Bobby put in eighteen-hour coding days for the next week to get them to a working prototype. Reggie came up with a name for the app: Picaboo, a riff on the childhood game Peek-a-boo. Evan designed the app’s interface, digitally mocking up what it would look like and how users would interact with it, so that Bobby could turn his visions into reality.
When users opened the app, which was only available for iPhones, it showed a camera screen so they could immediately take a picture.1 Once they took a picture, they could set a timer from one to ten seconds, tap to the right, and select which of their Picaboo friends they wanted to send it to. Then when their friend opened their picture, it would display for the set number of seconds before disappearing. If users tapped left they could see what photos their friends had sent them. The interface was simple but had the ugly clumsiness of a rough draft, with big square buttons and a jumble of icons crowding the screen.
They finished a working prototype of Picaboo just days before final exams. They needed people to download the app, test it out, and hopefully tell their friends about it. Evan decided to approach his former fraternity brothers; despite having been kicked out, he was still friendly with most of the guys from his year, and they were still some of the most social people on campus. Evan needed the popular crowd to use this if it was going to catch on.
Evan quickly typed out a few lines about the app. He had told a lot of the guys about the idea before but not in such a broad, public way. He imagined people forwarding the email, downloading the app, and being instantly addicted. Facebook had launched a mere seven years earlier and ripped through Harvard like wildfire before spreading to other campuses, and then the world. The Stanford Daily wrote at the time about how many students were skipping classes because they were consumed with Facebook. Instagram had been downloaded over forty thousand times on the day of its initial release. Evan used an analytics platform called Flurry to track how many people downloaded the app, how often they used it, and how often they sent pictures to each other. It was time for the world to see Picaboo. Putting the finishing touches on the email, Evan hit send.
And then … nothing. It was a dud.
The fraternity brothers who downloaded the app that first week had fun with it, sending each other silly photos of themselves bored in class or pics of themselves partying. Even more so, it was cool because it was one of the first times they could hold something in their palms, on their phones, that one of their friends had built. But it wasn’t serious; it was just Evan’s little toy. A few dozen people had downloaded it and were toying around with it because their friends had created it. But they weren’t totally sure what it was and how they were supposed to use it. It was too early to call Picaboo a failure—the thing had just launched and barely worked. But it was far from the fairy-tale launch Evan had dreamed of.
Evan was enrolled in a mechanical engineering class called “Design and Business Factors” that encouraged upperclassmen product design majors to create a prototype and business plan for an app or other product. The final project, presenting this prototype and business plan, was a third of the grade for the course. Reggie’s idea was much more intriguing than the ones Evan had been considering, so he adopted it for his class. While most of the other students worked in groups of three to five, Evan worked on his idea alone.
At the end of the class, everyone presented their prototypes to a panel of venture capitalists. There are dozens of entrepreneurship classes like this at Stanford, and while there is the allure of a team making it big, the vast majority of the students are just playing startup. If most startups fail, most of these class projects don’t even reach a stage where they can accurately be called a startup.
Like a school science fair, everyone put together a visual presentation to display on tables in the back. Each group sent a presenter to sell the judges on their project and receive feedback. Evan sat in the back of the classroom and watched his peers pitch their ideas. They ran the usual gamut from overpolished presentations by excited students seeking approval to underprepared undergrads just running out the clock until their turn was over. For the first time, Evan worried what other people would think about his app. The fraternity brothers enjoyed playing with it—surely Evan’s peers and these venture capitalists would understand the value of what he had been working so hard to build. They had to, right?
Finally, it was Evan’s turn. Showtime. He approached the front of the room like the entrance to a party, strutting confidently to show the crowd what he, Reggie, and Bobby had been working on tirelessly for the past six weeks. Confident and comfortable, Evan enthusiastically explained to the other thirty students, two professors, and half a dozen venture capitalists that not every photograph is meant to last forever. He passionately argued that people would have fun messaging via pictures.
The response? Less than enthusiastic.
Why would anyone use this app? “This is the dumbest thing ever,” seemed to be the sentiment underlying everyone’s tones. One of the venture capitalists suggested that Evan make the photos permanent and work with Best Buy for photos of inventory. The course’s teaching assistant, horrified, pulled Evan aside and asked him if he’d built a sexting app.
The scene was reminiscent of another Stanford student’s class presentation half a century earlier. In 1962, a student in Stanford’s Graduate School of Business named Phil Knight presented a final paper to his class titled “Can Japanese Sports Shoes Do to German Sports Shoes What Japanese Cameras Did to German Cameras?” Knight’s classmates were so bored by the thesis that they didn’t even ask him a single question. That paper was the driving idea behind a company Knight founded called Nike.
The VCs sitting in Evan’s classroom that day likely passed up at least a billion-dollar investment return. But it’s very easy to look at brilliant ideas with the benefit of hindsight and see that they were destined to succeed. Think about it from their perspective—Picaboo’s pitch was basically, “Send self-destructing photos to your significant other.” Impermanence had a creepy vibe to it, belonging only to government spies and perverts. With the benefit of hindsight, we can see that Facebook developed the conditions that allowed Snapchat to flourish. But it wasn’t at all obvious watching Evan’s pitch in 2011 that this was a natural rebellion against Facebook or that it would grow beyond our small Stanford social circle.
