‹ View all briefings
January 16, 2022

Telegram: How to Counter-Attack

"Russia's Mark Zuckerberg" has built a social media giant defined by its counter-positioning. 

Photo by

You can listen to an audio version of The Generalist on Spotify or Apple Podcasts.

In collaboration with Masterworks...

I Just Invested More With Masterworks

This week, I bought shares in “Mineral Kingdom,” a 1976 piece by Helen Frankenthaler. In part, that’s because I find it beautiful. But more importantly: the art market is on fire. The Wall Street Journal recently reported that “art is among the hottest markets on Earth.”  It might get even hotter in 2022.

Here's why:

  • Real assets like art appreciate well when inflation is high. 
  • “Crypto-driven” buyers are pouring money into physical art. 
  • Blue-chip Art prices outpaced the S&P 500 by 164% from 1995 to 2021


I have several paintings in my portfolio including a Picasso and a Haring. (I never thought I’d be able to say that!). It was genuinely easy and fun thanks to Masterworks. The company’s also done a strong job of getting results: two of the paintings they’ve sold got investors a net IRR of 30%+ in 2020 and 2021. If you’d like to join me and 300,000 users — click this Generalist Link for priority access*

Actionable insights

If you only have a couple of minutes to spare, here's what investors, operators, and founders should know about Telegram.

  • Telegram is the fastest-growing app in the world. At least, by some measures. A 2021 report suggested that no major app grew monthly active users more than the messaging service. It now boasts around 600 million users. 
  • It has built a narrative around its security bonafides. Though Telegram does encrypt messages, most are not truly, completely private. That hasn't seemed to hurt the company's rhetoric, though. It has done a stellar job of counter-positioning itself.
  • Going crypto has its risks. An ICO in 2018 brought $1.7 billion into Telegram's coffers. Unfortunately for founder Pavel Durov, the SEC concluded it constituted an unregistered sale of securities. The debacle distracted Telegram's development and prompted unusual financial agreements. 
  • Contests can be an effective recruiting method. Few companies seem to have as many talented engineers as Telegram. Part of its success rests on its use of competitions. The company frequently offers prizes for product improvements, hiring the most talented entrants. 
  • It still hasn't found a business model. Telegram has supported payments since 2017 and has recently experimented with advertisements. Neither has caught fire so far. To reach "default alive" status, Durov's team may look for inspiration from WeChat and others.

Over a twenty-four-hour spell last October, Telegram gained 70 million new users. Social media's ubiquity has made us numb to such large numbers, but context helps. That figure is greater than the population of South Africa, France, and Thailand; it is only a smidge less than two Canadas. 

Such comparisons illustrate that Telegram is a messaging app with global scale. It is capable of onboarding the equivalent of nation-states in the time it takes for the sun and moon to complete their shifts and swap spots.

Why this happened is no less important than its magnitude. Facebook stumbled. For six hours, Instagram, Messenger, and Oculus went dark. In search of stimulus, connection, and perhaps even a better, more humane brand of social media, users flooded to the company founded by a charismatic Russian entrepreneur, Pavel Durov.

Beyond serving as a sign of Telegram's rising fortune, this episode tells us something fundamental about the company and how it works. The messenger is a study in negation, best defined by what it is not. It is not Facebook, with its trailing privacy abuses. It is not Instagram, stuffed and padded by advertisers. It is not even WhatsApp, guilty by association. 

That Telegram feels most like a repudiation of Zuckerberg's apparatus gives suitable credit to its narrative but glosses over other strengths. Yes, Telegram has established a reputation as a more privacy-conscious substitute, but it is also, simply, a better messenger. While it may still trail WhatsApp in active users — two billion to around 600 million — it offers more power and finesse. 

Durov's business has had its share of stumbles, of course. A bungled Initial Coin Offering (ICO) brought in $1.7 billion to finance the company's blockchain ambitions but led nowhere. Telegram would argue the SEC bears responsibility for that failure. It can only look inward when it considers its inability to establish a viable business model. Ten years into its life and meaningful revenue still seems distant.

The result is a complex, sometimes quixotic company that, despite its product excellence, seems to do its best work on the back foot, a counter puncher that thrives on comparisons. In chess, the "Russian Game" is an opening sequence characterized, in part, by mirroring one's opponent and attempting to counterattack. In many respects, Pavel Durov seems to be taking the same approach. 

To fulfill its true potential, Telegram may have to vary its play. As the company enters a new decade, it will hope to establish a reputation on its own merits. Powered by a visionary executive and exceptionally talented technical team, it has the ingredients to not only match the reach of WhatsApp but eclipse it. In today's piece, we'll talk through Telegram's past and future, covering the following: 

  • Establishing VKontakte. Before he tried to build a better WhatsApp, Pavel Durov created Russia's version of Facebook. Though Zuckerberg's story had plenty of intrigue, Durov's is far more exciting. 
  • Starting Telegram. Ousted from his old company, Durov set about building Telegram. To grow the app, he's had to contend with FBI interference and SEC truculence. 
  • Unusual financing. Durov has resorted to unorthodox means of financing Telegram to avoid raising from venture capitalists. Not only has he paid for much of the development himself, but he's turned to ICOs and bond issuances.
  • Excelling with product. Telegram might have started after WhatsApp, but it is now the clear leader in product. Telegram supports larger groups, more formats, and a range of different features. 
  • Money troubles. Much of the company's reputation relies on its commitment to privacy. That makes an ad-based business model an uncomfortable fit. Telegram has experimented with promotions and payments without landing a breakout hit. 
  • Looking ahead. There is reason for optimism, though. Other messaging apps have found creative ways to monetize, not least China's WeChat and Japan's LINE. 

Let's get started.

The VK Story

Though not a frequently invoked name, the Roman poet Juvenal is responsible for several of our modern era's favorite turns of phrase. Alongside "bread and circuses," used to depict how to appease the masses, he can reasonably take credit for both "black swan" and the query "who watches the watchmen?" 

He is a minor star in the story of Pavel Durov. Fittingly, the Telegram CEO's tale is a carnival of freak outcomes, mass adulation, and governmental suppression. Much of it exists only in Russian, which I have done my best to translate and triangulate. Circuses, black swans, and unfettered watchmen abound. 

Firestarter

There is some irony that a man whose life would be defined by a quest for privacy would be born in 1984. Pavel Durov was the second son of Albina Durova and her husband, Valery Semenovich Durov, a respected Roman historian who wrote a thesis on one of Juvenal's satires. 

Though born in St. Petersburg, Durov spent much of his childhood in Turin. Only after Valery accepted a position as the Head of Philology at St. Petersburg University (SPbU) would the family return to Russia. 

Though undoubtedly intelligent, Pavel was the less prodigious of the Brothers Durov. Born four years earlier, Nikolai showed remarkable mathematical prowess from an early age. (We'll refer to Nikolai Durov as "Nikolai" throughout this piece to differentiate between him and Pavel.) 

Nikolai competed in the International Mathematical Olympiad in his teen years, winning several gold medals. He was also a talented computer scientist, an interest he passed to this younger brother, who showed a knack for building products. At the age of 11, Pavel created a Tetris spin-off. (The original was also the brainchild of a Russian developer.) Later, he and Nikolai completed a strategy game called "Lao Unit," set in ancient China.

Pavel was not the easiest student. The boy who sat at the front of the classroom to better see the board received good marks but often told teachers they were incompetent. He seemed to delight in showing his superior intellect, particularly when it came to computers. In one instance, he changed the screensavers on school computers to a picture of a teacher accompanied by the words "Must die." Though the instructor tried to lock Pavel out of the computer system several times, he always seemed to find a way in. Such eccentric behavior was not solely reserved for teachers; a classmate remarked that when he spoke to Pavel, he could never be sure whether he was serious or mocking him. 

Despite this interest in programming, Pavel followed in his father's footsteps when it came time to attend university. Not only did he matriculate to SPbU, but he focused on linguistics. To fulfill Russia's military conscription requirements, he studied propaganda, learning tactics espoused by Sun Tzu and Napoleon. In time, Durov would realize just how seriously his country took informational control.

Alongside his studies, Pavel worked on his own endeavors, including Durov.com. What began as a blog morphed into a platform for university students to upload essays and exchange ideas. Pavel used pseudonyms to argue multiple positions on the site, often making purposefully inflammatory statements—praising Hitler, for example. He later explained

Sometimes I have to start fires. If users agree with you, you'll feel on top of the world, but they'll just leave. If you argue with them, humiliate them, they'll come back to prove they were right.

Durov's incendiary understanding of online social dynamics ensured the site attracted more than 2.7 million visitors. Not only did it give his ideas massive reach, but it demonstrated the demand for destinations to gather online. That insight would prove invaluable as the budding entrepreneur considered his next move. 

Chasing Facebook

In 2006, Slava Mirilashvili logged on to a Russian news site and was surprised to see the face of his old classmate, Pavel Durov. His friend was being profiled for creating a popular forum for university students. (As a note, we'll refer to Slava Mirilashvili as "Slava" to distinguish between him and his father, also involved in this story.)

From his perch at Tufts, Slava had seen the rise of Facebook up close. The social network had, of course, been founded in Boston two years earlier. In Durov's forum, he saw the beginnings of a similar business geared toward the Russian market. 

Slava found Durov's address, and the two young men recommenced their friendship. Conversation soon turned to the potential in the nascent social networking space, with friend and McGill graduate Lev Leviev soon joining. 

A few months after graduating from SPbU that summer, Durov registered a domain: vkontakte.ru. As the story goes, the name VKontakte—which means "in contact"—came to Durov quickly. Initially, he envisioned it changing by city – "in contact with Moscow," for example. In a minor echo of Facebook's "drop the 'the,' it's cleaner" moment, Durov would end up nixing appending the names of individual cities. 

To get their project off the ground, the trio needed funding. Luckily, they had a readymade source of capital: Slava's father, Mikhail Mirilashvili. The Georgian had built a dizzying empire of different businesses from property to petroleum, media to gambling. Mirilashvili's network of slot machines was the largest in Europe. 

At his son's behest, Mirilashvili capitalized VK in exchange for 60% of the business. Though Durov held just 20%—the remaining 20% split between Slava and Lev Leviev—he was given the majority of voting power, reflecting the startup's reliance on his vision. (Other sources suggest the three recent graduates each received 20%, with Mikhail Mirilashvili holding 40%.)

With money in the bank, VK was off to the races. Like Facebook, VK began by targeting university students, growing campus by campus through invitations. Durov also incentivized sign-ups through a competition: users were encouraged to get as many friends as possible to sign up. Whoever proved the best referrer was promised a new iPod. This tactic alone helped VK secure thousands of early adopters. 

It didn't take long for VK to break into six figures. Just six months after launching the company's beta, VK had become Russia's second-largest social network with more than 100,000 users. A little over a year later, VK had pulled into first place, surpassing Odnoklassniki and reaching 1 million. 

Scaling VK

The company's success seemed to come from a combination of product savvy and technological excellence. 

From the beginning, Durov illustrated both vision and pragmatism when it came to VK's product. Early iterations borrowed heavily from Facebook, mimicking the American company's color palette and functionality. VK would soon make moves of its own. For example, Durov believed that a feed, though prevalent today, was a misstep, favoring the profile page as the user default. That may have been a better fit for the Russian market at the time.

Additionally, VK supported video and audio file uploads, including many subject to copyright. That brought scrutiny, with one Russian television company suing for infringement. It also made the product richer, operating as a pseudo-Netflix or Spotify. Users spent hours every week watching videos on the site.

Durov's VK Profile

In researching this piece, I had the chance to speak with one of VK's early employees. They noted that even as VK matured, Pavel ruled over the product function, with high expectations. "Pavel puts a high bar on the quality…the quality of the code, the quality of the final product. You have to meet that bar by any means." As VK matured, even small stylistic decisions frequently rolled up to the CEO. 

VK also excelled from a technological perspective. As the company grew, it became an increasing challenge to support skyrocketing volume, especially as the site became a target for hackers. Thankfully, Durov had an ace up his sleeve: his brother, Nikolai. After attaining a PhD in mathematics from SPbU in 2005, Nikolai had continued to the University of Bonn, receiving a PhD in computer science (and mathematics, again). Like few others, he constructed a backend capable of handling millions of users and fending off attackers.

