We’re at the end of our allotted 35 minutes, and the iPhone in Ted Livingston’s hand is ringing. But Livingston hasn’t finished his story, so he informs his caller that he needs an extra 45 seconds, turns to me and sums up. “We view this as one of the most fundamental races in the history of humanity,” he says. “Why would we get out of that race now?”
The anecdote Livingston is recounting comes in response to a question about whether Kik Interactive, the Waterloo, Ont.-based mobile messaging firm he co-founded six years ago, is looking to be acquired. It goes like this: In March 2011, while at the South by Southwest festival in Austin, Texas, Livingston learned that one of Kik’s competitors had sold to Facebook for an estimated US$40 million (Beluga, it was called, would go on to form the basis of the social media giant’s own Messenger app). “Everybody was looking at Kik and saying, ‘Sell now. This is the peak of the messaging bubble,’” recalls Livingston. But Kik wasn’t interested. Then, last year, Facebook bought another messaging company, WhatsApp, for US$22 billion. “So now instead of an M it’s a B—a thousand times larger,” Livingston says. “And everybody is saying the same thing to us. But for us, the logic remains true.”
Kik is not for sale, even if the buzz coming out of the technology industry would have you believe otherwise. A few weeks after our conversation, Kik retained the services of Qatalyst Partners, a Silicon Valley investment bank with a track record of connecting mid-sized technology firms with big money buyers. Livingston insists that Kik is simply looking for “strategic partners” as the chat race intensifies, which could mean a big investment, or a deal to share content or pooled resources, depending on the partner.
Mobile chat, the category of apps that facilitate the exchange of messages, emojis, photos and other content over the internet from a smartphone or tablet, is an increasingly crowded space. Kik’s current competitors flaunt 11-figure valuations and continent-sized user bases: Leading the pack is Facebook Messenger, with some 500 million monthly active users (MAU), and its subsidiary WhatsApp, which has 700 million; Line, a Japanese app, boasts 170 million users and is eyeing a US$10-billion IPO; and Snapchat’s most recent funding round values its 100 million users at $15 billion. Kik runs in the back of this pack. Its 200 million registered users (Livingston won’t disclose Kik’s MAU figure) make it good enough for eighth place, according to the data aggregator Statista. But based on one common tech industry formula, that puts Kik’s valuation somewhere between $500 million and two billion.
There’s a popular term for companies that cross the billion dollar-valuation mark these days: unicorn. Investors fight to fund these much-celebrated, much-cited companies—the Ubers, Snapchats and Slacks of Silicon Valley—feeding them with more money than they can conceivably need. While Kik likely makes the ten-figure cut (Livingston also won’t disclose Kik’s own valuation figures), it tends not to attract the kind of buzz that venture capitalists and the tech press fawn over. While the rest of Silicon Valley is busy crowning unicorns, Livingston—all of 28 years old—has been quietly building a product used by some 200 million people. (Consider that the U.S., its biggest market, has 319 million residents.) And he’s done it by ignoring the tech industry’s obsession with valuations and buzz in favour of solid, steady improvements. “Anything less than winning the world will be a failure to me,” Livingston will tell you. It’s not for lack of ambition that Kik may never catch up to its competition. But here’s the thing: It may not even have to. There will be room for more than one winner in this race.
When Kik first launched in October 2010, it was the number one chat app in North America—for about a month. What had started as an idea for a music app that would make it easier for Blackberry owners to listen to music on their devices, had to be downgraded to a mere chat service while Kik waited on licensing deals. It was a surprise hit. Then Blackberry, where Livingston had spent time as a University of Waterloo co-op student, sued the company for patent infringement and pulled Kik from its app store. “Our growth plummeted,” recalls Livingston. The companies settled the suit in 2013, but the Blackberry setback cost Kik its first-mover advantage.
Little appears to have changed since the days when Livingston was a baby-faced college student who just wanted to listen to tunes on his Blackberry. The tousled mop of hair he sported in early interviews is gone, replaced by a cleaner cut. But his uniform of jeans and a solid-colour hoodie persists. Taking pages from the Mark Zuckerberg style manual, a willingness to keep people waiting and an unshakeable belief that his product will change the world: so far, so Silicon Valley. But Livingston is no brash tech bro. The first $1 million he made from selling Kik shares went to the University of Waterloo to pay for a startup seed fund. Ask him how it feels to have built a global competitor at such a young age and he reflexively cites the potential to connect people around the world. Contrast that with Snapchat founder Evan Spiegel, who has sullied his company’s rapid rise with his smarter-than-thou tone and revelations of misogynistic emails sent while a Stanford fratboy.