If anyone was searching for the next Facebook killer, they were hopefully looking at a little photo-sharing app called Instagram that had just raised Series A funding valuing the company at $25 million; it’s much more likely that they were looking at any number of apps or websites that have since died without your ever hearing of them.
In spite of this third failure to successfully pitch people on the idea, Evan remained undaunted. And as he hoped to keep Reggie and Bobby engaged and driving on the project, he told them that everyone really liked their idea.
Most of their peers were pursuing internships—or, in Bobby’s case, full-time jobs—at prestigious banks and big tech companies. But Evan and Bobby were used to ignoring the norms to chase their startup ideas. And Reggie was committed to it. Most importantly, they really liked the app. While primitive, it was fun to use. And they really believed that people would want to send pictures that deleted themselves, whether for sexting or otherwise.
The trio agreed to move south for the summer, to Evan’s dad’s house in Pacific Palisades. There, they would develop the app, gain users, and take their shot at becoming the next big Stanford startup. As they agreed on the logistics of the summer, Reggie felt his excitement grow. As long as he had Evan, nothing could go wrong.
CHAPTER FOUR
THE OTHER STARTUP
JUNE 2011
STANFORD, CA
Around the same time that Reggie had his idea for a disappearing-photos app, another Stanford student, a sophomore named Lucas Duplan, had an even bigger idea.
Duplan was a member of the Sigma Nu fraternity and a year younger than Evan and Reggie. He grew up in Orinda, Califor
nia, which borders Berkeley. After his freshman year at Stanford in 2010, Lucas was studying abroad in London and became frustrated that he could use his phone to do any number of things, from messaging friends to playing music, but not to pay for a sandwich. Money could be transported and sent back and forth as little electronic bits of information just like anything else. So, Lucas wondered, why was it so much harder to buy something than it was to do anything else on his phone?
Lucas recruited two Stanford engineers, Frank Li and Jason Riggs, to cofound a new company with him. Li and Riggs agreed to work with Lucas despite the fact that Lucas was a year younger than Li and two years younger than Riggs. Their new company, Clinkle, would completely replace your wallet. Anything you used to pay friends or businesses, from credit cards to debit cards to checks to cash, would become obsolete thanks to this magical new app.
Lucas asked his professors to connect him with the very best designers and engineers. Some professors pushed back, saying there was no objective list, but they eventually relented and gave Lucas some names of talented students. Lucas, merely a sophomore, recruited two seniors: Rob Ryan to head up design and John Rothfels to run engineering.
The 2008 financial crisis was fresh on the undergraduates’ minds as they set out to change the financial world. The system was unfair. The process of exchanging money was clunky and outdated. They intended to build a proper financial system for the twenty-first century, eventually maybe even expanding into areas like microlending. It would certainly be a more meaningful project than the silly photo-sharing apps their classmates were building.
They felt like the next generation of the PayPal Mafia, a group of roughly two dozen entrepreneurs who left PayPal after selling the company to eBay in 2002. Members of the group went on to found Tesla, SpaceX, LinkedIn, YouTube, Yelp, and Palantir, among many other successful companies and venture capital firms. Not coincidentally, many of the members of the PayPal Mafia had studied at Stanford, often as classmates.
Duplan received some money from his parents and a $15,000 grant from a summer program at the venture capital firm Highland Capital. It had become quite easy for students to raise initial funding for their startup ideas. Venture capitalists were frequently on campus, often as professors or guest lecturers. Sand Hill Road, which runs from the 280 highway right past the edge of Stanford University in Menlo Park bordering Palo Alto, is home to the world’s major venture capital firms; think of it as Wall Street for venture capital. In the summer of 2011—the same summer that Evan, Reggie, and Bobby moved in to the Spiegels’ house to start Picaboo—Lucas and ten members of team Clinkle rented a house in Palo Alto to build the company’s first product.
I first heard of Clinkle soon after I heard of Snapchat, in 2012, during my sophomore year at Stanford. Clinkle worked wonderfully. It looked like a beautiful wallet on your phone, and you could pull dollars out of it and swipe them to send them to friends. Instead of trying to split bills over credit cards or remember how much cash you owed a friend, you could just send them money phone to phone, instantly. This may sound dull to current readers, but this was before Venmo, Apple Pay, and a number of other payment services launched. It felt like the future.
It was an amazing time to be on campus. We knew some people would become wildly successful; we just weren’t sure who yet. There was this amazing feeling of possibility, of untapped potential. This would be the time we’d look back upon, the days we first knew each other before everyone became who they were going to become.
Lucas believed users would only use Clinkle en masse if it were able to replace their entire wallet from day one. So the team held off on launching the peer-to-peer payment app and worked on its solution for paying businesses, which involved transmitting high-frequency sounds between smartphones and payment terminals. Lucas also didn’t want users to get Clinkle only to find that it didn’t work at their favorite restaurant or bar. So he planned to start at college campuses, insular communities in which the Clinkle team could get every business signed up before launch. So, like Facebook before it, Clinkle would launch college by college and dominate these campus networks before opening up to the broader world.
