Telegram founder Pavel Durov was arrested this morning and faces charges of terrorism, fraud, and money laundering. Elon Musk and others have expressed support for Pavel Durov, the founder of Telegram.

Written by: Mario Gabriele, The Generalist

Translated by: Dopamine Alien

As one of the world's most successful social media platforms, Telegram has the following core business characteristics:

Telegram is the fastest-growing app in the world. At least in some dimensions. A report from 2021 showed that no mainstream app had a higher monthly active user growth than social apps. Telegram now has approximately 6 billion users.

Built a strong security image. Although Telegram does encrypt messages, most information is not truly encrypted or completely private. However, this does not seem to have damaged the company's glamorous rhetoric. It excels in counter positioning.

Using cryptocurrency comes with risks. In 2018, an ICO (Initial Coin Offering) injected $1.7 billion into Telegram's coffers. Unfortunately, the U.S. Securities and Exchange Commission deemed this to be an unregistered securities sale. This setback disrupted Telegram's development and led to unconventional financial arrangements.

Competition is an effective recruitment method. Few companies seem to have as many talented engineers as Telegram. Its success partly depends on the use of competition. The company often improves its products by rewarding the most talented participants.

It has not yet found a business model. Since 2017, Telegram has been supporting payment services and recently attempted advertising. However, neither has taken off. To achieve profitability, Durov's team may seek inspiration from WeChat and other apps.

Behind the business, the birth story of Telegram combines the most exciting and mysterious elements in the world, including rebellious tech geeks, maneuvering with official control, the gathering and collapse of a money empire, starting over in a foreign land, and cryptocurrency. Most importantly, Telegram founder Pavel Durov has always been passionately pursuing freedom. This article provides a detailed account of the fascinating story of Telegram. Enjoy.

Table of Contents

1. The Story of VK

- Chasing Facebook

- The ever-rising VK

- Money mania

- The game of power

- April Fools' Day

2. The Story of Telegram

- Center of the storm

- The art of balance

- Troubles of TON

- Unsettling bonds

- New heights

In October 2021, during the 24-hour outage of mainstream software including Facebook, Telegram gained 70 million new users. The ubiquity of social media makes us numb to such large numbers, but comparing it to reality helps us perceive: this number is larger than the populations of South Africa, France, and Thailand; it is only slightly less than the populations of two Canadas.

This indicates that Telegram is a social app with a global scale, capable of engulfing an entire country in the time it takes for the sun and moon to alternate.

The occurrence of this event is as important as its massive user base. In the six hours of the morning of October 5, 2021, Facebook failed, and Instagram, Messenger, and Oculus all went offline. Users flocked to Telegram, founded by the charismatic Russian entrepreneur Pavel Durov, in search of excitement, connection, and a better, more humane social media.

Image: Handsome Telegram figure Pavel Durov

Telegram feels more like the opposite of Facebook, thanks to its emphasis on security branding, but it also conceals other advantages. Yes, Telegram has gained a reputation for prioritizing privacy, but it is also a better social media platform. While it may still lag behind WhatsApp in active users (around 6 billion) compared to WhatsApp (around 20 billion), it offers more features.

Of course, Durov has had setbacks. A botched Initial Coin Offering (ICO) brought in $1.7 billion in capital for the company's blockchain ambitions but made no progress. Telegram argued that the SEC was responsible for this failure. However, it only pays attention to its own problems when questioned about its inability to establish a viable business model. A decade later, profitability still seems out of reach.

The result is a complex, sometimes unrealistic company, with outstanding products, a counterattacker thriving in competition. In chess, the "Russian Game" is an opening sequence, characterized in part by imitating the opponent and launching a counterattack. In many ways, Pavel Durov seems to have taken the same approach.

In this article, we will discuss the past and future of Telegram, including:

Establishing VKontakte.

Before attempting to create a better WhatsApp, Pavel Durov created a Russian version of Facebook. While Zuckerberg's story is fascinating, Durov's story is more exciting.

Founding Telegram.

Durov was ousted from his old company and began building Telegram. To develop this app, he had to deal with FBI interference and the SEC's brutality.