What has changed in that time is the market for third-party messaging apps (i.e. software that doesn’t come preloaded on your smartphone, like iMessage and SMS services). Unlike the social network wars of the mid-2000s, the chat race has drawn more competitors. “We’re certainly seeing more messaging apps than we ever did with social networking,” observes Brian Blau, research director for mobile & wireless consumer technologies at U.S. IT research firm Gartner. Of course, which chat app you’re familiar with depends on where you live and how old you are. WhatsApp leads globally and in countries with expensive SMS rates like India; Line dominates in Japan; KakaoTalk has been downloaded by 93% of South Korea’s smartphone users; WeChat has a near monopoly in China.
Kik is the chosen vehicle of young North Americans. The majority of its users (70%) are under 25 years old, with two in five U.S. teens using the app. One reason Kik is popular with teens is because, while most other messaging-first services require a phone number to register, Kik bases accounts on user names instead. That means kids with their own iPod or tablet, but no smartphone, can still chat with their friends. And once they’ve gotten used to the platform, they stick with it when they do acquire their own phones.
Even though the market for messaging apps is a young one, there’s some sense it may already be maturing. “At this point, if you don’t have a phone and you don’t have a chat app on your phone, you’re probably never going to have either of those two things,” admits Livingston. So Kik and its competitors are turning to the next stage in the messaging marathon: How will they make money from them?
Arrive at the building that houses Kik’s offices and it might seem like you’ve copied out the address wrong. The company operates out of a two-storey industrial park in Waterloo, Ont., several kilometres up the road from a new downtown cluster of tech companies—some of which received their first funding through Livingston’s UW donation. Kik shares signage with a tax preparation firm, a driving school and a personal injury lawyer. It feels more like the headquarters of a parcel delivery service than the site of a billion-dollar tech company. The modest workspace is all part of the plan. “We don’t have a flashy office because we don’t think it contributes to our odds of winning,” Livingston says. “In fact, we actually think it has a risk for detracting from that—‘Flashy office means we’ve made it, so now let’s just all chill out for a bit.’” On the other hand, Livingston says that when something adds to their “probability of winning,” they incorporate it immediately. Kik, he says, was one of the first Waterloo tech firms to cater lunch and dinner every day for its 62 full-time staff. Catered meals make the team more productive and less reliant on the carb-heavy menus of East Side Mario’s, Harvey’s and Subway nearby.
Despite spending a couple of weeks each month in the Valley (the company has offices in San Francisco and New York, as well as a just-announced division called Kik Services run by a former ad agency CEO in Los Angeles), Livingston is adamant that Waterloo is the best place to build his company. The talent coming out of the city’s universities is top-tier and tends to stick around and Kik doesn’t face the same poaching problems as most San Francisco firms. According to Justin Waldron, a co-founder of the internet gaming company Zynga and advisor to Kik, the only thing staying in Waterloo costs the company is exposure. It’s why he helps Kik make introductions in the Valley and why Livingston says it hired Qatalyst, which has connections in the highest ranks of the tech industry’s top companies. “If there was anything that it was a disadvantage for, I think it would probably only be from a hype and generic buzz standpoint,” says Waldron.
Another thing separating Kik from its Silicon Valley messaging rivals is Livingston’s approach to the capital markets. Snapchat’s recent US$537-million funding round brought the total amount of capital it has raised to $1.4 billion. Kik by contrast has raised just US$70.5 million to date, including a $38.3-million round in November 2014. That’s enough capital to pay the staff, keep the lights on and keep building new features, says Livingston. “Should we have raised $100 to 200 million? Sure, it would have made us feel great, and the press would have been great. But we just don’t need that much money. We don’t know what we would do with [it],” he says flatly.
Still, the money Kik has raised so far is sizeable, says Andrew Parker, a general partner at New York’s Spark Capital and board member of Kik, which is a Spark portfolio company. “Raising venture capital is like you’re on a journey in a car, and you’ve got to stop at the gas station to fill the tank,” Parker says, calling upon a trite—his words—venture capital analogy. “The purpose of the journey is not to make a tour of gas stations, right? So we’re not going to go out there and raise money if we don’t need it.”