Money mania

Soon though, not even the elder Durov's mastery could keep up with rising demand. VK had started monetizing relatively early, encouraging users to buy in-app currency, send paid text messages, and play games. Beginning in 2008, the company had also experimented with running advertisements on the site, though Pavel preferred to keep them to a minimum so as not to hamper the user experience. The former VK employee I spoke with remarked that "customer obsession was the first priority, always." 

Despite bringing money in, the growing need for more servers meant that further funding was needed. It's at this point that our tale intersects with a previous piece—VK's new sponsor was none other than Yuri Milner, founder of DST Global

At first, taking Milner's cash wasn't a difficult decision for Durov's team – in trademark fashion, the venture capitalist offered the most money at the best terms while letting VK continue to operate as it wished. But over time, DST, whose Russian properties were soon bundled into Mail.ru Group (MRG), built up a significant position. By early 2011, MRG held a 32.5% stake, with an option on a further 7.5%. It wanted even more. General manager Dmitry Grishin, one of Milner's lieutenants, noted that it would be "strategically correct for us to take control of the social network or, even better, to acquire all its shares. We are holding a dialog for that."

That dialog didn't seem to last long. Though Durov reportedly visited MRG's offices to discuss a takeover, he gave his final answer on social media: posting a picture of his middle finger captioning that this was his "official" response to Grishin and calling MRG a "trash holding." 

Vesti

Though strong words, they didn't stop MRG from exercising its option, taking its stake to 40% and valuing VK at $1.5 billion. The social network had reached 125 million user accounts, spread across Russia and former Soviet states.

Power plays

VK's reach gave it real power. Toward the end of 2011, that would prove something of a liability. In December of that year, protests over unjust parliamentary elections gripped the country. In response, the FSB, the country's security agency, pressured VK to shut down seven opposition groups and pass on user information. In response, Durov tweeted a photo of a husky in a hoodie, sticking its tongue out. It was his way of letting the world and VK's users know that he would not submit to governmental pressure. 

Durov's Twitter

A SWAT team visited his apartment shortly after, though Durov refused to let them in. Surrounded, he decided to call his brother to tell him what was going on. As he would later tell it, this was the moment that sparked the idea for the business that would succeed VK: "I realized I don't have a safe means of communications with him. That's how Telegram started."

Remarkably, the SWAT team retreated, and Durov emerged from his brush with the Kremlin with his reputation enhanced, at least for the time being. 

Governmental pressure continued into the new year, perhaps contributing to Nikolai's decision to leave VK. Squeezed by businessmen and bureaucrats and newly lacking his closest ally, the younger Durov's behavior remained erratic.

In one famous incident, Durov threw money from VK's office windows. As the story goes, he had just given a large bonus to one of the company's VPs. When the employee responded that it was the mission, not the money, that mattered to him, Durov challenged him to prove it, suggesting he throw rubles onto St. Petersburg's bustling Nevsky Avenue. Though the VP complied, Durov thought he did so with insufficient panache and decided to take over, making paper planes from 5,000 ruble notes, and floating them down to the quickly assembling crowd. Durov later called it "one of the funniest moments in the history of our company."

Meanwhile, MRG was still jockeying for control. In late 2012, Alisher Usmanov, the mogul that had financed many of Milner and MRG's maneuvers, said that "concrete negotiations" were in process. As discussed in our DST piece, Usmanov was not the kind of person to refuse for too long. Not only was the Uzbek absurdly wealthy, but he was seen as a Kremlin ally. 

The pressure continued to mount into 2013. VK came under fire for piracy from The Recording Industry Association of America (RIAA), hampering the company's chances of publicly filing on Western exchanges. 

Two months later and Pavel Durov's Terrible-Horrible-No-Good-Very-Bad-April began. On April 4, Novaya Gazeta dropped a bombshell. The Russian newspaper reported that rather than resisting the FSB's advances, Durov and VK had actively abetted the government's attempts to quash resistance groups. In support of these claims, the periodical published alleged communiqués between Durov, VK's then press secretary, and high-ranking government officials. For those unfamiliar with their work, Novaya is a highly reputable publisher known for its investigative reporting. Last year, co-founder and editor-in-chief Dmitry Muratov was awarded the Nobel Peace Prize for protecting freedom of speech in his native land. 

According to Novaya, Durov outlined his cooperation, remarking that he had passed on information for thousands of users to the FSB. VK's press secretary suggested his team should be commended for blocking "radicals." After initially denying the authenticity of these messages, VK's press secretary admitted his cooperation; Durov continued to deny his role. 

When I asked the former VK employee what they thought of these accusations, they responded that while they wanted to believe the letters were forged, they suspected that some kind of collaboration with Russian law enforcement was likely unavoidable. If Durov did aid the FSB, it would only have been because he felt he was protecting VK against a "bigger evil."

Though Durov often seems like an idealist, animated by libertarian leanings, he's also a pragmatist. He may have decided some measure of government cooperation protected VK's independence in the long term.  

Around the same time, police launched an investigation against him for his role in an alleged hit-and-run in which a white Mercedes rolled over a traffic warden's foot. Durov was believed to be inside. Fearing political retribution, Durov fled with some believing he'd absconded to Italy, Switzerland, or St. Kitts and Nevis. On April 16, investigators stormed VK's offices, ripping through filing cabinets. 

Wherever he was in the world, Durov got a call the next day. Could he confirm that United Capital Partners (UCP) had purchased a 48% stake in VK? He knew nothing about it, though the news would prove true. For $1.12 billion, the Mirilashvilis and Leviev had sold their stakes to a firm rumored to have government ties. Indeed, many thought UCP would have been unable to finance such a large purchase without the help of influential backers. From one vantage at least, it looked as if the Kremlin had forced a partial takeover in the face of corporate rules that dictated existing shareholders had the right of first refusal on such sales. Even MRG would later refer to it as a "dubious scheme" on UCP's part. 

Perhaps sensing his days at the company he had founded were dwindling, Durov ramped up work on the side project he'd begun with Nikolai not long after the SWAT team had descended on his apartment. Dubbed Telegram and repping a paper plane as a logo, the free, secure messaging service had already racked up a considerable user base. By October of 2013, it had more than 100,000 daily active users and had already surpassed WhatsApp when it came to certain features. Despite this traction, the Durovs conceived of the project as a non-profit with development financed via their new holding company, Digital Fortress. 

April Fools'

In January 2014, Pavel Durov sold his remaining shares of VK. The buyer was Ivan Tavrin, the CEO of MegaFon. Durov must have made his peace with Usmanov by that point since he was a partial owner of the mobile carrier. And presumably, Durov knew what would happen next.

A few months later, Tavrin sold the stake he had purchased to MRG, giving the company control over VK. At last, Russia's internet conglomerate had snagged the country's largest social network. 

Though he remained CEO, Durov started to chafe against UCP and MRG. On April 1 of that year, he announced his resignation via his VK account. Many assumed it was a (rather bizarre) April Fools' joke, a belief strengthened by one communication employee's decision to tweet out a link to further information directed to Rick Astley's "Never Gonna Give You Up." 

Was it a joke? Eight years on, and it's still not clear. On April 3, Durov returned to social media, posting the doge meme and saying it had been a prank all along. On April 21, he was to report he had been fired for real, this time for incorrectly retracting his resignation. Bubbling beneath the surface was UCP's reported discontent over Durov's involvement with Telegram, something they believed to be a competing project and one they alleged he had used VK funds to support. 

Whatever the case was, he closed out April by sharing a final update: he was going full-time on Telegram and looking for a new home for his team. In a Facebook post, he wrote: 

What country or city do you think would suit us best? Please feel free to comment below. To give you an idea of our preferences, we dislike bureaucracy, police states, big governments, wars, socialism and excessive regulation. We like freedoms, strong judicial systems, small governments, free markets, neutrality and civil rights.

Understand the world's most consequential tech companies before they IPO. Don't miss our next email. 

The Telegram Story

Telegram's story emulates VK's. Though the messaging app has reached stratospheric heights in little time, it has courted controversy along the way. Since the Durovs began working on the project in 2012, Telegram has racked up nearly 600 million monthly active users and was 2021's fastest-growing app on that basis. In the process, Durov has had to fend off the FBI, face down the SEC, and even make an uneasy peace with Russian powerbrokers. 

In the wind

When Pavel Durov left Russia, he was not hurting for money. Later reports would suggest he departed with around $300 million and 2,000 bitcoin—roughly $87 million at today's prices. That gave him more than enough capital to finance Telegram's development and invest in Caribbean island, St. Kitts and Nevis, in exchange for citizenship. Alongside brother Nikolai, installed as CTO, Pavel set about growing Telegram. 

Not all were convinced by the project's promise, considering it a replica of WhatsApp that brought little new to the table. But even early on, Telegram's team set itself apart by offering smoother interfaces, faster interactions, and purportedly safer communication. That promise attracted users, with the company snagging 35 million within a few months of launching. Telegram's counter positioning became even more potent after Facebook acquired WhatsApp in early 2014 for $21.8 billion. 

UCP continued to cause problems, though. The VK shareholder sued Durov for ownership of Telegram, claiming Durov had spent company time and money developing it. The disagreement seethed through 2014, only ending after MRG purchased UCP's stake in VK. (We have entered proper alphabet soup territory.) As part of the sale, the lawsuit was dropped, leaving Telegram's path clear. 

Matters of moderation

By 2016, the company had amassed 100 million monthly active users (MAUs) with "zero marketing budget." Still, Telegram frequently found itself at the center of controversy. The app's privacy-focused features not only attracted security-conscious users but extremist groups looking to stay out of the public eye. Telegram struggled to control jihadist groups using the app and adequately moderate illegal content. Dissidents and journalists operating in oppressive countries benefited from many of the same features. 

Governmental agencies also caused strife. Russian police were, at one point, believed to be pressuring mobile operators to intercept Telegram messages. At the same time, Durov claims the FBI tried to bribe him and his developers to introduce a backdoor. As he tells it, the US intelligence officials offered one of Telegram's engineers "on the order of tens of thousands of dollars," hardly an enticing proposal given Durov's claim that the app's developers were all millionaires. Russian authorities reportedly made similar requests without luck.

Despite these impediments, Telegram kept growing. Often, it was boosted by Facebook's missteps. Whenever the social network went down or found itself in hot water for misuse of user data, millions turned to Durov's creation. As we've noted, Telegram often acts as a kind of InverseFacebook instrument, prospering as the American behemoth bleeds. The same is true of its relationship with other traditional social tools. For example, criticism of South Korean app Kakao Talk in 2014 and 2019 drove users to Durov's messenger.

As public opinion and media narratives turned against incumbent, ad-driven products, Telegram continued to rise. Its only problem seemed to be the small matter of money.

TON of trouble

By 2018, Telegram was approaching 200 million users but had yet to find a reliable form of monetization. Though Durov still seemed to see his creation as a public good, revenue generation would allow it to become self-sustaining. Also, Durov's VK windfall wouldn't last forever; in 2017, the company's costs reportedly reached $70 million.

Though Durov had famously disliked running ads on VK–contributing to Facebook's average revenue per user being 7x larger at one point–he'd surely learned that it was the most effective way to monetize social networks. However, that playbook didn't seem well-suited to Telegram. Because of its focus on privacy and security, Telegram couldn't pass on data to advertisers without breaking one of its fundamental promises. That meant that money would have to arrive from elsewhere. 

The early bitcoin investor turned to the accelerating cryptocurrency space. In January, Telegram announced its intention to launch the "Telegram Open Network" (TON), a new blockchain that would support an in-app ecosystem. With typical bombast, Durov claimed it would prove "vastly superior" to incumbent chains like Bitcoin or Ethereum. 

TON planned to enable payments and purchases, including from third-party developers. Telegram raised $1.2 billion via an Initial Coin Offering (ICO) to finance its construction. Participants included Silicon Valley royalty like Sequoia, Benchmark, Kleiner Perkins, and Lightspeed. If Telegram wouldn't sell equity, at least the thinking went, this provided some exposure to its torrid growth.

TON Whitepaper

At first glance, it was a masterful strategic move, giving Telegram a war chest based on an idea. Anton Rozenberg, a Telegram executive, and former VK engineer, later noted

Everything in this ICO seemed magic: Telegram managed to raise on a virtual project as much or even more than the company itself could have been valued – with almost no commitments to investors and no equity loss.

One source I spoke to suggested that Telegram's move into the crypto space prompted Facebook's subsequent efforts. Like Libra (now called Diem), Telegram's attempt proved somewhat ill-fated. Though the core messaging app continued to snowball, development on TON stuttered. 

