You Only Have to Be Right Once

by Randall Lane

  Cohen wound up heading up engineering teams that worked on everything from monetization strategies to application programming interfaces, or APIs, which make it easier for outsiders to work with eBay’s data—skills that would eventually accelerate Houzz. Tatarko’s ambitions took a backseat: Her first son was born in 2002, and two more followed. She worked part-time as an investment adviser for Commonwealth Financial, coaching clients on how to manage their money.

  Then Houzz started to take shape, proving the core truth of this latest gold rush: Even after a twenty-year stampede to create consumer Internet start-ups, plenty of big, unexplored opportunities still exist. The richest cluster of this latest digital boom involves community sites like Pinterest and Twitter, which nimbly connect the curious with the sharers. Such start-ups are hopelessly unsuited to bringing in revenue at first. But if they can grow to attract millions of users, all the usual opportunities to sell ads, data, and goods spring to life. With $150 billion spent each year on home improvement just in the United States, Houzz was an especially fruitful example of how this dynamic plays out.

  The new company began imperceptibly in 2006, when Cohen bought the rights to www.houzz.com for twenty dollars. “We wanted a five-letter domain name that had something to do with home improvement,” he explained. The natural choice, www.house.com, was long gone. But he and Tatarko decided that their concoction would suffice; it combined the terms “house” and “buzz” in a way that they hoped would seem clever. They hardly used the domain name until 2008. That’s when Tatarko started collecting designer photos and asking other parents at her boys’ schools if they might want to look at home-improvement photos, too.

  Think of Houzz as the triumph of the innocents. The site lacks the trend-spotting insistence of an architecture magazine; it’s missing the “buy now” exhortations of a big-league e-commerce site. But those omissions mean Houzz sidesteps the egos and pushiness that usually plague interior design. Houzz is an explorer’s haven, letting jittery homeowners browse for as long as they choose, gradually sharpening their tastes and budgets until they can say with confidence: “Here’s what we want.”

  While the traffic originally came mostly from the Bay Area, the site quickly attracted a global following. More unexpectedly, architects and interior designers began serenading Tatarko and Cohen, out of the blue, clamoring to post photo albums, giving the site a seemingly unlimited supply of free content and ideas. “Houzz has become as much of a tool in how architects communicate with clients as a pencil or a T-square,” said Richard Buchanan, a high-end architect near Philadelphia, who took early note when his clients began showing up at his office with tidy digital “IdeaBooks” from Houzz.

  In 2009, the couple faced a crossroads. Houzz couldn’t be a weekend hobby anymore. The fast-growing company needed twenty servers to sustain its expected data load. It needed full-time engineers and full-time editors. Houzz also needed far more cash than the $2,000 a month Tatarko and Cohen were dribbling into it.

  Where to turn? “Adi and I were scared of venture capitalists then,” Cohen recalled. It was clear that the couple could turn a small profit in a hurry by jamming the site full of ads, or by setting up some pay-to-see features that would make it harder for architects and clients to get connected on their own. But neither of them wanted to do so. Tatarko was especially adamant. She wanted to spend at least a year or two making Houzz the friendliest, smoothest site possible, before worrying at all about what the business model should be. Neither of the founders wanted to take money from a financier who might arm-twist them to put profits ahead of quality.

  Safety arrived in the form of Oren Zeev, a Silicon Valley angel investor who was recommended to Tatarko and Cohen by a mutual Israeli-born acquaintance. He promised the Houzz founders that they would stay in charge. He would only look for ways to make their vision come true. In November 2009, he led a syndicate of investors that took a 35 percent stake in Houzz for $2 million. Other investments began streaming in, including $1 million–plus from David Sacks, the founder of office-productivity tool Yammer, who came across Houzz while gut-rehabbing a San Francisco town house. “We’d start scrolling through pictures, and we couldn’t stop,” he recalled.