In the spring of 2012, Clinkle design chief Rob Ryan was a teaching assistant for a class on campus called CS 183: Startup. Peter Thiel, perhaps the crucial member of the PayPal Mafia as the company’s cofounder, taught students “how to build the future.” The course was so popular that Thiel and one of his students, Blake Masters, eventually published a book, Zero to One, based on the class and Masters’ notes.1
Thiel told the teaching assistants that they each had one golden ticket: an opportunity to pitch him their startup idea for venture capital funding. Rob signed Lucas and himself up for a half-hour slot to pitch Clinkle to Thiel at the office of Founders Fund, Thiel’s venture capital firm.
As Lucas talked about Clinkle and their dreams for a new wallet-less future, Thiel canceled other appointments and sat there, captivated, for ninety minutes. When Lucas finished, Thiel paused for almost a minute, just sitting there. The room was filled with a deafening silence. Thiel asked Lucas, “What is the maximum I can invest right now?”
Lucas replied that Thiel could invest between $250,000 and $2,000,000 in Clinkle. They agreed to the principles of a deal right there in the room. It was like a scene out of The Social Network—Thiel had actually put the first $500,000 into Facebook back in 2004.2 Now, he was putting money into Clinkle. After that, money, investors, advisors, employees—everything flowed into Clinkle easily.
Let’s take a minute to look at how most startups raise funding. A genius hero founder is walking along one day when a brilliant idea pops into her head, or so the creation myth goes. She then goes out and raises some money. This can be anything from raising several thousand dollars from “angels,” rich people who help startups get going, to raising millions of dollars from professional investors. While startup funding is a bit hard to generalize across sectors and companies, seed funding usually gives a company six months to two years to get going.
If the company survives on this seed money, the founders next raise a round called a Series A from professional venture capitalists. Subsequent rounds continue in alphabetical order until the company dies, gets acquired, goes public, or starts making enough money that it turns down investors.
If you take a hundred startups that manage to raise seed funding, only thirty-one of them on average will raise Series A funding. Only seventeen will raise a Series B; seven will raise a Series C; and two will raise a Series D. It isn’t, or at least shouldn’t be, surprising that the success rate hits single digits by a Series C, as these are large funding rounds in the tens of millions of dollars set aside for highly successful companies. But the descent from seed-funded startups to Series A and B is often much steeper than people expect. Raising some money for an idea is not that difficult. Staying in the game round after round, as the world changes and targets are met or not met, is extraordinarily difficult.
At each stage, the company gets a valuation. This is often confused with what the company is actually “worth,” and it is this number that usually has talking heads up in arms about how a no-revenue app is “worth” hundreds of millions of dollars. But these are not publicly traded companies; this valuation is merely what one private investor is willing to pay. The company is almost certainly worth far less than this number if you break down its assets. Odds are, it will be worth zero or close to zero in the years to come. But a minuscule number of these companies will break out and be worth billions, if not hundreds of billions, of dollars.
It’s important to reiterate again that the valuations are not the same as public companies’ market caps. Venture capitalists invest in startups to hold their equity for years until the company goes public or gets acquired. The current valuation doesn’t matter in the long run to investors. What matters is how the company grows and what percentage of the company the venture capitalists own. So while a startup might haggle over whether it should be val
ued at $80 or $90 million, a VC cares much more about whether his equity stake is 18 percent or 19 percent.
For example, take Sequoia Capital, Silicon Valley’s premier venture capital firm, founded in 1972 far before VC became sexy, with investments in Apple, Google, Oracle, PayPal, and a litany of others. In 2011, Sequoia invested $8 million in the messaging app WhatsApp. Over the next three years, Sequoia led two more rounds of funding in WhatsApp, investing $60 million in the company. When WhatsApp sold to Facebook in February 2014 for $19 billion, Sequoia earned roughly $3 billion.
With Peter Thiel on board, Lucas Duplan set out to lure other investors. He succeeded wildly; his investors would include Accel Partners, Andreessen Horowitz, Intel, Intuit, Qualcomm cofounder Andrew Viterbi, and Salesforce founder and CEO Mark Benioff.
VMWare cofounder Diane Green and her husband and fellow VMWare cofounder Mendel Rosenblum invested in Clinkle after teaching Lucas at Stanford.
Stanford University president John Hennessy, a successful entrepreneur himself and a member of Google’s and Cisco’s boards of directors, was Lucas’s computer science advisor and became an advisor to Clinkle. Mehran Sahami, a Stanford professor who teaches the popular introductory computer science class, invested in Clinkle after teaching Lucas and several members of the early Clinkle team. The former dean of Stanford’s business school, Bob Joss, invested as well.
All told, close to sixty people and institutions invested a sum of $30 million in Clinkle before the company even told the world what they were doing. The company had at this point been in “stealth mode,” a sexy term meaning they weren’t telling anyone what they were working on.
How to Turn Down a Billion Dollars Page 4