According to a former employee, Telegram told backers it was "90-95%" finished with much of TON's initial build in September of that year. In December, they suggested they were just days away from unveiling their work. A new year began, and still, TON had yet to see daylight. In September 2019, Telegram released its source code for experimentation, and in October, the SEC came calling. 

The US entity determined that the TON ICO constituted a sale of unregulated securities, halting development. Division of Enforcement co-head Stephanie Avakian said

Our emergency action today is intended to prevent Telegram from flooding the US markets with digital tokens that we allege were unlawfully sold.

TON's launch was delayed again, and after further issues, Durov surrendered. In May 2020, Telegram's CEO announced he was giving up the project, attributing TON's demise to the SEC. The company had spent $405 million on development without shipping a viable version of the product. Frustrated, some investors considered a lawsuit, alleging that their capital had been misused, allocated toward developing Telegram's messaging app rather than the TON network. 

In the end, Telegram returned 72% of funding to TON investors – a total of $1.2 billion. Many were frustrated not to receive equity in Telegram. Non-US investors were given the option of converting refunds into loans that delivered 110% return on their initial investment after one year, putting Durov on the clock to raise more money. Telegram also paid the SEC an $18.5 million penalty without "admitting or denying the allegations."

After separating himself from the project, Durov passed control of TON to its "community." Because the code was open source, anyone could continue to build on the project's architecture. Several spin-offs emerged, including "Free TON" and "Toncoin." The latter seems to have established itself as the spiritual heir to the original, receiving Durov's endorsement in late 2021. Two independent developers helm the project, with a further nine associated with Toncoin's Github. Based on contributions to various repositories, development seems sporadic. Nevertheless, the spin-off trades at a $4.4 billion market cap and $18.2 billion when fully diluted. Free Ton has since rebranded to Everscale and uses a different programming language than the initial TON code.

When I asked a current Telegram employee for their thoughts on TON, they noted that it had interfered with the core product's development and created friction. They also conveyed the company's separation from TON's future. Though a daring gambit by Durov, TON ultimately failed to solve the monetization and capitalization issue. He took another unusual approach. 

Uneasy bonds

By April 31, 2021, Telegram would owe $700 million. At that point, the company's loan to ICO investors that elected to take up its offer would come due. Once again, Telegram had a money problem, unhelped by the fact that, by Durov's admission, it took "a few hundred million dollars per year" to run. 

With more than 500 million active users, Telegram had no shortage of suitors. Reports suggested that Western VCs had offered to purchase a 5% to 10% stake in the business at a $30 billion valuation; others suggested the price was closer to $40 billion. 

But building VK had taught Durov the dangers of introducing outside investors. After being shuffled out of his CEO perch once, he wasn't about to let it happen again.

Instead of selling equity, Durov turned to debt. In March of last year, Telegram issued $1 billion in bonds paying 7-8% annually. More importantly, should Telegram IPO within three years of the issuance, purchasers could exchange the bonds for equity at a 10% discount to the listing price. If it takes Telegram longer to hit the public markets, the discount steepens to 15-20%. 

Among the buyers was Abu Dhabi's sovereign wealth fund, Mubadala Investment. As part of the purchase, Durov committed to extending Telegram's presence in the region, with another office expected in the UAE. 

Surprisingly, Mubadala's bond purchase involved the Russian Direct Investment Fund (RDIF). In a secondary transaction, the Abu Dhabi firm sold a reported $2 million in bonds to RDIF. Mubadala referred to the exchange as part of a joint venture between the sovereign wealth funds. Given Durov's strained relationship with his homeland's authorities, Telegram was not best pleased with a spokesperson noting: 

Russia's Direct Investment Fund is not on the list of investors we sold bonds to. We wouldn't be open to any transaction with this fund. 

Nevertheless, RDIF now holds the right to attain equity at a discount to Telegram's potential IPO. Though it likely irked Durov, the fund's involvement is also an indication that, in some respect, Telegram's CEO has won. Almost as long as the app has existed, Russian authorities have sought control. When Durov failed to comply with their demands, the Kremlin attempted to ban the app for almost two years before eventually throwing in the towel in 2020. RDIF's engagement with the bond sale suggests the country considers Telegram too big to stop. 

New heights

Not long before Mark Zuckerberg announced Facebook's rebrand, the company experienced the massive outage that we have already discussed. Over a day, customers flocked to alternatives. Messaging app Signal reported picking up "millions" of users, while Telegram announced it had gained 70 million newcomers. That constituted a "record" for Durov's company and a meaningful uptick for an app that had started the year with half a billion users. 

Though this was the most dramatic example of Telegram gaining ground on WhatsApp, 2021 was a stellar growth year broadly speaking. By one account, Telegram was the fastest-growing major app of the year, surpassing Instagram, Zoom, TikTok, Signal, and others. In 2022, the company will hope to surpass one billion active users. To reach that goal, it  may need to keep improving an already powerful product.

Powerful product

Look at Telegram too quickly, and you might think it is just another undifferentiated messaging app. The truth is far more interesting. This is a robustly built product constantly pushing the limits of what a messenger can and should do. Though Telegram may have started as a WhatsApp clone, it now bears more than a passing resemblance to Twitter, Clubhouse, Reddit, Discord, and Slack, housed in a single, slick interface.

MTProto

Telegram relies on a custom protocol named "MTProto." Designed by Nikolai Durov, MTProto is intended to offer security while retaining performance. Specifically, the protocol leverages two encryption schemes with differing levels of privacy. 

While more technical readers may be able to parse much more from the diagrams below, the rest can be content knowing that "Part 1" is a "server-client encryption," meaning that user data is stored in Telegram's servers. All "cloud chats" use this encryption scheme. As an aside, Telegram's corporate structure is designed to add an extra layer of security here. Data from cloud chats is spread across global servers, governed by different legal entities. As Telegram explains, "several court orders from different jurisdictions" would be required to secure company data. 

"Secret chats" leverage the more secure end-to-end encryption (E2EE), as illustrated in MTProto's "Part 2." With E2EE, no one except the sender and the recipient can decipher the data. Not even Telegram can decrypt messages sent via this layer. 

Telegram

Telegram's approach here has attracted criticism. In a recent Twitter thread, Moxie Marlinspike, the co-founder and former CEO of rival messaging service Signal, outlined his issues with the product. 

In Marlinspike's view, Telegram was no more secure than Facebook Messenger: 

Telegram stores all your contacts, groups, media, and every message you've ever sent or received in plaintext on their servers. The app on your phone is just a "view" onto their servers, where the data actually lives. Almost everything you see in the app, Telegram also sees…The confusion is that Telegram does allow you to create very limited "secret chats" (no groups, synchronous, no sync) that nominally do use e2ee…

FB Messenger also has an e2ee "secret chat" mode that is actually much less limited than Telegram's (and also uses a better e2ee protocol), but nobody would consider Messenger to be an "encrypted messenger." 

FB Messenger and Telegram are built almost exactly the same way.

Marlinspike's work building Signal complicates his argument, as does his product's connections to the CIA and other US national security entities. It nevertheless highlights a core part of Durov's strategy. Like its founder, Telegram is both idealist and pragmatic. Yes, it wants to provide a secure experience for those that need it but not at the expense of the majority of users. While having true E2EE might create a more private experience, it would make Telegram less usable for many; no longer would messages sync across different devices, for example. 

One member of the Telegram team that I spoke with explained that above all, the company wanted to give users the best experience – for some, that might involve E2EE and disappearing chats, but for most, it wouldn't. In comparing Telegram to Signal, the former VK employee discussed previously succinctly said, "Signal is not a product for billions." 

Chat

The core of Telegram's visible product is its chat functionality. Available across devices, users can message each other via a simple, intuitive interface. Anecdotally, I find it feels smoother, faster, and more vivid than WhatsApp. Buttons do what you expect them to, and small features produce unexpected delight. 

More concretely, Telegram's chat is robust. It supports various files (doc, zip, mp3) with high size limits. Replies, mentions, and hashtags are baked in, and in-app photo editing features are surprisingly advanced. 

As alluded to above, default chats are stored on the cloud so that users can view them as they move from phone to laptop and back again. If you want to keep things under wrap, you can start a "Secret Chat," which uses E2EE and can be set up to automatically destroy messages after a certain period. 

Groups

If users want to communicate with a broader cadre of people, they can turn to "Groups." As with other messengers, these are used for different purposes, from family chats to commercial coordination. A recent article noted that Telegram groups had gained popularity among students. Rather than emailing a teacher or texting one friend at a time, students share questions and answers in an ongoing chat. This is reminiscent of Discord, an unexpected hit among different learners.

In some countries, groups serve as a Slack alternative for startups and SMBs. For example, one source noted that in Russia, many preferred Telegram to the Salesforce subsidiary—thanks in part to it being entirely free. This could present a path to reliable monetization, as we'll discuss later. 

Telegram groups have taken on such a life of their own because, like the rest of the application, they're almost bizarrely powerful. Telegram supports up to 200,000 members; WhatsApp tops out at 256. Telegram has built out a suite of sharing and administrative tools to manage those kinds of numbers. Group managers can create group links to share with the world and granularly manage how members are permitted to interact.

Channels

If Telegram's groups mimic Discord, "Channels" are a kind of Twitter or Reddit facsimile. Rather than conversation, channels are built for broadcast and have no upper limit on the number of users. Some of Telegram's company channels, for example, exceed 8 million participants. 

There are popular channels for memes, pictures, news, quotes, and more. More than 400 million people view a Telegram channel each day. View data is visible to channel owners message by message. If channel owners want to allow viewers to talk, they can nest breakout group chats within the channel. 

Telegram

Audio and video

After witnessing Clubhouse's breakout pandemic trajectory, Telegram accelerated its audio development. It offered voice calls early in its development, but audio rooms were newer. Today, groups and channels can host "limitless" voice chats. Millions can join, and administrators can invite participants on stage, record their discussion, and share links to the conversation outside of the app. Thanks to Telegram's massive pre-existing user base, Telegram quickly surpassed Clubhouse in terms of minutes spent listening. 

Telegram

The company is following a similar trajectory with video, leveling up from calls to group calls to pseudo-streaming. Telegram can now support up to 1,000 synchronous viewers and allows for easy recording and watching. We should expect further improvements. Per Telegram's blog, "We will keep increasing this limit until all humans on Earth can join one group call and watch us yodel in celebration (coming soon)."

Payments

Though you may not have seen it, Telegram does support in-app payments. A beta of this functionality first emerged in 2017 but was limited to interactions with Telegram "bots." Via this interface, users could do "anything from ordering a pizza to hailing a taxi, to replacing winter tires when you're tired of winter."

How many people did those things? While a blog update highlighted that Telegram now integrates with 15 different payment providers, including Stripe, the fact the company has not celebrated any significant milestones suggests processing volume is low. In time, payments may prove one of the most critical elements of Telegram's platform. While the company takes no commission right now, it's easy to imagine a small rake at scale – giving Durov's team the firepower to keep building.

Details

Outside of Telegram's primary functionality, it has a host of more minor features. Many may go undetected, but they illuminate the care the team puts into its product. No detail is too small not to improve or potentially delight. 

For example, Telegram protects you against spoilers. When sending a sensitive text, you can select part or all of it and mark it as a "Spoiler" to obscure it. To decipher it, the reader must explicitly tap it. (I could not find this functionality on my app; it may only be live in certain countries.) 

Telegram

Another helpful feature is "People Nearby." Though turned off by default for privacy reasons, anyone that wants to can find local groups and chats by activating the feature. 

There are several more "nice-to-have" additions like this, including text recognition, a suite of bots capable of auto-posting emails or launching game experiences, and extra identity features. While these seem unlikely to play a significant role in Telegram's future, they subtly improve the product. 

Learn the playbooks of today's global giants. Join 53,000 others to get our next Sunday briefing.  

Competitive culture

Little information exists about Telegram's culture. That's fitting for a business that prides itself on privacy but presents a challenge for an analyst. Through my discussions, I was nevertheless able to get a sense of how Telegram operates and what makes it unique. 

Leadership

A friend at Amazon once told me that, like many other corporations, the e-commerce behemoth organizes itself into "levels." An entry-level engineer might be a Level 4 or "L4," while a VP would be an L10. The highest level was L12 and had just one member: Jeff Bezos. (This always struck me as faintly hilarious; why was a whole new stratum – unreachable to anyone else – required to enforce Bezos' supremacy?) 