  Those investments proved quite astute. Houzz doesn’t disclose its operating results, but people familiar with its books say the company has operated at a very modest burn rate since 2011, in spite of making only modest attempts to monetize its business. The site could take a cut of commerce or referral revenue; it also could step up what right now are fairly tiny efforts in preferred listings. Today, many thousands of architects and designers pay about $2,500 a year, each, for premium listings in Houzz’s regional directories. “I don’t think we could get that many business leads any other way,” said Mike Close, who runs Spinnaker Development, a luxury homebuilder in Orange County, California. “In fact, we’re now updating our Houzz profile even before we add something to our website.” They could increase their push among major manufacturers and retailers, with the likes of Ikea and Kohler already on board.

  Instead, they continue to focus on site quality. And investors clearly buy into the money that will follow: Tatarko and Cohen have raised nearly $200 million in venture capital, culminating in a $150 million round that was negotiated in the first half of 2014. “We like founders who build companies to solve problems in their own lives, even if they aren’t experts in the field,” says Alfred Lin, a Sequoia Capital partner who led an initial venture investment in Houzz in 2011. “They unpack issues in a way that people in the industry have never unpacked them. They see things that everyone else misses.”

  Such vision can prove highly lucrative. This most recent round values Houzz at about $2.3 billion. Tatarko and Cohen’s stake likely approaches $1 billion.

  • • •

  NOBODY ASKS MALE EXECUTIVES about work-life balance. But when Tatarko, while running one of the world’s fast-growing start-ups, had a third son in 2013, it weighed on her. “I’m trying, I’m trying,” Tatarko exclaimed at one point, in the midst of an interview mostly about Houzz, before remarking to no one in particular: “I hope I’m doing the right thing.”

  “There are things I can’t do anymore. I used to cook every night. Now, someone else is using my recipes to cook for us.” She’s been reading Harry Potter novels to her second son as a bedtime treat for both of them, and that makes her smile. Still, she says, there are times she wakes up at 2:00 a.m., with the twin pressures of parenting and corporate leadership weighing on her. “I’ll think: Did I schedule that playdate yet? And then I’ll suddenly realize that there’s another slide I need to make for the next board meeting.”

  And having a cofounder that doubles as your husband represents a dynamic intense even by Silicon Valley sleep-in-your-office standards. “This is hard,” said their original financier, Oren Zeev. “They’re juggling. Other than work and family, they really don’t have a life.” Other Silicon Valley CEOs take the work-hard, play-hard ethos seriously, weaving in conferences in Davos and Aspen with charitable boards and vacation homes. Not Tatarko or Cohen. They run a company, they connect with their kids, and they catch a few hours of sleep. That’s it. Some nights Tatarko works late and Cohen dashes home to join the boys for dinner. Other evenings they reverse roles.

  Even in the office, there’s a sense that Tatarko and Cohen are constantly trying to fit thirty hours of activities into a twenty-four-hour day. Her sparse white desk sits in one corner of the company’s giant, open-plan offices. Surrounded by editorial employees, she focuses on international expansion. Nearly 30 percent of the site’s visitors already are from outside the United States, most of whom arrived by chance. In 2014, Houzz was in the process of opening offices in London and Sydney, and translating the site into German and French. Great design, Tatarko argues, can happen anywhere in the world, and good ideas are good ideas, no matter what time zone they come from.

  Cohen, meanwhile, sits off in another corne
r, in the heart of engineering-land. Yes, it’s a pretty site, but there’s obsessive technology behind it. He and developer Guy Shaviv have filed a patent on some of Houzz’s features, such as little green information tags that are attached to sinks, light fixtures, and the like, which offer viewers a chance to click for more details. To avoid having the tags look like aggressive advertisements, Shaviv arranged for them to sway back and forth in the mobile version, like tiny Christmas tree ornaments. Hidden algorithms allow for more than a hundred different pendulum arcs that can govern each tag, and no two wiggle at the same rate. Cohen’s latest obsession: a new version of their iPad app, which already allows designers and architects to leave their binders at home.