Unconventional financing.

Durov used non-traditional methods to finance Telegram, avoiding raising funds from risk-averse VCs. He not only paid most of the development costs himself but also turned to ICOs and bond issuances.

Let's get started.

01 The Story of VK

Pavel Durov is the second son of Albina Durova and her husband Valery Semenovich Durov, a respected historian of Roman history. Although born in St. Petersburg, Pavel spent most of his childhood in Turin. It was only when Valery Semenovich Durov took up the position of head of the Department of Linguistics at St. Petersburg University (SPbU) that the family returned to Russia.

Although undoubtedly intelligent, Pavel was not the most outstanding of the Durov brothers. Nikolai, four years older, showed extraordinary mathematical abilities from a young age.

Nikolai participated in the International Mathematical Olympiad in his teenage years and won several gold medals. He was also a talented computer scientist and passed on this interest to his brother, who showed talent in building products. At the age of 11, Pavel created a derivative of the Russian game Tetris. Later, he and Nikolai completed a strategic game called "Lao Unit" based on ancient China.

Pavel was not a compliant student. This boy, who sat at the front of the classroom to see the blackboard better, achieved good grades but often questioned the competence of his teachers. He was eager to show off his exceptional intelligence, especially in the field of computers. Once, he changed the screensaver of the school computer to a photo of a teacher with the words "must die" next to it. Despite the instructor's attempts to block Pavel from the computer system, he always seemed to find a way in. This quirky behavior was not only directed at teachers; a classmate said that when he spoke to Pavel, he could never be sure if Pavel was serious or mocking him.

Although interested in programming, Pavel followed in his father's footsteps when he went to college. He not only enrolled at SPbU but also focused on linguistics. To meet Russia's conscription requirements, he studied propaganda, Sun Tzu's "The Art of War," and Napoleon's tactical principles. Over time, Pavel realized the extent of his country's emphasis on information control.

In addition to his studies, Pavel also devoted himself to his own ventures, including Durov.com. This initial blogging platform later evolved into a platform for university students to upload papers and exchange ideas. Pavel used a pseudonym to argue multiple positions on the website, often deliberately making provocative statements—such as praising Hitler. He later explained:

"Sometimes I had to stir things up. If users agree with your point of view, you feel like you're on top of the world, but they will leave. If you argue with them, humiliate them, they will come back to prove they are right."

Durov's profound understanding of online social interaction attracted over 2.7 million visitors to the website. This not only gave his ideas widespread influence but also reflected a strong demand for online social interaction at the time. When this emerging entrepreneur considered his next move, this insight proved to be invaluable.

Chasing Facebook

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

Slava had witnessed the rise of Facebook up close. Of course, this social network had been founded in Boston two years earlier. On Durov's forum, he saw the potential for a social network targeting the Russian market.

Slava found Durov's address, and the two young men rekindled their friendship. The conversation quickly turned to the potential of the emerging social network, and McGill University graduate Lev Leviev soon joined in.

A few months after graduating from St. Petersburg University that summer, Durov registered a domain: vkontakte.ru. As the story unfolded, Durov quickly thought of the name VKontakte—meaning "contact."

To launch their project, the trio needed funding. Fortunately, they had a ready source of funds: Slava's father, Mikhail Mirilashvili. This Georgian had built a dazzling empire, covering various businesses from real estate to oil, media, and gambling. Mirilashvili owned the largest slot machine network in Europe.

At his son's behest, Mirilashvili capitalized VK in exchange for a 60% stake. Although Durov only held a 20% share (the remaining 20% was divided between Slava and Lev Leviev), he had the majority of the voting rights, reflecting the startup's reliance on his vision. (Other sources indicate that the three recent graduates each received 20%, and Mikhail Mirilashvili held 40%.)

With money in the bank, VK entered the competition of social products. Like Facebook, VK initially targeted university students and developed campus by campus through invitations. Durov also encouraged registration through competitions: encouraging users to invite as many friends as possible to register. The referrer with the most invited users could win a new iPod. This strategy alone helped VK gain thousands of early users.