Telegram feels like this in a minor key – when it comes to control, Pavel stands alone. Not only has he financed the company, but he's guided its vision. So, what is the younger Durov brother like? 

As we've alluded to, he seems to be a mercurial, contradictory character. An awfully large number of shirtless pictures exist for someone that champions an ascetic lifestyle, free from the vanity and the trappings of wealth. Though self-styled as an iconoclast, he has been credibly accused of colluding with the FSB. His choices regarding financing and head-quartering Telegram do not scream rebellion; while Abu Dhabi is a modern city, the UAE is not a bastion of tolerance. Critics and activists are too frequently imprisoned on nebulous charges, and women's rights remain compromised. Of course, no country is perfect, not least the United States, but some of Durov's most consequential human and corporate decisions demonstrate more than a little ideological plasticity.

(To take the other side, tech can be a progressive force. By building a social media giant in the Middle East, Durov may be contributing to a more liberal regional posture.)

Beyond this disconnection, Pavel is a highly intelligent operator with a keen product sense. An employee described him as a "visionary," capable of recruiting exceedingly talented engineers and rallying them around a common goal. He insists on a high standard of work, delivered rapidly. 

Though nominally Telegram's CTO, Nikolai Durov doesn't seem to carry managerial responsibilities. Befitting his technological genius, Nikolai is shielded from such mundanity, tasked with building and improving the core architecture. He is rumored to have completed the MTProto and the TON specification alone. Telegram's Android client was almost entirely his creation, according to a source. 

He is an eccentric character. In a Medium post, a childhood friend relayed a story he had heard about Nikolai that he felt had the ring of truth to it. The "genius among geniuses" had once eaten a bowl of cereal invaded by beetles without noticing; problems of greater significance occupied his mind. 

A Telegram employee noted that Nikolai seemed shy and often struggled to communicate in large groups. They indicated that Pavel showed extraordinary care when accommodating his elder brother, recognizing what Nikolai brought to the table, and giving him the tools necessary to succeed. 

Shipping

As suggested above, Telegram is known for shipping fast. The employee I spoke to highlighted how, despite starting four years after WhatsApp, Telegram quickly caught up and then sprinted ahead from a feature perspective. Now, WhatsApp and Messenger lag Durov's company, introducing updates that Telegram rolled out years earlier. 

This may be partially due to a flat managerial structure – at least if the company is run similarly to VK. The former employee I spoke to noted that VK had almost no managers while they worked there. Instead, small pods worked on products, moving quickly. As often as possible, decisions bubbled up to Durov. Telegram may run the same way. 

Contests

Telegram has reportedly done an exceptional job recruiting engineers. In part, that's thanks to Pavel Durov's reputation. In Russia, he is viewed as a generational entrepreneur and an icon of technological progress. One source explained how that had helped Telegram's image, saying, "Telegram in Russia is a kind of symbol. I think you could say it's a symbol of resistance."

That's allowed the company to get its pick of Russia's elite developers. (By some accounts, the country's software engineers are the best in the world; Russia has won more International Collegiate Programming Contests than any other nation.) It has taken creative measures to support that talent pipeline, launching "contests." 

On contest.com (what a domain!), Telegram runs "Developer Challenges" to improve its product and find new teammates. For example, the company recently ran a "GIF Contest" to create more "GIF-style reaction videos." The winner was given $50,000. 

According to an employee, thousands compete in these contests. From this pool, Telegram hires the "top two or top three." This is part of the reason the company has managed to remain lean throughout its life; the engineers it recruits are, quite literally, in the top 0.1%. 

Default alive

In addition to being the co-founder of Y Combinator, Paul Graham is known for erudite writing about company building. Among his famous frameworks is the idea that startups are either "default alive" or "default dead." 

Default alive startups have a line of sight to achieving profitability without further funding. No additional capital injections are needed for them to continue operating. Default dead startups don't have this freedom; their survival is predicated on fundraising. Graham's advice is that startups should ask whether they are default alive too early rather than too late. Per Graham: 

It's probably not that dangerous to start worrying too early that you're default dead, whereas it's very dangerous to start worrying too late.

Thanks to Durov's personal wealth, Telegram has been able to delay answering that question definitively. Starting in 2018, though, the company seemed to realize its founder's lucre was not limitless, recognition that led to the ill-fated TON ICO and eventual bond sale. While $1 billion in debt financing has given Telegram some breathing room, there's no doubting that the company is default dead right now. This money won't last forever either. Assuming Telegram maintains the same burn rate of a few hundred million a year, it will likely be out of cash within three years and possibly much less. 

How does the company get out of this predicament? It will either need to raise more money from the private or public markets or find a reliable way to monetize. 

Capital

While Telegram could take its pick of private financiers, Durov is likely to prefer raising money via an IPO. The company is reportedly targeting 2023 for a public debut. That timing is likely inspired by the terms of the bond offering – if it takes longer than three years for Telegram to list, the discount given to backers increases. 

Reports from Russian newspaper Vedomosti suggest Durov has already begun speaking to investment banks and is scoping out the appropriate venue for an offering. Durov is apparently considering both a SPAC and a direct listing, with a preference for the latter. While the NYSE is a mooted destination, Asian exchanges are also in the running, including the Hong Kong Stock Exchange. 

If Telegram were to go public today, what kind of valuation might it fetch? 

At its acquisition in 2014, WhatsApp reported 400 million active users, meaning that Facebook paid roughly $55 per user. Assuming Telegram has surpassed 600 million active users, it could fetch a $32.7 billion valuation on those terms. 

But the market has changed in the eight years since WhatsApp was snapped up. Social media companies have further demonstrated their monetization potential, fintech has insinuated itself into all manner of products, and tech writ large has gained prominence. Judging Telegram by the same per-user value feels out of date. 

We may need to turn to the private markets for a better comparison. In September of last year, Discord raised $500 million at a $15 billion valuation. At the time, the company reported 150 million active users, equating to $100 per user. By this measure, Telegram would be worth closer to $60 billion, a figure that feels like a better representation of the company's value.

Company data

Of course, the difference between Telegram and Discord is the small matter of revenue. Jason Citron's gaming-focused chat business earned $130 million in revenue, a figure that has grown at a CAGR of 126% over the past five years. If Telegram is making money, it is certainly not on that order of magnitude. 

Can Telegram go public without some revenue? While investors are more willing to underwrite fast-growing social media companies today than they were at the time of Facebook's IPO, they will want to see some sign of commercial demand. To do that, Telegram will need to find a way to monetize.  

Monetization

Telegram is, in some respects, a quixotic app. Though it has scalding hot product-market fit, it has yet to achieve product-model fit. Durov's team has yet to land on a definitive business model despite a few experiments. It will need to keep swinging, testing advertisements, subscriptions, and payment-based approaches. 

While Durov finds advertising that relies on user data immoral, Telegram is open to selling its audience's attention. In October 2021, Durov announced that promotions would be allowed on Telegram, though they would not rely on user data. Instead, the company would attempt to drive a return for advertisers by allowing them to target specific channels. Rather than pinpointing users within a certain age range, geography, and expressed set of interests, sponsoring businesses can instead choose to promote their wares in a channel dedicated to a related subject. Thus far, advertisers can only access channels with more than 1,000 users and must have a minimum budget of more than $2 million. In time, Telegram hopes to experiment with giving some portion of revenue to channel owners.

Will this work? It seems like an uphill battle. Granular targeting has been catnip to advertisers, and few will favor a platform with less precision unless attention comes at a steep discount. Even the Telegram employee I spoke to seemed to think this would be a challenging approach. That's without mentioning that Durov has never seemed to like advertisements, resisting them even during his VK days. It's hard to imagine him happily running a business financed by this model. 

Where else might Telegram earn its money, then? Subscriptions are one option and could come in many different forms. The company has mooted an "inexpensive" offering that removes the ads it is adding. While not a particularly exciting proposition, it could open up user patronage, similar to Discord's "server boosts." While these convey limited functionality, they permit users to support the company. Telegram's base may have equally altruistic motivations. 

If you dream a little bigger, it's not hard to imagine a subscription service that monetizes super users, particularly those running large groups or channels. For example, advanced features could be behind a paywall, though Telegram will need to be careful not to alienate creators. Since Telegram is already used as a Slack replacement in some parts of the world, it could introduce an enterprise tier, though charging could remove its primary allure.

WhatsApp seems to be skating in this direction with its "Business" product. But rather than focusing on internal communications, it's providing tools for companies to serve customers better. That includes marketing and user support tooling. While Facebook is giving away these features for free, monetizing by pushing businesses to purchase ads on Instagram or Facebook itself, it's possible Telegram could charge. Over time, it could seek to compete with companies like Hubspot and Intercom, offering lightweight alternatives for mobile-first businesses. 

WhatsApp

Payments feel like the most natural fit. Though this has yet to take off for Telegram, it seems to have the ingredients to make a go of it. Not only does it have a massive user base, but much of its strength comes from geographies with unbanked populations, including Armenia, Cambodia, Kazakhstan, Jordan, and Venezuela. Moreover, thanks to its misadventure with TON, the company has real crypto expertise, which it could put to good use. Toward the end of last year, Durov noted that the app would support Toncoin payments. Perhaps that's the first step of many towards socially-embedded crypto transactions? 

The current Telegram employee I spoke with highlighted payments as an area of focus. In particular, they noted the lack of a unified global payments system, comparing the state-of-play in the space to messaging pre-WhatsApp. Just as WhatsApp changed the game by bypassing telecom providers, Telegram could do the same by going over the top, or integrating with, traditional payment processors. The result would be similarly simple: send data (money in this case) anywhere on earth, seamlessly. This might leverage or involve stablecoins or other cryptocurrencies. 

Facebook is chasing this with Diem, but Telegram may be better placed. While consumers deeply distrust Zuckerberg's company, Telegram has a reputation of being a privacy-conscious actor. When it comes to the sensitive matter of money, such stature is invaluable. 

Pulling off such a maneuver would make Telegram not only more potent than WhatsApp but put it among the world's most influential businesses. Even if it fails to become the de facto choice for global social payments, carving off even a percentage of this market could put the company on firm footing. 

Reasons to believe

Though it has yet to find its stride in terms of revenue generation, the good news for Telegram is that it's possible to build a great business on top of a messaging app. While Facebook still hasn't figured out exactly how to use WhatsApp, both WeChat and LINE make meaningful money. 

WeChat is best-in-class in this regard. The Tencent subsidiary is less an app than an ecosystem, offering chat, payments, e-commerce, games, and more via a single interface. The Chinese company monetizes through advertisements, payments, and purchases. While it's tricky to separate WeChat's revenue from the rest of Tencent's, reporting in January of last year noted that the sub-unit processed $250 billion in transactions over a year. Payments flowed through its "mini programs" – essentially third-party apps built for the platform. 

Encouragingly, WeChat only began its "mini program" initiative in 2017 and now supports more than 1 million of these partners. From an active user perspective, it is not so far beyond Telegram – the same report suggested the company has 1.2 billion MAUs, about double Durov's company. 

Could Telegram find similar multi-faceted success? It won't be easy. WeChat has benefited from serious governmental support and has had a supra-organization bankrolling its development. But it nevertheless offers a glimpse of what could be possible. 

LINE is thriving with a smaller user base. The Japanese business has roughly 160 million MAUs, with 84 million in its home country. Revenue in 2020 came to $1.5 billion thanks to a mix of games, payments, and shopping. While a couple of billion dollars wouldn't be enough to prop up Telegram's market cap long term, it would be an excellent base to build from. Again, LINE has benefitted from a moneyed owner; in March of last year, the app merged with Z Holdings, a SoftBank affiliate. 

Whatever direction Telegram chooses, it will need to move quickly. Thankfully, there are few things that Pavel Durov does better.

We should be glad that Telegram exists. While the app may not be as private as users might think, it has undoubtedly elevated the discourse around user security and pushed its competitors to improve. At the same time, it's raised the bar both in terms of usability and feature depth.

Time will tell where this leads Telegram and Pavel Durov. It has been content to exist for so much of its life in juxtaposition with larger businesses. As it scales to new heights and crosses the 1 billion user mark, that narrative no longer makes sense. Telegram is something wholly, uniquely its own. It is a messenger on a mission that has not lost sight of pleasing its users. Durov's game has only just begun. 