  Tatarko and Cohen remain in their own worlds each day until noon, when they break for an hour to get lunch together. This isn’t a romantic escape—the conversation generally covers everything from site design to the latest about a sick child. Houzz engineer Ofir Zwebner, who has known Cohen and Tatarko for about a decade, said there’s a “sweet bickering” between the two that helps them navigate through just about any challenge. They don’t pretend that everything’s going perfectly. Instead, they jostle through each new challenge, knowing that with a little give-and-take, they’ll find the right answer once again. By 1:00 p.m., they’re back to their separate corners of the office.

  Boundaries matter in a family that’s constantly feeling the tugs of conflicting demands. A while back, the couple’s older boys complained that even when their parents showed up at home, their minds remained at work—and their fingers remained stuck on their smartphones. So, Tatarko says, there’s a new rule at home now, calling for everyone to unplug from devices during family time. Parents put down their smartphones; the children let go of game consoles and iPads.

  “Doing a start-up with kids is a lot more difficult,” said Cohen. Two shifts of nannies provide backup child care throughout most waking hours. But there are many moments that the parents don’t want to delegate at all. Cohen plays basketball regularly with his oldest son, Ben. To the parents’ surprise, when they began talking about remodeling their driveway, Ben confronted them with a Houzz IdeaBook showing all the different ways that the driveway could be transformed into a partial basketball court. Parking their cars off-street might become impossible. But that wasn’t his problem.

  “What could we do?” Tatarko shrugged. “We arranged for him to have a meeting with the architect. And the architect listened very seriously to Ben’s ideas. Everything needs to change all the time. They’re growing, and the company is growing, too.”

  CHAPTER 16

  Jan Koum, WhatsApp:

  The Face of the American Dream

  It’s hard to come up with the proper superlative for what Jan Koum pulled off in founding WhatsApp and then selling it to Facebook for $19 billion. Silicon Valley’s most successful startup ever? The greatest tech deal of the century? Both are likely true, but the one I think holds the most weight: the greatest rags-to-riches saga in American history.

  While that’s more debatable, Koum, now thirty-nine, inarguably belongs in the top ten, given the size and speed of the fortune and his background. He was born in Ukraine, outside Kiev, and emigrated here as a sullen teen. Brought up as an only child, he lived with his mother on welfare in Mountain View, before she succumbed to cancer. Alone, with not even a high school degree, Koum became, in the truest sense, a child of this country.

  For someone who processes the conversations of more than half a billion people around the world, Koum remains a very private man. It took Parmy Olson eighteen months to convince him to speak with her for this story, and he hasn’t talked to anyone publicly since. But for several months, Koum and Olson chatted and met regularly, and it so happened that the conversations overlapped with the evolution of the tech-deal-to-end-all-tech deals, resulting in a delicious tick-tock peek into business history. The story appeared within hours of the deal’s completion, and someone in the company, for added effect, immediately “WhatsApp’d” Olson a photo. It was of Koum, signing on the dotted line—effectively giving himself a fortune, even after taxes, of $6.8 billion—against the door of the welfare office he frequented as a teen. The American Dream is alive and well in Silicon Valley.

  “Get together?”

  The subject line of the e-mail was like every other come-on that hit Jan Koum’s in-box in the spring of 2012. He was pounded daily by investors who wanted a piece of his company, WhatsApp. Hatched on his birthday, February 24, in 2009, WhatsApp was emerging as a global phenomenon. Some 90 million people were using it to text and send photos for free. No social utility had ever grown as fast. Facebook had only 60 million users by its third birthday. And at the time, close to half of WhatsApp users were returning daily.

  Koum looked at the e-mail sender: Mark Zuckerberg. Now, that was a first. The Facebook founder had been using WhatsApp and wanted him over for dinner. Koum stalled, then finally wrote back saying he was traveling soon and dealing with server issues. Zuckerberg suggested they meet before Koum left. Koum forwarded the reply to his cofounder, Brian Acton, and his sole venture backer, Jim Goetz, a partner at Sequoia Capital, adding the word: “Persistent!”

  Take the meeting, Acton said: “When someone of Mark’s status contacts you directly, you answer the phone.”

  Koum had lunch with Zuckerberg later that month at Esther’s German Bakery, chosen for its discreet back patio and location, twenty miles away from Facebook’s campus. Over their meal Zuckerberg said he admired what Koum had built and hinted at his interest in combining their two firms.