What the backers are buying for their multi-million dollar investments is potential—there’s not a lot of revenue in the chat business right now. Livingston says Kik pioneered the platform model, which makes a chat app the doorway to a host of other functionalities and services. The most successful example of the platform model so far is WeChat. “If you kept a journal of all the things you do throughout the day, WeChat plays a role in each of those things,” Livingston says. “When you get taxis, when you buy things, when you share things, they’re making everything better with chat.”
A platform model also means a user never has to leave the app for a competitor. Kik was among the first messengers to feature a full web browser, which allows users to open links and search for content within the app. The company finally added native video capability earlier this year, and in November 2014 it acquired the GIF messaging startup Relay. Both moves appear aimed at Snapchat, the app with which Kik has the highest affinity, says Waldron, meaning users of one are likely to have downloaded the other. Kik already boasts higher engagement than its North American competitors; according to Business Insider’s BI Intelligence service, people spend more time using Kik than Snapchat or Facebook Messenger. “If you can build an ecosystem, then there will be all sorts of services that you can monetize,” Livingston says.
But all that monetization remains firmly in the future. For now, Kik’s revenue-generation strategy is a feature called Promoted Chats. Launched in November, it allows users to opt in to “talk” to a brand. The conversation partner is actually a chatbot, a minor form of artificial intelligence programmed with stock responses to certain keywords. Brands pay Kik for the opportunity to chat with users because it’s a lot easier to program a bot than to respond individually to consumers’ Facebook posts or tweets. The headphone manufacturer Skullcandy got 300,000 chatters in its first three months on the platform, triple the number of Twitter followers it had accumulated over a period of two years. Other brands using Promoted Chats include MTV and the Washington Post.
Brand engagement—advertising—is the dominant form of revenue on most social platforms, says Paul Gray, the product specialist responsible for the chatbots: “Facebook’s product is promoted posts. Twitter’s product was promoted tweets.” Kik offers richer engagement than you’d get on a broadcast-based platform like Facebook or Twitter—the comedy video website Funny or Die, for example, has had conversations with 1.5 million chatters on Kik, and users send an average of seven messages to a brand per chat. But Blau points out brands don’t have infinite resources to spend on engaging potential consumers, and scale will eventually matter. “If it’s an advertising business or some sort of ecommerce play, advertisers are going to be looking for engaged users and market share,” he says. “If Kik is not in one of those top spots maybe in the next five or 10 years, then advertisers may not think about them first.”
Even if you accept Livingston’s insistence that he has no plans to sell Kik—and there’s no reason not to—Blau says you don’t bring on a major Silicon Valley dealmaker like Qatalyst lightly. “You never know what will happen once you hire a bank and they start shopping things around.” A more likely ending might be an IPO. Kik co-founder and chief technology officer Chris Best hinted as much during an episode of The Disruptors on Business News Network, grinning and admitting that “probably, possibly, at some point, yes” that would be the goal. And though Parker wouldn’t speak specifically to Kik’s future plans, he says Spark hopes all its firms end up as “independent, publicly traded companies that are sustainable, profitable, have a global audience and reach, and are employing thousands of people around the world.” If an IPO really is the goal, Kik’s reluctance to disclose its internal valuation makes sense—without a huge number hanging over its head, Kik stands a better chance of a successful share offering. “By the time companies get to market these days, the value [in a company] has largely been realized by private investors,” says Roger L. Kay, president of Endpoint Technology Associates, a Massachusetts-based consultancy firm. Investors cash out, but “the public gets to hold the over-bloated carcass of the thing they finally brought to market,” Kay says.
But Livingston is correct to brush off speculation about a sale or IPO at this point. The chat race isn’t over yet, and Blau for one believes it is possible that Kik could eventually emerge near the front of the pack. “A lot of youth are using messaging, and if they stick with it, [Kik will] be a fixture for many, many years to come,” he observes. “If they can keep user engagement high, keep growing, and figure out how to monetize it in an effective way.”
Moreover, there’s room for more than one app atop the chat podium, and Kik has shown that it’s able to carve out enough of a foothold to make some money and build a sustainable business.
But none of that will stop Livingston from trying to win, and his very Canadian calmness doesn’t altogether mask the chip on his shoulder. He’s willing to admit that losing his 2010 lead in the chat race hurt, and that he wants to make up for it. “A big part of what’s kept us hungry is feeling like we deserve to show the world that we can get back there—that it wasn’t just a fluke, that it was taken away and that we will get back to that point.”
This article was originally published at CanadianBusiness.com.