---

*See important disclosures and offering circular.

You can listen to an audio version of The Generalist on Spotify or Apple Podcasts.

In collaboration with Masterworks...

I Just Invested More With Masterworks

This week, I bought shares in “Mineral Kingdom,” a 1976 piece by Helen Frankenthaler. In part, that’s because I find it beautiful. But more importantly: the art market is on fire. The Wall Street Journal recently reported that “art is among the hottest markets on Earth.”  It might get even hotter in 2022.

Here's why:

  • Real assets like art appreciate well when inflation is high. 
  • “Crypto-driven” buyers are pouring money into physical art. 
  • Blue-chip Art prices outpaced the S&P 500 by 164% from 1995 to 2021


I have several paintings in my portfolio including a Picasso and a Haring. (I never thought I’d be able to say that!). It was genuinely easy and fun thanks to Masterworks. The company’s also done a strong job of getting results: two of the paintings they’ve sold got investors a net IRR of 30%+ in 2020 and 2021. If you’d like to join me and 300,000 users — click this Generalist Link for priority access*

Actionable insights

If you only have a couple of minutes to spare, here's what investors, operators, and founders should know about Telegram.

  • Telegram is the fastest-growing app in the world. At least, by some measures. A 2021 report suggested that no major app grew monthly active users more than the messaging service. It now boasts around 600 million users. 
  • It has built a narrative around its security bonafides. Though Telegram does encrypt messages, most are not truly, completely private. That hasn't seemed to hurt the company's rhetoric, though. It has done a stellar job of counter-positioning itself.
  • Going crypto has its risks. An ICO in 2018 brought $1.7 billion into Telegram's coffers. Unfortunately for founder Pavel Durov, the SEC concluded it constituted an unregistered sale of securities. The debacle distracted Telegram's development and prompted unusual financial agreements. 
  • Contests can be an effective recruiting method. Few companies seem to have as many talented engineers as Telegram. Part of its success rests on its use of competitions. The company frequently offers prizes for product improvements, hiring the most talented entrants. 
  • It still hasn't found a business model. Telegram has supported payments since 2017 and has recently experimented with advertisements. Neither has caught fire so far. To reach "default alive" status, Durov's team may look for inspiration from WeChat and others.

Over a twenty-four-hour spell last October, Telegram gained 70 million new users. Social media's ubiquity has made us numb to such large numbers, but context helps. That figure is greater than the population of South Africa, France, and Thailand; it is only a smidge less than two Canadas. 

Such comparisons illustrate that Telegram is a messaging app with global scale. It is capable of onboarding the equivalent of nation-states in the time it takes for the sun and moon to complete their shifts and swap spots.

Why this happened is no less important than its magnitude. Facebook stumbled. For six hours, Instagram, Messenger, and Oculus went dark. In search of stimulus, connection, and perhaps even a better, more humane brand of social media, users flooded to the company founded by a charismatic Russian entrepreneur, Pavel Durov.

Beyond serving as a sign of Telegram's rising fortune, this episode tells us something fundamental about the company and how it works. The messenger is a study in negation, best defined by what it is not. It is not Facebook, with its trailing privacy abuses. It is not Instagram, stuffed and padded by advertisers. It is not even WhatsApp, guilty by association. 

That Telegram feels most like a repudiation of Zuckerberg's apparatus gives suitable credit to its narrative but glosses over other strengths. Yes, Telegram has established a reputation as a more privacy-conscious substitute, but it is also, simply, a better messenger. While it may still trail WhatsApp in active users — two billion to around 600 million — it offers more power and finesse. 

Durov's business has had its share of stumbles, of course. A bungled Initial Coin Offering (ICO) brought in $1.7 billion to finance the company's blockchain ambitions but led nowhere. Telegram would argue the SEC bears responsibility for that failure. It can only look inward when it considers its inability to establish a viable business model. Ten years into its life and meaningful revenue still seems distant.

The result is a complex, sometimes quixotic company that, despite its product excellence, seems to do its best work on the back foot, a counter puncher that thrives on comparisons. In chess, the "Russian Game" is an opening sequence characterized, in part, by mirroring one's opponent and attempting to counterattack. In many respects, Pavel Durov seems to be taking the same approach. 

To fulfill its true potential, Telegram may have to vary its play. As the company enters a new decade, it will hope to establish a reputation on its own merits. Powered by a visionary executive and exceptionally talented technical team, it has the ingredients to not only match the reach of WhatsApp but eclipse it. In today's piece, we'll talk through Telegram's past and future, covering the following: 

  • Establishing VKontakte. Before he tried to build a better WhatsApp, Pavel Durov created Russia's version of Facebook. Though Zuckerberg's story had plenty of intrigue, Durov's is far more exciting. 
  • Starting Telegram. Ousted from his old company, Durov set about building Telegram. To grow the app, he's had to contend with FBI interference and SEC truculence. 
  • Unusual financing. Durov has resorted to unorthodox means of financing Telegram to avoid raising from venture capitalists. Not only has he paid for much of the development himself, but he's turned to ICOs and bond issuances.
  • Excelling with product. Telegram might have started after WhatsApp, but it is now the clear leader in product. Telegram supports larger groups, more formats, and a range of different features. 
  • Money troubles. Much of the company's reputation relies on its commitment to privacy. That makes an ad-based business model an uncomfortable fit. Telegram has experimented with promotions and payments without landing a breakout hit. 
  • Looking ahead. There is reason for optimism, though. Other messaging apps have found creative ways to monetize, not least China's WeChat and Japan's LINE. 

Let's get started.

The VK Story

Though not a frequently invoked name, the Roman poet Juvenal is responsible for several of our modern era's favorite turns of phrase. Alongside "bread and circuses," used to depict how to appease the masses, he can reasonably take credit for both "black swan" and the query "who watches the watchmen?" 

He is a minor star in the story of Pavel Durov. Fittingly, the Telegram CEO's tale is a carnival of freak outcomes, mass adulation, and governmental suppression. Much of it exists only in Russian, which I have done my best to translate and triangulate. Circuses, black swans, and unfettered watchmen abound. 

Firestarter

There is some irony that a man whose life would be defined by a quest for privacy would be born in 1984. Pavel Durov was the second son of Albina Durova and her husband, Valery Semenovich Durov, a respected Roman historian who wrote a thesis on one of Juvenal's satires. 

Though born in St. Petersburg, Durov spent much of his childhood in Turin. Only after Valery accepted a position as the Head of Philology at St. Petersburg University (SPbU) would the family return to Russia. 

Though undoubtedly intelligent, Pavel was the less prodigious of the Brothers Durov. Born four years earlier, Nikolai showed remarkable mathematical prowess from an early age. (We'll refer to Nikolai Durov as "Nikolai" throughout this piece to differentiate between him and Pavel.) 

Nikolai competed in the International Mathematical Olympiad in his teen years, winning several gold medals. He was also a talented computer scientist, an interest he passed to this younger brother, who showed a knack for building products. At the age of 11, Pavel created a Tetris spin-off. (The original was also the brainchild of a Russian developer.) Later, he and Nikolai completed a strategy game called "Lao Unit," set in ancient China.

Pavel was not the easiest student. The boy who sat at the front of the classroom to better see the board received good marks but often told teachers they were incompetent. He seemed to delight in showing his superior intellect, particularly when it came to computers. In one instance, he changed the screensavers on school computers to a picture of a teacher accompanied by the words "Must die." Though the instructor tried to lock Pavel out of the computer system several times, he always seemed to find a way in. Such eccentric behavior was not solely reserved for teachers; a classmate remarked that when he spoke to Pavel, he could never be sure whether he was serious or mocking him. 

Despite this interest in programming, Pavel followed in his father's footsteps when it came time to attend university. Not only did he matriculate to SPbU, but he focused on linguistics. To fulfill Russia's military conscription requirements, he studied propaganda, learning tactics espoused by Sun Tzu and Napoleon. In time, Durov would realize just how seriously his country took informational control.

Alongside his studies, Pavel worked on his own endeavors, including Durov.com. What began as a blog morphed into a platform for university students to upload essays and exchange ideas. Pavel used pseudonyms to argue multiple positions on the site, often making purposefully inflammatory statements—praising Hitler, for example. He later explained

Sometimes I have to start fires. If users agree with you, you'll feel on top of the world, but they'll just leave. If you argue with them, humiliate them, they'll come back to prove they were right.

Durov's incendiary understanding of online social dynamics ensured the site attracted more than 2.7 million visitors. Not only did it give his ideas massive reach, but it demonstrated the demand for destinations to gather online. That insight would prove invaluable as the budding entrepreneur considered his next move. 

Chasing Facebook

In 2006, Slava Mirilashvili logged on to a Russian news site and was surprised to see the face of his old classmate, Pavel Durov. His friend was being profiled for creating a popular forum for university students. (As a note, we'll refer to Slava Mirilashvili as "Slava" to distinguish between him and his father, also involved in this story.)

From his perch at Tufts, Slava had seen the rise of Facebook up close. The social network had, of course, been founded in Boston two years earlier. In Durov's forum, he saw the beginnings of a similar business geared toward the Russian market. 

Slava found Durov's address, and the two young men recommenced their friendship. Conversation soon turned to the potential in the nascent social networking space, with friend and McGill graduate Lev Leviev soon joining. 

A few months after graduating from SPbU that summer, Durov registered a domain: vkontakte.ru. As the story goes, the name VKontakte—which means "in contact"—came to Durov quickly. Initially, he envisioned it changing by city – "in contact with Moscow," for example. In a minor echo of Facebook's "drop the 'the,' it's cleaner" moment, Durov would end up nixing appending the names of individual cities. 

To get their project off the ground, the trio needed funding. Luckily, they had a readymade source of capital: Slava's father, Mikhail Mirilashvili. The Georgian had built a dizzying empire of different businesses from property to petroleum, media to gambling. Mirilashvili's network of slot machines was the largest in Europe. 

At his son's behest, Mirilashvili capitalized VK in exchange for 60% of the business. Though Durov held just 20%—the remaining 20% split between Slava and Lev Leviev—he was given the majority of voting power, reflecting the startup's reliance on his vision. (Other sources suggest the three recent graduates each received 20%, with Mikhail Mirilashvili holding 40%.)

With money in the bank, VK was off to the races. Like Facebook, VK began by targeting university students, growing campus by campus through invitations. Durov also incentivized sign-ups through a competition: users were encouraged to get as many friends as possible to sign up. Whoever proved the best referrer was promised a new iPod. This tactic alone helped VK secure thousands of early adopters. 

It didn't take long for VK to break into six figures. Just six months after launching the company's beta, VK had become Russia's second-largest social network with more than 100,000 users. A little over a year later, VK had pulled into first place, surpassing Odnoklassniki and reaching 1 million. 

Scaling VK

The company's success seemed to come from a combination of product savvy and technological excellence. 

From the beginning, Durov illustrated both vision and pragmatism when it came to VK's product. Early iterations borrowed heavily from Facebook, mimicking the American company's color palette and functionality. VK would soon make moves of its own. For example, Durov believed that a feed, though prevalent today, was a misstep, favoring the profile page as the user default. That may have been a better fit for the Russian market at the time.

Additionally, VK supported video and audio file uploads, including many subject to copyright. That brought scrutiny, with one Russian television company suing for infringement. It also made the product richer, operating as a pseudo-Netflix or Spotify. Users spent hours every week watching videos on the site.

Durov's VK Profile

In researching this piece, I had the chance to speak with one of VK's early employees. They noted that even as VK matured, Pavel ruled over the product function, with high expectations. "Pavel puts a high bar on the quality…the quality of the code, the quality of the final product. You have to meet that bar by any means." As VK matured, even small stylistic decisions frequently rolled up to the CEO. 

VK also excelled from a technological perspective. As the company grew, it became an increasing challenge to support skyrocketing volume, especially as the site became a target for hackers. Thankfully, Durov had an ace up his sleeve: his brother, Nikolai. After attaining a PhD in mathematics from SPbU in 2005, Nikolai had continued to the University of Bonn, receiving a PhD in computer science (and mathematics, again). Like few others, he constructed a backend capable of handling millions of users and fending off attackers.

Money mania

Soon though, not even the elder Durov's mastery could keep up with rising demand. VK had started monetizing relatively early, encouraging users to buy in-app currency, send paid text messages, and play games. Beginning in 2008, the company had also experimented with running advertisements on the site, though Pavel preferred to keep them to a minimum so as not to hamper the user experience. The former VK employee I spoke with remarked that "customer obsession was the first priority, always." 