  So began the most lucrative, two-year courtship in technology history, one in which admiration led to friendship and then, in a last-minute hurry, to an unprecedented transfer of wealth, all signed and sealed on the door of the welfare office Koum once haunted. In early 2014, Facebook bought WhatsApp for $4 billion in cash, $12 billion in stock (8.5 percent of the company) plus $3 billion in restricted shares. The deal cemented Zuckerberg as tech’s new billionaire-maker. Koum, a shy but brilliant engineer who had moved from Ukraine to the U.S. with nary even a degree, joined the Facebook board and, after taxes, pocketed $6.8 billion. His cofounder, Brian Acton, a mild-mannered forty-three-year-old ex-Yahoo engineer who got turned down for jobs at Twitter and Facebook, came away with $3 billion after tax. The deal, he said, left him “astonished.” Sequoia Capital, the only venture firm to taste a part of this deal, walked away with $3.5 billion—a sixty-fold return on its $58 million investment.

  The numbers were crazy for a company with only fifty-six employees and roughly $20 million in revenue, but it made sense for Facebook. WhatsApp is one of the world’s most commonly used utilities after e-mail and the telephone and is now rolling out voice calling. Its 480 million users have already erased $33 billion in SMS revenue from wireless carriers that got rich and fat charging per text. WhatsApp charges nothing for the first year and then asks you to pay $1 a year thereafter. No ads, no stickers, no premium upgrades. In later discussions Zuckerberg promised the WhatsApp founders “zero pressure” to make money, saying, “I would love for you guys to connect four to five billion people in the next five years.”

  WhatsApp could eventually make Zuck a lot of money. It costs WhatsApp five cents to support each user, and it’s charging customers in only a handful of countries, like the U.S. and Britain, where mobile payments are relatively mature. WhatsApp believes $1 billion in annual revenue is within reach by 2017 as the service grows and billing falls into place. Insiders say the app could also start charging airlines or companies like Uber for the right to send messages into WhatsApp with user permission.

  The big risk, as always, is a mass exodus of users to the next new thing. That doesn’t seem likely right now. WhatsApp, Acton confirmed, was signing up a million new users per day in the early months of 2014. Everyone in Hong Kong with a smartphone uses WhatsApp. In the United Arab Emirates you can watch WhatsApp Academy on TV. In the Netherland
s, where 9.5 million people (more than half the population) actively use it, “Whatsappen” is now a verb in the Dutch dictionary, meaning to send a WhatsApp message. Brazil’s professional soccer players use its group-chat feature to organize labor strikes during games. “Sometime in the not-too-distant future,” said Sequoia’s Goetz, “WhatsApp is likely to eclipse all SMS traffic across the globe.”

  • • •

  TO UNDERSTAND WHY WHATSAPP got where it is today, you only have to walk a couple of blocks from its unmarked headquarters in Mountain View to a disused white building across the railroad tracks, the former location of North County Social Services, where Koum once stood in line to collect food stamps.

  Koum was born and raised in the small town of Fastiv, outside of Kiev, Ukraine, the only child of a housewife and a construction manager who built hospitals and schools. Electricity and hot water were limited. His parents rarely talked on the phone, in case it was tapped by the state. It sounds bad, but Koum still pines for the rural life he once lived, and it’s one of the main reasons he’s so vehemently against the hurly-burly of advertising.

  At sixteen, in 1992, Koum and his mother immigrated to Mountain View to flee a troubling political and anti-Semitic environment, and got a small two-bedroom apartment through government assistance. His dad, who died in 1997, never made it over. Koum’s mother had stuffed their suitcases with pens and a stack of twenty Soviet-issued notebooks to avoid paying for school supplies in the U.S. She took up babysitting, and Koum swept the floor of a grocery store to help make ends meet. When his mother was diagnosed with cancer, they lived off her disability allowance. Koum spoke English well enough but disliked the casual, flighty nature of American high school friendships; in Ukraine you went through ten years with the same, small group of friends. There, he says, “you really learn about a person.”