Before long, VK's user base surpassed six figures. Just six months after the company's beta launch, VK became the second-largest social network in Russia, with over 100,000 users. Over a year later, VK surpassed Odnoklassniki, reaching 1 million users.

The Ever-Rising VK

The company's success seemed to come from a combination of product understanding and outstanding technology.

From the start, Durov demonstrated foresight and pragmatism in VK's product. Early iterations heavily borrowed from Facebook, imitating the American company's color palette and features. But VK quickly took its own course. For example, Durov believed that Facebook had a place that was not well done and preferred to use the personal profile page as the default setting for users. This was more suitable for the Russian market at the time.

In addition, VK supported the upload of video and audio files, including many copyrighted files. This sparked regulatory scrutiny, and a Russian television company even sued for copyright infringement. But it made the content of the product richer, and VK became like a pirated version of Netflix or Spotify, with users spending hours each week watching videos on the website.

An early VK employee pointed out that even as VK matured, Pavel continued to rule over product features with high standards. "Pavel set very high standards for quality… the quality of the code, the quality of the final product. You had to meet this standard in any way." As VK matured, even small style decisions were often submitted to the CEO.

VK also excelled in technology. As the company grew, supporting the skyrocketing user base became an increasingly significant challenge, especially when the website became a target for hackers. Fortunately, Durov had an ace up his sleeve: his brother Nikolai. After obtaining a Ph.D. in mathematics from SPbU in 2005, Nikolai continued to pursue a Ph.D. in computer science (and mathematics) at the University of Bonn. He built a technical shield capable of handling millions of users and repelling attackers.

Money Mania

However, soon even the Durov brothers' exceptional technical abilities could not keep up with the growing demand. VK began commercializing relatively early, encouraging users to purchase in-app currency, send premium SMS, and play games. Starting in 2008, the company also attempted to place advertisements on the website, but Pavel preferred to keep advertising to a minimum to avoid affecting the user experience. A former VK employee said, "Customer first is the top priority, always."

Growth brought in funds, but the increasing need for more servers also meant the need for more funds. VK's new sponsor was Yuri Milner, the founder of DST Global.

Initially, taking Milner's cash was not a difficult decision for Durov's team. The venture capitalist offered the most funds on the most favorable terms while allowing VK to continue operating according to its own wishes. But over time, DST's Russian assets were quickly bundled into the Mail.ru Group (MRG). By early 2011, MRG held a 32.5% stake and had the option to acquire another 7.5%, but it wanted more. One of Milner's deputies, CEO Dmitry Grishin, pointed out, "We control the social network, and it makes strategic sense to acquire all of its shares, even better. We are communicating for this."

The communication did not seem to last long. Despite Durov visiting MRG's office to discuss the acquisition, he gave the final answer on social media: posting a photo of a raised middle finger, captioned as his "official" response to Grishin, and calling MRG a "dump."

Despite the strong language, they could not prevent MRG from exercising its option to increase its stake to 40% and valuing VK at $1.5 billion. By this time, the social network's user accounts had reached 125 million, spread across Russia and the former Soviet states.

The Game of Power

VK's influence gave it significant power, which by the end of 2011 was proven to be a burden. In December 2011, protests against unfair parliamentary elections swept across Russia. In response, the country's security agency FSB pressured VK to shut down the accounts of seven opposition groups and disseminate positive information to users. In response, Durov posted a photo of a hooded husky sticking out its tongue on Twitter. This was his way of letting the world and VK's users know that he would not succumb to government pressure.

Soon after, a special police force visited his apartment, although Durov refused to let them in. Surrounded by the police, he decided to call his brother and tell him what was happening. As he later said, it was this moment that sparked another successful product idea for VK: "I realized I had no secure way to communicate with him. That's how Telegram started."

It is worth noting that after the special police force withdrew, the conflict with the Kremlin raised Durov's profile, and his public reputation was elevated, at least at the time.

Pressure from the government continued into the following year, which may have been the reason Nikolai decided to leave VK. The young Durov was squeezed by businessmen and bureaucrats, and with the loss of his closest ally, his behavior remained unstable.