Despite bringing money in, the growing need for more servers meant that further funding was needed. It's at this point that our tale intersects with a previous piece—VK's new sponsor was none other than Yuri Milner, founder of DST Global

At first, taking Milner's cash wasn't a difficult decision for Durov's team – in trademark fashion, the venture capitalist offered the most money at the best terms while letting VK continue to operate as it wished. But over time, DST, whose Russian properties were soon bundled into Mail.ru Group (MRG), built up a significant position. By early 2011, MRG held a 32.5% stake, with an option on a further 7.5%. It wanted even more. General manager Dmitry Grishin, one of Milner's lieutenants, noted that it would be "strategically correct for us to take control of the social network or, even better, to acquire all its shares. We are holding a dialog for that."

That dialog didn't seem to last long. Though Durov reportedly visited MRG's offices to discuss a takeover, he gave his final answer on social media: posting a picture of his middle finger captioning that this was his "official" response to Grishin and calling MRG a "trash holding." 

Vesti

Though strong words, they didn't stop MRG from exercising its option, taking its stake to 40% and valuing VK at $1.5 billion. The social network had reached 125 million user accounts, spread across Russia and former Soviet states.

Power plays

VK's reach gave it real power. Toward the end of 2011, that would prove something of a liability. In December of that year, protests over unjust parliamentary elections gripped the country. In response, the FSB, the country's security agency, pressured VK to shut down seven opposition groups and pass on user information. In response, Durov tweeted a photo of a husky in a hoodie, sticking its tongue out. It was his way of letting the world and VK's users know that he would not submit to governmental pressure. 

Durov's Twitter

A SWAT team visited his apartment shortly after, though Durov refused to let them in. Surrounded, he decided to call his brother to tell him what was going on. As he would later tell it, this was the moment that sparked the idea for the business that would succeed VK: "I realized I don't have a safe means of communications with him. That's how Telegram started."

Remarkably, the SWAT team retreated, and Durov emerged from his brush with the Kremlin with his reputation enhanced, at least for the time being. 

Governmental pressure continued into the new year, perhaps contributing to Nikolai's decision to leave VK. Squeezed by businessmen and bureaucrats and newly lacking his closest ally, the younger Durov's behavior remained erratic.

In one famous incident, Durov threw money from VK's office windows. As the story goes, he had just given a large bonus to one of the company's VPs. When the employee responded that it was the mission, not the money, that mattered to him, Durov challenged him to prove it, suggesting he throw rubles onto St. Petersburg's bustling Nevsky Avenue. Though the VP complied, Durov thought he did so with insufficient panache and decided to take over, making paper planes from 5,000 ruble notes, and floating them down to the quickly assembling crowd. Durov later called it "one of the funniest moments in the history of our company."

Meanwhile, MRG was still jockeying for control. In late 2012, Alisher Usmanov, the mogul that had financed many of Milner and MRG's maneuvers, said that "concrete negotiations" were in process. As discussed in our DST piece, Usmanov was not the kind of person to refuse for too long. Not only was the Uzbek absurdly wealthy, but he was seen as a Kremlin ally. 

The pressure continued to mount into 2013. VK came under fire for piracy from The Recording Industry Association of America (RIAA), hampering the company's chances of publicly filing on Western exchanges. 

Two months later and Pavel Durov's Terrible-Horrible-No-Good-Very-Bad-April began. On April 4, Novaya Gazeta dropped a bombshell. The Russian newspaper reported that rather than resisting the FSB's advances, Durov and VK had actively abetted the government's attempts to quash resistance groups. In support of these claims, the periodical published alleged communiqués between Durov, VK's then press secretary, and high-ranking government officials. For those unfamiliar with their work, Novaya is a highly reputable publisher known for its investigative reporting. Last year, co-founder and editor-in-chief Dmitry Muratov was awarded the Nobel Peace Prize for protecting freedom of speech in his native land. 

According to Novaya, Durov outlined his cooperation, remarking that he had passed on information for thousands of users to the FSB. VK's press secretary suggested his team should be commended for blocking "radicals." After initially denying the authenticity of these messages, VK's press secretary admitted his cooperation; Durov continued to deny his role. 

When I asked the former VK employee what they thought of these accusations, they responded that while they wanted to believe the letters were forged, they suspected that some kind of collaboration with Russian law enforcement was likely unavoidable. If Durov did aid the FSB, it would only have been because he felt he was protecting VK against a "bigger evil."

Though Durov often seems like an idealist, animated by libertarian leanings, he's also a pragmatist. He may have decided some measure of government cooperation protected VK's independence in the long term.  

Around the same time, police launched an investigation against him for his role in an alleged hit-and-run in which a white Mercedes rolled over a traffic warden's foot. Durov was believed to be inside. Fearing political retribution, Durov fled with some believing he'd absconded to Italy, Switzerland, or St. Kitts and Nevis. On April 16, investigators stormed VK's offices, ripping through filing cabinets. 

Wherever he was in the world, Durov got a call the next day. Could he confirm that United Capital Partners (UCP) had purchased a 48% stake in VK? He knew nothing about it, though the news would prove true. For $1.12 billion, the Mirilashvilis and Leviev had sold their stakes to a firm rumored to have government ties. Indeed, many thought UCP would have been unable to finance such a large purchase without the help of influential backers. From one vantage at least, it looked as if the Kremlin had forced a partial takeover in the face of corporate rules that dictated existing shareholders had the right of first refusal on such sales. Even MRG would later refer to it as a "dubious scheme" on UCP's part. 

Perhaps sensing his days at the company he had founded were dwindling, Durov ramped up work on the side project he'd begun with Nikolai not long after the SWAT team had descended on his apartment. Dubbed Telegram and repping a paper plane as a logo, the free, secure messaging service had already racked up a considerable user base. By October of 2013, it had more than 100,000 daily active users and had already surpassed WhatsApp when it came to certain features. Despite this traction, the Durovs conceived of the project as a non-profit with development financed via their new holding company, Digital Fortress. 

April Fools'

In January 2014, Pavel Durov sold his remaining shares of VK. The buyer was Ivan Tavrin, the CEO of MegaFon. Durov must have made his peace with Usmanov by that point since he was a partial owner of the mobile carrier. And presumably, Durov knew what would happen next.

A few months later, Tavrin sold the stake he had purchased to MRG, giving the company control over VK. At last, Russia's internet conglomerate had snagged the country's largest social network. 

Though he remained CEO, Durov started to chafe against UCP and MRG. On April 1 of that year, he announced his resignation via his VK account. Many assumed it was a (rather bizarre) April Fools' joke, a belief strengthened by one communication employee's decision to tweet out a link to further information directed to Rick Astley's "Never Gonna Give You Up." 

Was it a joke? Eight years on, and it's still not clear. On April 3, Durov returned to social media, posting the doge meme and saying it had been a prank all along. On April 21, he was to report he had been fired for real, this time for incorrectly retracting his resignation. Bubbling beneath the surface was UCP's reported discontent over Durov's involvement with Telegram, something they believed to be a competing project and one they alleged he had used VK funds to support. 

Whatever the case was, he closed out April by sharing a final update: he was going full-time on Telegram and looking for a new home for his team. In a Facebook post, he wrote: 

What country or city do you think would suit us best? Please feel free to comment below. To give you an idea of our preferences, we dislike bureaucracy, police states, big governments, wars, socialism and excessive regulation. We like freedoms, strong judicial systems, small governments, free markets, neutrality and civil rights.

Understand the world's most consequential tech companies before they IPO. Don't miss our next email. 

The Telegram Story

Telegram's story emulates VK's. Though the messaging app has reached stratospheric heights in little time, it has courted controversy along the way. Since the Durovs began working on the project in 2012, Telegram has racked up nearly 600 million monthly active users and was 2021's fastest-growing app on that basis. In the process, Durov has had to fend off the FBI, face down the SEC, and even make an uneasy peace with Russian powerbrokers. 

In the wind

When Pavel Durov left Russia, he was not hurting for money. Later reports would suggest he departed with around $300 million and 2,000 bitcoin—roughly $87 million at today's prices. That gave him more than enough capital to finance Telegram's development and invest in Caribbean island, St. Kitts and Nevis, in exchange for citizenship. Alongside brother Nikolai, installed as CTO, Pavel set about growing Telegram. 

Not all were convinced by the project's promise, considering it a replica of WhatsApp that brought little new to the table. But even early on, Telegram's team set itself apart by offering smoother interfaces, faster interactions, and purportedly safer communication. That promise attracted users, with the company snagging 35 million within a few months of launching. Telegram's counter positioning became even more potent after Facebook acquired WhatsApp in early 2014 for $21.8 billion. 

UCP continued to cause problems, though. The VK shareholder sued Durov for ownership of Telegram, claiming Durov had spent company time and money developing it. The disagreement seethed through 2014, only ending after MRG purchased UCP's stake in VK. (We have entered proper alphabet soup territory.) As part of the sale, the lawsuit was dropped, leaving Telegram's path clear. 

Matters of moderation

By 2016, the company had amassed 100 million monthly active users (MAUs) with "zero marketing budget." Still, Telegram frequently found itself at the center of controversy. The app's privacy-focused features not only attracted security-conscious users but extremist groups looking to stay out of the public eye. Telegram struggled to control jihadist groups using the app and adequately moderate illegal content. Dissidents and journalists operating in oppressive countries benefited from many of the same features. 

Governmental agencies also caused strife. Russian police were, at one point, believed to be pressuring mobile operators to intercept Telegram messages. At the same time, Durov claims the FBI tried to bribe him and his developers to introduce a backdoor. As he tells it, the US intelligence officials offered one of Telegram's engineers "on the order of tens of thousands of dollars," hardly an enticing proposal given Durov's claim that the app's developers were all millionaires. Russian authorities reportedly made similar requests without luck.

Despite these impediments, Telegram kept growing. Often, it was boosted by Facebook's missteps. Whenever the social network went down or found itself in hot water for misuse of user data, millions turned to Durov's creation. As we've noted, Telegram often acts as a kind of InverseFacebook instrument, prospering as the American behemoth bleeds. The same is true of its relationship with other traditional social tools. For example, criticism of South Korean app Kakao Talk in 2014 and 2019 drove users to Durov's messenger.

As public opinion and media narratives turned against incumbent, ad-driven products, Telegram continued to rise. Its only problem seemed to be the small matter of money.

TON of trouble

By 2018, Telegram was approaching 200 million users but had yet to find a reliable form of monetization. Though Durov still seemed to see his creation as a public good, revenue generation would allow it to become self-sustaining. Also, Durov's VK windfall wouldn't last forever; in 2017, the company's costs reportedly reached $70 million.

Though Durov had famously disliked running ads on VK–contributing to Facebook's average revenue per user being 7x larger at one point–he'd surely learned that it was the most effective way to monetize social networks. However, that playbook didn't seem well-suited to Telegram. Because of its focus on privacy and security, Telegram couldn't pass on data to advertisers without breaking one of its fundamental promises. That meant that money would have to arrive from elsewhere. 

The early bitcoin investor turned to the accelerating cryptocurrency space. In January, Telegram announced its intention to launch the "Telegram Open Network" (TON), a new blockchain that would support an in-app ecosystem. With typical bombast, Durov claimed it would prove "vastly superior" to incumbent chains like Bitcoin or Ethereum. 

TON planned to enable payments and purchases, including from third-party developers. Telegram raised $1.2 billion via an Initial Coin Offering (ICO) to finance its construction. Participants included Silicon Valley royalty like Sequoia, Benchmark, Kleiner Perkins, and Lightspeed. If Telegram wouldn't sell equity, at least the thinking went, this provided some exposure to its torrid growth.

TON Whitepaper

At first glance, it was a masterful strategic move, giving Telegram a war chest based on an idea. Anton Rozenberg, a Telegram executive, and former VK engineer, later noted

Everything in this ICO seemed magic: Telegram managed to raise on a virtual project as much or even more than the company itself could have been valued – with almost no commitments to investors and no equity loss.

One source I spoke to suggested that Telegram's move into the crypto space prompted Facebook's subsequent efforts. Like Libra (now called Diem), Telegram's attempt proved somewhat ill-fated. Though the core messaging app continued to snowball, development on TON stuttered. 

