with an interesting founder at the center of it, please email us at firstname.lastname@example.org, subject line “Season 7.” StartUp is hosted by me, Lisa Chow. Our show is produced by Bruce Wallace, Luke Malone, Simone Polanen, Emanuele Berry, and Amy Standen. Our senior producer is Molly Messick. We are edited by Annie-Rose Strasser. Production assistance and fact checking by Max Gibson. Mark Phillips wrote and performed our theme song. Build Buildings wrote and performed our special ad music. For full music credits, visit our website. David Herman and Ian Scott mixed the episode. Special thanks to Jake Brukhman, Laura Shin, Colin Vine, Itamar Rogel, and Pat Walters. To subscribe to StartUp, go to Apple Podcasts, or whichever app you like to use. Or check out the Gimlet Media website: GimletMedia.com. You can follow us on Twitter @podcaststartup.
Thanks for listening. We’re off next week, so we’ll see you in two weeks.
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