In a famous incident, Durov threw money out of the window of VK's office. It was said that he gave a large bonus to a company vice president at the time. When the employee replied that what mattered to him was the mission, not the money, Durov challenged him to prove it and suggested he throw rubles onto the bustling Nevsky Avenue in St. Petersburg. Although the vice president agreed, Durov felt it was not grand enough and decided to take over, making paper airplanes out of 5,000 ruble bills and then letting them float down into the quickly gathering crowd. Durov later called it "one of the most fun moments in our company's history."

Meanwhile, MRG was still vying for control. By the end of 2012, Alisher Usmanov, a tycoon who funded many activities for Milner and MRG, stated that "specific negotiations" were underway. Usmanov could not tolerate refusal, as the Uzbek not only absurdly wealthy but also seen as an ally of the Kremlin.

The pressure continued into 2013. VK faced criticism from the Recording Industry Association of America (RIAA) for piracy, hindering the company's chance to go public on Western stock exchanges.

In April 2013, Pavel Durov's worst April began. On April 4th, Novaya Gazeta dropped a bombshell, reporting that Durov and VK did not resist FSB's demands but actively encouraged the government to suppress opposition civil organizations. To support these allegations, the journal published communications between VK's then press secretary, Durov, and senior government officials.

According to Novaya, Durov outlined his cooperation with the FSB to a colleague and indicated that he had passed on the information of thousands of users to the FSB. After initially denying the authenticity of these messages, VK's press secretary finally admitted to the cooperation; Durov continued to deny the accusations against him.

Although Durov often appeared to be an idealist inspired by liberal tendencies, he was also a pragmatist. In the long run, he may have decided to take some form of government cooperation measure to protect VK's independence.

Around the same time, he was investigated by the police for allegedly hit-and-run, driving a white Mercedes over a traffic warden's foot. Fearing political retaliation, Durov began to go into hiding, with some speculating that he fled to Italy, Switzerland, or Saint Kitts and Nevis. On April 16th, investigators stormed VK's office and tore apart filing cabinets.

Wherever Durov was, on April 17th, he received a call asking him to confirm that United Capital Partners (UCP) had purchased 48% of VK. Although he was unaware of this, the news was true. The Mirilashvilis and Leviev sold their shares to UCP for $1.12 billion, a company rumored to have ties to the government. Many believed that without influential backers' help, UCP could not have funded such a large-scale acquisition. With existing shareholders having the right of first refusal in the event of such a sale under company regulations, the Kremlin seemed to have forced a partial acquisition, and even MRG later referred to it as a "suspicious plan" by UCP.

Perhaps sensing his time at VK was running out, shortly after the special police force visited his apartment, Durov began a side project with Nikolai: a free, secure messaging service called Telegram, which had already amassed a considerable user base and used a paper airplane as its symbol. By October 2013, it had over 100,000 daily active users and surpassed WhatsApp in certain features. Despite this appeal, the Durov brothers envisioned the project as a non-profit venture, with development funding provided by their new holding company, Digital Fortress.

April Fools' Day

In January 2014, Pavel Durov sold the remaining VK shares to Ivan Tavrin, the CEO of MegaFon. By then, Durov must have reconciled with Usmanov, as he was a partial owner of the mobile operator. A few months later, Tavrin sold the shares he had purchased to MRG, giving the company control of VK. Ultimately, Russia's internet giant seized the country's largest social network.

Although Durov remained the CEO, he began to grow dissatisfied with UCP and MRG. On April 1st of that year, he announced his resignation through his VK account. Many believed it was an (quite strange) April Fools' Day joke.

Was it a joke? Eight years later, we still don't know the answer. On April 3rd, Durov returned to social media, posting an annoyed dog emoji and stating that it was a prank. On April 21st, he was actually fired, this time for mistakenly withdrawing his resignation. Beneath the surface, UCP's dissatisfaction with Durov's involvement in Telegram was brewing, as they saw it as a competing project and claimed he used VK's funds to support Telegram.