According to a former employee, Telegram told backers it was "90-95%" finished with much of TON's initial build in September of that year. In December, they suggested they were just days away from unveiling their work. A new year began, and still, TON had yet to see daylight. In September 2019, Telegram released its source code for experimentation, and in October, the SEC came calling. 

The US entity determined that the TON ICO constituted a sale of unregulated securities, halting development. Division of Enforcement co-head Stephanie Avakian said

Our emergency action today is intended to prevent Telegram from flooding the US markets with digital tokens that we allege were unlawfully sold.

TON's launch was delayed again, and after further issues, Durov surrendered. In May 2020, Telegram's CEO announced he was giving up the project, attributing TON's demise to the SEC. The company had spent $405 million on development without shipping a viable version of the product. Frustrated, some investors considered a lawsuit, alleging that their capital had been misused, allocated toward developing Telegram's messaging app rather than the TON network. 

In the end, Telegram returned 72% of funding to TON investors – a total of $1.2 billion. Many were frustrated not to receive equity in Telegram. Non-US investors were given the option of converting refunds into loans that delivered 110% return on their initial investment after one year, putting Durov on the clock to raise more money. Telegram also paid the SEC an $18.5 million penalty without "admitting or denying the allegations."

After separating himself from the project, Durov passed control of TON to its "community." Because the code was open source, anyone could continue to build on the project's architecture. Several spin-offs emerged, including "Free TON" and "Toncoin." The latter seems to have established itself as the spiritual heir to the original, receiving Durov's endorsement in late 2021. Two independent developers helm the project, with a further nine associated with Toncoin's Github. Based on contributions to various repositories, development seems sporadic. Nevertheless, the spin-off trades at a $4.4 billion market cap and $18.2 billion when fully diluted. Free Ton has since rebranded to Everscale and uses a different programming language than the initial TON code.

When I asked a current Telegram employee for their thoughts on TON, they noted that it had interfered with the core product's development and created friction. They also conveyed the company's separation from TON's future. Though a daring gambit by Durov, TON ultimately failed to solve the monetization and capitalization issue. He took another unusual approach. 

Uneasy bonds

By April 31, 2021, Telegram would owe $700 million. At that point, the company's loan to ICO investors that elected to take up its offer would come due. Once again, Telegram had a money problem, unhelped by the fact that, by Durov's admission, it took "a few hundred million dollars per year" to run. 

With more than 500 million active users, Telegram had no shortage of suitors. Reports suggested that Western VCs had offered to purchase a 5% to 10% stake in the business at a $30 billion valuation; others suggested the price was closer to $40 billion. 

But building VK had taught Durov the dangers of introducing outside investors. After being shuffled out of his CEO perch once, he wasn't about to let it happen again.

Instead of selling equity, Durov turned to debt. In March of last year, Telegram issued $1 billion in bonds paying 7-8% annually. More importantly, should Telegram IPO within three years of the issuance, purchasers could exchange the bonds for equity at a 10% discount to the listing price. If it takes Telegram longer to hit the public markets, the discount steepens to 15-20%. 

Among the buyers was Abu Dhabi's sovereign wealth fund, Mubadala Investment. As part of the purchase, Durov committed to extending Telegram's presence in the region, with another office expected in the UAE. 

Surprisingly, Mubadala's bond purchase involved the Russian Direct Investment Fund (RDIF). In a secondary transaction, the Abu Dhabi firm sold a reported $2 million in bonds to RDIF. Mubadala referred to the exchange as part of a joint venture between the sovereign wealth funds. Given Durov's strained relationship with his homeland's authorities, Telegram was not best pleased with a spokesperson noting: 

Russia's Direct Investment Fund is not on the list of investors we sold bonds to. We wouldn't be open to any transaction with this fund. 

Nevertheless, RDIF now holds the right to attain equity at a discount to Telegram's potential IPO. Though it likely irked Durov, the fund's involvement is also an indication that, in some respect, Telegram's CEO has won. Almost as long as the app has existed, Russian authorities have sought control. When Durov failed to comply with their demands, the Kremlin attempted to ban the app for almost two years before eventually throwing in the towel in 2020. RDIF's engagement with the bond sale suggests the country considers Telegram too big to stop. 

New heights

Not long before Mark Zuckerberg announced Facebook's rebrand, the company experienced the massive outage that we have already discussed. Over a day, customers flocked to alternatives. Messaging app Signal reported picking up "millions" of users, while Telegram announced it had gained 70 million newcomers. That constituted a "record" for Durov's company and a meaningful uptick for an app that had started the year with half a billion users. 

Though this was the most dramatic example of Telegram gaining ground on WhatsApp, 2021 was a stellar growth year broadly speaking. By one account, Telegram was the fastest-growing major app of the year, surpassing Instagram, Zoom, TikTok, Signal, and others. In 2022, the company will hope to surpass one billion active users. To reach that goal, it  may need to keep improving an already powerful product.

Powerful product

Look at Telegram too quickly, and you might think it is just another undifferentiated messaging app. The truth is far more interesting. This is a robustly built product constantly pushing the limits of what a messenger can and should do. Though Telegram may have started as a WhatsApp clone, it now bears more than a passing resemblance to Twitter, Clubhouse, Reddit, Discord, and Slack, housed in a single, slick interface.

MTProto

Telegram relies on a custom protocol named "MTProto." Designed by Nikolai Durov, MTProto is intended to offer security while retaining performance. Specifically, the protocol leverages two encryption schemes with differing levels of privacy. 

While more technical readers may be able to parse much more from the diagrams below, the rest can be content knowing that "Part 1" is a "server-client encryption," meaning that user data is stored in Telegram's servers. All "cloud chats" use this encryption scheme. As an aside, Telegram's corporate structure is designed to add an extra layer of security here. Data from cloud chats is spread across global servers, governed by different legal entities. As Telegram explains, "several court orders from different jurisdictions" would be required to secure company data. 

"Secret chats" leverage the more secure end-to-end encryption (E2EE), as illustrated in MTProto's "Part 2." With E2EE, no one except the sender and the recipient can decipher the data. Not even Telegram can decrypt messages sent via this layer. 

Telegram

Telegram's approach here has attracted criticism. In a recent Twitter thread, Moxie Marlinspike, the co-founder and former CEO of rival messaging service Signal, outlined his issues with the product. 

In Marlinspike's view, Telegram was no more secure than Facebook Messenger: 

Telegram stores all your contacts, groups, media, and every message you've ever sent or received in plaintext on their servers. The app on your phone is just a "view" onto their servers, where the data actually lives. Almost everything you see in the app, Telegram also sees…The confusion is that Telegram does allow you to create very limited "secret chats" (no groups, synchronous, no sync) that nominally do use e2ee…

FB Messenger also has an e2ee "secret chat" mode that is actually much less limited than Telegram's (and also uses a better e2ee protocol), but nobody would consider Messenger to be an "encrypted messenger." 

FB Messenger and Telegram are built almost exactly the same way.

Marlinspike's work building Signal complicates his argument, as does his product's connections to the CIA and other US national security entities. It nevertheless highlights a core part of Durov's strategy. Like its founder, Telegram is both idealist and pragmatic. Yes, it wants to provide a secure experience for those that need it but not at the expense of the majority of users. While having true E2EE might create a more private experience, it would make Telegram less usable for many; no longer would messages sync across different devices, for example. 

One member of the Telegram team that I spoke with explained that above all, the company wanted to give users the best experience – for some, that might involve E2EE and disappearing chats, but for most, it wouldn't. In comparing Telegram to Signal, the former VK employee discussed previously succinctly said, "Signal is not a product for billions." 

Chat

The core of Telegram's visible product is its chat functionality. Available across devices, users can message each other via a simple, intuitive interface. Anecdotally, I find it feels smoother, faster, and more vivid than WhatsApp. Buttons do what you expect them to, and small features produce unexpected delight. 

More concretely, Telegram's chat is robust. It supports various files (doc, zip, mp3) with high size limits. Replies, mentions, and hashtags are baked in, and in-app photo editing features are surprisingly advanced. 

As alluded to above, default chats are stored on the cloud so that users can view them as they move from phone to laptop and back again. If you want to keep things under wrap, you can start a "Secret Chat," which uses E2EE and can be set up to automatically destroy messages after a certain period. 

Groups

If users want to communicate with a broader cadre of people, they can turn to "Groups." As with other messengers, these are used for different purposes, from family chats to commercial coordination. A recent article noted that Telegram groups had gained popularity among students. Rather than emailing a teacher or texting one friend at a time, students share questions and answers in an ongoing chat. This is reminiscent of Discord, an unexpected hit among different learners.

In some countries, groups serve as a Slack alternative for startups and SMBs. For example, one source noted that in Russia, many preferred Telegram to the Salesforce subsidiary—thanks in part to it being entirely free. This could present a path to reliable monetization, as we'll discuss later. 

Telegram groups have taken on such a life of their own because, like the rest of the application, they're almost bizarrely powerful. Telegram supports up to 200,000 members; WhatsApp tops out at 256. Telegram has built out a suite of sharing and administrative tools to manage those kinds of numbers. Group managers can create group links to share with the world and granularly manage how members are permitted to interact.

Channels

If Telegram's groups mimic Discord, "Channels" are a kind of Twitter or Reddit facsimile. Rather than conversation, channels are built for broadcast and have no upper limit on the number of users. Some of Telegram's company channels, for example, exceed 8 million participants. 

There are popular channels for memes, pictures, news, quotes, and more. More than 400 million people view a Telegram channel each day. View data is visible to channel owners message by message. If channel owners want to allow viewers to talk, they can nest breakout group chats within the channel. 

Telegram

Audio and video

After witnessing Clubhouse's breakout pandemic trajectory, Telegram accelerated its audio development. It offered voice calls early in its development, but audio rooms were newer. Today, groups and channels can host "limitless" voice chats. Millions can join, and administrators can invite participants on stage, record their discussion, and share links to the conversation outside of the app. Thanks to Telegram's massive pre-existing user base, Telegram quickly surpassed Clubhouse in terms of minutes spent listening. 

Telegram

The company is following a similar trajectory with video, leveling up from calls to group calls to pseudo-streaming. Telegram can now support up to 1,000 synchronous viewers and allows for easy recording and watching. We should expect further improvements. Per Telegram's blog, "We will keep increasing this limit until all humans on Earth can join one group call and watch us yodel in celebration (coming soon)."

Payments

Though you may not have seen it, Telegram does support in-app payments. A beta of this functionality first emerged in 2017 but was limited to interactions with Telegram "bots." Via this interface, users could do "anything from ordering a pizza to hailing a taxi, to replacing winter tires when you're tired of winter."

How many people did those things? While a blog update highlighted that Telegram now integrates with 15 different payment providers, including Stripe, the fact the company has not celebrated any significant milestones suggests processing volume is low. In time, payments may prove one of the most critical elements of Telegram's platform. While the company takes no commission right now, it's easy to imagine a small rake at scale – giving Durov's team the firepower to keep building.

Details

Outside of Telegram's primary functionality, it has a host of more minor features. Many may go undetected, but they illuminate the care the team puts into its product. No detail is too small not to improve or potentially delight. 

For example, Telegram protects you against spoilers. When sending a sensitive text, you can select part or all of it and mark it as a "Spoiler" to obscure it. To decipher it, the reader must explicitly tap it. (I could not find this functionality on my app; it may only be live in certain countries.) 

Telegram

Another helpful feature is "People Nearby." Though turned off by default for privacy reasons, anyone that wants to can find local groups and chats by activating the feature. 

There are several more "nice-to-have" additions like this, including text recognition, a suite of bots capable of auto-posting emails or launching game experiences, and extra identity features. While these seem unlikely to play a significant role in Telegram's future, they subtly improve the product. 

Learn the playbooks of today's global giants. Join 53,000 others to get our next Sunday briefing.  

Competitive culture

Little information exists about Telegram's culture. That's fitting for a business that prides itself on privacy but presents a challenge for an analyst. Through my discussions, I was nevertheless able to get a sense of how Telegram operates and what makes it unique. 

Leadership

A friend at Amazon once told me that, like many other corporations, the e-commerce behemoth organizes itself into "levels." An entry-level engineer might be a Level 4 or "L4," while a VP would be an L10. The highest level was L12 and had just one member: Jeff Bezos. (This always struck me as faintly hilarious; why was a whole new stratum – unreachable to anyone else – required to enforce Bezos' supremacy?) 