Whatever the circumstances, Durov shared a final update at the end of April: he would be fully involved in Telegram and looking for a new home for his team. In a Facebook post, he wrote:

Which country or city do you think is best for us? Feel free to comment below at any time. To give you an idea of our preferences, we don't like bureaucracy, police states, big government, war, socialism, and overregulation. We like freedom, a strong judiciary, small government, free markets, neutrality, and civil rights.

02 The Telegram Story

The story of Telegram has many similarities to the story of VK. Although the social app reached great heights in a short time, it also sparked significant controversy along the way. Since the Durov brothers started the project in 2012, Telegram's monthly active users have approached 600 million and it was the fastest-growing app in 2021. In the process, Durov had to resist the FBI, face the U.S. Securities and Exchange Commission, and even reach unsettling peace with Russian power brokers.

Eye of the Storm

When Pavel Durov left Russia, he was not short of money. Later reports indicated that he left with approximately $300 million and 2,000 bitcoins. At today's prices, that's about $87 million. This gave him enough funds to support the development of Telegram and invest in citizenship in the Caribbean island of Saint Kitts and Nevis. Together with his brother Nikolai, who was appointed as CTO, Pavel began developing Telegram.

Not everyone believed in the project's promise, as it was a replica of WhatsApp and brought almost nothing new. But even in the early days, Telegram's team stood out by offering a smoother interface, faster interaction, and allegedly more secure communication. This promise attracted users, and the company attracted 35 million users in the months following its launch. After Facebook acquired WhatsApp for $19 billion in early 2014, Telegram's different stance became even more powerful.

The Art of Balance

By 2016, the company had accumulated 100 million monthly active users (MAU) with a "zero marketing budget." Nevertheless, Telegram often found itself at the center of controversy. The app's privacy-focused features not only attracted security-conscious users but also drew interest from extremist organizations seeking to stay out of the public eye. Telegram made efforts to control the use of the app by militant groups and effectively mitigate illegal content. Dissidents and journalists working in oppressive countries also benefited from this.

Government agencies also caused conflicts. It was believed that the Russian police had pressured mobile operators to intercept Telegram messages. At the same time, Durov claimed that the FBI had attempted to bribe him and his developers to create backdoors. As he stated, U.S. intelligence officials offered "tens of thousands of dollars" to a Telegram engineer, considering Durov claimed that the app's developers were all millionaires, this was hardly an enticing proposition.

Despite these obstacles, Telegram continued to grow. Often, it was propelled by Facebook's missteps. Whenever Facebook faltered or ran into trouble due to the misuse of user data, millions turned to Durov's product. As we have pointed out, Telegram often acted as a disruptive tool against Facebook, thriving on the blood of the American behemoth. Its relationship with other traditional social tools was similar. For example, criticism of the Korean app Kakao Talk in 2014 and 2019 drove users to Durov's Telegram.

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

TON Troubles

By 2018, Telegram's user base had approached 200 million, but a reliable form of monetization had not been found. Although Durov seemed to still view his creation as a public good, the revenue was not enough to sustain it. Additionally, Durov's unexpected windfall from VK would not last forever; reportedly, the company's costs reached $70 million in 2017.

Despite Durov's aversion to advertising on VK, he certainly knew it was the most effective way to profit from a social network. But this script seemed less fitting for Telegram. Due to its focus on privacy and security, Telegram could not pass on data to advertisers without violating its fundamental promises. This meant that funding had to come from elsewhere.

Durov, an early Bitcoin investor, turned to the cryptocurrency field. In January, Telegram announced plans to launch the "Telegram Open Network" (TON), a new blockchain supporting an in-app ecosystem. In typical grandiose fashion, Durov claimed it would be "vastly superior" to existing blockchains like Bitcoin or Ethereum.

The TON project planned to support payments and purchases, including those from third-party developers. Telegram raised $1.2 billion through an initial coin offering (ICO) to fund its development. Participants included Silicon Valley royalty, Sequoia Capital, Benchmark, Kleiner Perkins, and Lightspeed.

Figure: TON Project Whitepaper

At first glance, this was a bold strategic move that gave Telegram an innovative treasure trove of ideas. Anton Rozenberg, a Telegram executive and former VK engineer, later pointed out:

Everything in this ICO seemed magical: Telegram managed to raise as much money for a virtual project as the company's own valuation, if not more—almost no commitments to investors, and no equity loss.

One source indicated that Telegram's foray into the crypto field prompted Facebook to make subsequent efforts. Like Libra (now called Diem), Telegram's attempt proved to be fraught with difficulties. While the core app's growth continued to snowball, TON's development faced significant challenges.

According to a former employee, Telegram told supporters that by September 2018, most of the initial construction of TON had been completed "90-95%." A new year began, but TON had yet to see the light of day. In September 2019, Telegram released its experimental source code. In October, the SEC called.

The U.S. SEC determined that the TON ICO involved the sale of unregistered securities, leading to an order to halt the project's development. Co-Director of the enforcement division, Stephanie Avakian, stated:

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

The launch of TON was once again delayed, and subsequently, Durov surrendered. In May 2020, Telegram's CEO announced that he would abandon the project, attributing TON's demise to the SEC. The company had spent $405 million on development but had not released a viable product version. Disappointingly, some investors considered legal action, claiming their funds had been misused and should have been allocated to developing Telegram rather than the TON network.

Ultimately, Telegram returned 72% of the funds to TON investors—a total of $1.2 billion. Many were disappointed at not receiving equity in Telegram. Non-U.S. investors had the option to convert their refunds into loans, which brought a 110% return on their initial investment after one year, allowing Durov to buy time to raise more funds. Telegram also paid a $18.5 million fine to the SEC but did not "admit or deny the allegations."

After separating himself from the project, Durov handed control of TON to its "community." Since the code was open-source, anyone could continue building on the project's architecture. Several derivative products emerged, including "Free TON" and "Toncoin." The latter seemed to have established itself as the original's spiritual successor and received Durov's endorsement at the end of 2021. Two independent developers oversee the project. Development seems sporadic based on various data storage. Nonetheless, the market value of the split transaction is $4.4 billion, fully diluted to $18.2 billion. Free Ton has been renamed Everscale and uses a different programming language from the original TON code.

When I asked a current employee of Telegram about their views on TON, they pointed out that it had disrupted the development of the core product and caused friction. They also conveyed the company's separation from the future of TON. Despite Durov's bold attempt, TON ultimately failed to address the issues of monetization and capitalization. He took another unconventional approach.

Anxious Bonds

By April 31, 2021, Telegram owed $700 million. At that time, the company's loans to ICO investors who chose to accept its offer would come due. Once again, Telegram faced funding issues, and Durov admitted that it needed "several billion dollars a year" to operate.

With over 500 million active users, including many enthusiasts, Telegram was reportedly offered at a valuation of $30 billion for 5% to 10% of the business by Western VCs; others believed the price was close to $40 billion.

But building VK had taught Durov the dangers of bringing in external investors. After being ousted from the CEO position once, he would not let it happen again.

Durov did not sell equity but turned to debt. In March of last year, Telegram issued $1 billion in bonds with an annual interest rate of 7-8%. More importantly, if Telegram goes public for the first time within three years of the issuance, buyers can convert the bonds into equity at a 10% discount from the listing price. If Telegram takes longer to go public, the discount will increase to 15-20%.

Among the buyers was the sovereign wealth fund Mubadala Investment from Abu Dhabi. As part of the acquisition, Durov pledged to expand Telegram's influence in the region and is expected to open another office in the UAE.

Surprisingly, Mubadala's bond purchase involved direct investment from the Russian Direct Investment Fund (RDIF). In a secondary transaction, the Abu Dhabi company reportedly sold $2 million in bonds to RDIF. Mubadala referred to the exchange as part of a joint venture between sovereign wealth funds. In light of Durov's tense relationship with the authorities in his homeland, Telegram expressed dissatisfaction with a spokesperson stating, "The Russian Direct Investment Fund is not on the list of investors to whom we sold bonds. We do not have an open attitude towards any transactions with this fund."

Nevertheless, RDIF now has the right to acquire equity at a price lower than Telegram's potential IPO. While this may have angered Durov, the fund's involvement also indicates that, in some respects, Telegram's CEO has already won. As long as the app exists, the Russian authorities have been seeking to control it. When Durov failed to meet their demands, the Kremlin attempted to ban the app for nearly two years, ultimately conceding in 2020. RDIF's involvement in the bond sale indicates that the country considers Telegram too large to ban.