Telegram feels like this in a minor key – when it comes to control, Pavel stands alone. Not only has he financed the company, but he's guided its vision. So, what is the younger Durov brother like? 

As we've alluded to, he seems to be a mercurial, contradictory character. An awfully large number of shirtless pictures exist for someone that champions an ascetic lifestyle, free from the vanity and the trappings of wealth. Though self-styled as an iconoclast, he has been credibly accused of colluding with the FSB. His choices regarding financing and head-quartering Telegram do not scream rebellion; while Abu Dhabi is a modern city, the UAE is not a bastion of tolerance. Critics and activists are too frequently imprisoned on nebulous charges, and women's rights remain compromised. Of course, no country is perfect, not least the United States, but some of Durov's most consequential human and corporate decisions demonstrate more than a little ideological plasticity.

(To take the other side, tech can be a progressive force. By building a social media giant in the Middle East, Durov may be contributing to a more liberal regional posture.)

Beyond this disconnection, Pavel is a highly intelligent operator with a keen product sense. An employee described him as a "visionary," capable of recruiting exceedingly talented engineers and rallying them around a common goal. He insists on a high standard of work, delivered rapidly. 

Though nominally Telegram's CTO, Nikolai Durov doesn't seem to carry managerial responsibilities. Befitting his technological genius, Nikolai is shielded from such mundanity, tasked with building and improving the core architecture. He is rumored to have completed the MTProto and the TON specification alone. Telegram's Android client was almost entirely his creation, according to a source. 

He is an eccentric character. In a Medium post, a childhood friend relayed a story he had heard about Nikolai that he felt had the ring of truth to it. The "genius among geniuses" had once eaten a bowl of cereal invaded by beetles without noticing; problems of greater significance occupied his mind. 

A Telegram employee noted that Nikolai seemed shy and often struggled to communicate in large groups. They indicated that Pavel showed extraordinary care when accommodating his elder brother, recognizing what Nikolai brought to the table, and giving him the tools necessary to succeed. 

Shipping

As suggested above, Telegram is known for shipping fast. The employee I spoke to highlighted how, despite starting four years after WhatsApp, Telegram quickly caught up and then sprinted ahead from a feature perspective. Now, WhatsApp and Messenger lag Durov's company, introducing updates that Telegram rolled out years earlier. 

This may be partially due to a flat managerial structure – at least if the company is run similarly to VK. The former employee I spoke to noted that VK had almost no managers while they worked there. Instead, small pods worked on products, moving quickly. As often as possible, decisions bubbled up to Durov. Telegram may run the same way. 

Contests

Telegram has reportedly done an exceptional job recruiting engineers. In part, that's thanks to Pavel Durov's reputation. In Russia, he is viewed as a generational entrepreneur and an icon of technological progress. One source explained how that had helped Telegram's image, saying, "Telegram in Russia is a kind of symbol. I think you could say it's a symbol of resistance."

That's allowed the company to get its pick of Russia's elite developers. (By some accounts, the country's software engineers are the best in the world; Russia has won more International Collegiate Programming Contests than any other nation.) It has taken creative measures to support that talent pipeline, launching "contests." 

On contest.com (what a domain!), Telegram runs "Developer Challenges" to improve its product and find new teammates. For example, the company recently ran a "GIF Contest" to create more "GIF-style reaction videos." The winner was given $50,000. 

According to an employee, thousands compete in these contests. From this pool, Telegram hires the "top two or top three." This is part of the reason the company has managed to remain lean throughout its life; the engineers it recruits are, quite literally, in the top 0.1%. 

Default alive

In addition to being the co-founder of Y Combinator, Paul Graham is known for erudite writing about company building. Among his famous frameworks is the idea that startups are either "default alive" or "default dead." 

Default alive startups have a line of sight to achieving profitability without further funding. No additional capital injections are needed for them to continue operating. Default dead startups don't have this freedom; their survival is predicated on fundraising. Graham's advice is that startups should ask whether they are default alive too early rather than too late. Per Graham: 

It's probably not that dangerous to start worrying too early that you're default dead, whereas it's very dangerous to start worrying too late.

Thanks to Durov's personal wealth, Telegram has been able to delay answering that question definitively. Starting in 2018, though, the company seemed to realize its founder's lucre was not limitless, recognition that led to the ill-fated TON ICO and eventual bond sale. While $1 billion in debt financing has given Telegram some breathing room, there's no doubting that the company is default dead right now. This money won't last forever either. Assuming Telegram maintains the same burn rate of a few hundred million a year, it will likely be out of cash within three years and possibly much less. 

How does the company get out of this predicament? It will either need to raise more money from the private or public markets or find a reliable way to monetize. 

Capital

While Telegram could take its pick of private financiers, Durov is likely to prefer raising money via an IPO. The company is reportedly targeting 2023 for a public debut. That timing is likely inspired by the terms of the bond offering – if it takes longer than three years for Telegram to list, the discount given to backers increases. 

Reports from Russian newspaper Vedomosti suggest Durov has already begun speaking to investment banks and is scoping out the appropriate venue for an offering. Durov is apparently considering both a SPAC and a direct listing, with a preference for the latter. While the NYSE is a mooted destination, Asian exchanges are also in the running, including the Hong Kong Stock Exchange. 

If Telegram were to go public today, what kind of valuation might it fetch? 

At its acquisition in 2014, WhatsApp reported 400 million active users, meaning that Facebook paid roughly $55 per user. Assuming Telegram has surpassed 600 million active users, it could fetch a $32.7 billion valuation on those terms. 

But the market has changed in the eight years since WhatsApp was snapped up. Social media companies have further demonstrated their monetization potential, fintech has insinuated itself into all manner of products, and tech writ large has gained prominence. Judging Telegram by the same per-user value feels out of date. 

We may need to turn to the private markets for a better comparison. In September of last year, Discord raised $500 million at a $15 billion valuation. At the time, the company reported 150 million active users, equating to $100 per user. By this measure, Telegram would be worth closer to $60 billion, a figure that feels like a better representation of the company's value.

Company data

Of course, the difference between Telegram and Discord is the small matter of revenue. Jason Citron's gaming-focused chat business earned $130 million in revenue, a figure that has grown at a CAGR of 126% over the past five years. If Telegram is making money, it is certainly not on that order of magnitude. 

Can Telegram go public without some revenue? While investors are more willing to underwrite fast-growing social media companies today than they were at the time of Facebook's IPO, they will want to see some sign of commercial demand. To do that, Telegram will need to find a way to monetize.  

Monetization

Telegram is, in some respects, a quixotic app. Though it has scalding hot product-market fit, it has yet to achieve product-model fit. Durov's team has yet to land on a definitive business model despite a few experiments. It will need to keep swinging, testing advertisements, subscriptions, and payment-based approaches. 

While Durov finds advertising that relies on user data immoral, Telegram is open to selling its audience's attention. In October 2021, Durov announced that promotions would be allowed on Telegram, though they would not rely on user data. Instead, the company would attempt to drive a return for advertisers by allowing them to target specific channels. Rather than pinpointing users within a certain age range, geography, and expressed set of interests, sponsoring businesses can instead choose to promote their wares in a channel dedicated to a related subject. Thus far, advertisers can only access channels with more than 1,000 users and must have a minimum budget of more than $2 million. In time, Telegram hopes to experiment with giving some portion of revenue to channel owners.

Will this work? It seems like an uphill battle. Granular targeting has been catnip to advertisers, and few will favor a platform with less precision unless attention comes at a steep discount. Even the Telegram employee I spoke to seemed to think this would be a challenging approach. That's without mentioning that Durov has never seemed to like advertisements, resisting them even during his VK days. It's hard to imagine him happily running a business financed by this model. 

Where else might Telegram earn its money, then? Subscriptions are one option and could come in many different forms. The company has mooted an "inexpensive" offering that removes the ads it is adding. While not a particularly exciting proposition, it could open up user patronage, similar to Discord's "server boosts." While these convey limited functionality, they permit users to support the company. Telegram's base may have equally altruistic motivations. 

If you dream a little bigger, it's not hard to imagine a subscription service that monetizes super users, particularly those running large groups or channels. For example, advanced features could be behind a paywall, though Telegram will need to be careful not to alienate creators. Since Telegram is already used as a Slack replacement in some parts of the world, it could introduce an enterprise tier, though charging could remove its primary allure.

WhatsApp seems to be skating in this direction with its "Business" product. But rather than focusing on internal communications, it's providing tools for companies to serve customers better. That includes marketing and user support tooling. While Facebook is giving away these features for free, monetizing by pushing businesses to purchase ads on Instagram or Facebook itself, it's possible Telegram could charge. Over time, it could seek to compete with companies like Hubspot and Intercom, offering lightweight alternatives for mobile-first businesses. 

WhatsApp

Payments feel like the most natural fit. Though this has yet to take off for Telegram, it seems to have the ingredients to make a go of it. Not only does it have a massive user base, but much of its strength comes from geographies with unbanked populations, including Armenia, Cambodia, Kazakhstan, Jordan, and Venezuela. Moreover, thanks to its misadventure with TON, the company has real crypto expertise, which it could put to good use. Toward the end of last year, Durov noted that the app would support Toncoin payments. Perhaps that's the first step of many towards socially-embedded crypto transactions? 

The current Telegram employee I spoke with highlighted payments as an area of focus. In particular, they noted the lack of a unified global payments system, comparing the state-of-play in the space to messaging pre-WhatsApp. Just as WhatsApp changed the game by bypassing telecom providers, Telegram could do the same by going over the top, or integrating with, traditional payment processors. The result would be similarly simple: send data (money in this case) anywhere on earth, seamlessly. This might leverage or involve stablecoins or other cryptocurrencies. 

Facebook is chasing this with Diem, but Telegram may be better placed. While consumers deeply distrust Zuckerberg's company, Telegram has a reputation of being a privacy-conscious actor. When it comes to the sensitive matter of money, such stature is invaluable. 

Pulling off such a maneuver would make Telegram not only more potent than WhatsApp but put it among the world's most influential businesses. Even if it fails to become the de facto choice for global social payments, carving off even a percentage of this market could put the company on firm footing. 

Reasons to believe

Though it has yet to find its stride in terms of revenue generation, the good news for Telegram is that it's possible to build a great business on top of a messaging app. While Facebook still hasn't figured out exactly how to use WhatsApp, both WeChat and LINE make meaningful money. 

WeChat is best-in-class in this regard. The Tencent subsidiary is less an app than an ecosystem, offering chat, payments, e-commerce, games, and more via a single interface. The Chinese company monetizes through advertisements, payments, and purchases. While it's tricky to separate WeChat's revenue from the rest of Tencent's, reporting in January of last year noted that the sub-unit processed $250 billion in transactions over a year. Payments flowed through its "mini programs" – essentially third-party apps built for the platform. 

Encouragingly, WeChat only began its "mini program" initiative in 2017 and now supports more than 1 million of these partners. From an active user perspective, it is not so far beyond Telegram – the same report suggested the company has 1.2 billion MAUs, about double Durov's company. 

Could Telegram find similar multi-faceted success? It won't be easy. WeChat has benefited from serious governmental support and has had a supra-organization bankrolling its development. But it nevertheless offers a glimpse of what could be possible. 

LINE is thriving with a smaller user base. The Japanese business has roughly 160 million MAUs, with 84 million in its home country. Revenue in 2020 came to $1.5 billion thanks to a mix of games, payments, and shopping. While a couple of billion dollars wouldn't be enough to prop up Telegram's market cap long term, it would be an excellent base to build from. Again, LINE has benefitted from a moneyed owner; in March of last year, the app merged with Z Holdings, a SoftBank affiliate. 

Whatever direction Telegram chooses, it will need to move quickly. Thankfully, there are few things that Pavel Durov does better.

We should be glad that Telegram exists. While the app may not be as private as users might think, it has undoubtedly elevated the discourse around user security and pushed its competitors to improve. At the same time, it's raised the bar both in terms of usability and feature depth.

Time will tell where this leads Telegram and Pavel Durov. It has been content to exist for so much of its life in juxtaposition with larger businesses. As it scales to new heights and crosses the 1 billion user mark, that narrative no longer makes sense. Telegram is something wholly, uniquely its own. It is a messenger on a mission that has not lost sight of pleasing its users. Durov's game has only just begun. 

---

*See important disclosures and offering circular.