New Heights

Shortly before Mark Zuckerberg announced the renaming of Facebook, the company experienced the widespread outage we have already discussed. Customers flocked in within a day. The messaging app Signal reported gaining "millions" of users, while Telegram announced acquiring 70 million new users. This set a "record" for Durov's company and brought a significant boost to the app, which had 5 billion users at the beginning of this year.

While this is the most notable example of Telegram's progress over WhatsApp, in a broader sense, 2021 was an outstanding year of growth. Telegram was the fastest-growing major app last year, surpassing Instagram, Zoom, TikTok, Signal, and others. In 2022, the company hopes to exceed 1 billion active users. To achieve this goal, it may need to continuously improve its already powerful product.

The above is a major review of the growth experience of Telegram's founder and the eventful development history of Telegram itself. The second half of this article will delve into the strengths and weaknesses of Telegram's product and business model. For a commercial company, this is the most essential part, so stay tuned.

01 Innate Power—Powerful Product

At first glance, Telegram may seem like just another unremarkable social app. The truth is much more interesting—it is a powerful product that continually pushes the limits of social apps.

MTProto

Telegram relies on a custom protocol called "MTProto." Designed by Nikolai and Durov, MTProto aims to provide security while maintaining performance. Specifically, the protocol utilizes two different encryption schemes with varying levels of privacy.

The "Part 1" in the image is "Server-Client Encryption," meaning user data is stored on Telegram's servers. All "cloud chats" use this encryption scheme. Additionally, Telegram's corporate structure adds an extra layer of security, with data from cloud chats distributed across global servers managed by different legal entities. As Telegram explains, it requires "several court orders from different jurisdictions" to access company data.

"Secret chats" utilize a more secure end-to-end encryption (E2EE), as shown in the "Part 2" of MTProto. In E2EE, no one can decrypt the data except the sender and receiver, not even Telegram can decrypt messages sent through this layer.

Figure: MTProto Analysis

Telegram's approach to encryption has drawn criticism. In a recent Twitter post, Moxie Marlinspike, co-founder and former CEO of Signal, a competitor messaging service to Telegram, outlined his concerns about the product:

"What surprises me is that after all this time, almost every media report about Telegram still refers to it as an 'encrypted messenger.'

Telegram has a lot of flashy features, but there's no worse choice for privacy and data collection."

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

"Telegram stores all of your contacts, groups, media, and every message you've ever sent or received in plaintext on their servers, and your app on your phone is just a 'read window' into the server. Almost everything you see in the app, Telegram can see… Confusingly, Telegram does allow you to create limited 'secret chats' that nominally use e2ee…

FB Messenger also has an e2ee 'secret chat' mode, with far fewer limitations than Telegram's (and uses a better e2ee protocol), but no one would call Messenger an 'encrypted messenger.'

The way FB Messenger and Telegram are built is almost identical."

Marlinspike highlights the core of Durov's strategy. Like its founder, Telegram is both idealistic and pragmatic, aiming to provide a secure experience for those who need it without sacrificing the majority of users. While using a true E2EE protocol may create a more private social experience, it may not be as useful for many Telegram users, such as messages not syncing across different devices.

A member of the Telegram team explained that the company aims to provide the best experience for users—this may involve E2EE protocols and secret chats for some, but not for most. When comparing Telegram to Signal, a former VK employee casually remarked, "Signal is not a product designed for billions of people."

Chat Features

The core of the Telegram product is its chat features. It is available across devices, and users can send messages to each other through a simple, intuitive interface. Interestingly, I found it to be smoother, faster, and more vibrant than WhatsApp. Buttons interact as expected, and small features bring unexpected delight.

Specifically, Telegram's chat features are robust. It supports various file types with size limits (doc, zip, mp3), incorporates reply, mention, and hashtag functions, and has advanced photo editing capabilities.

As mentioned earlier, Telegram defaults to storing chat data in the cloud, allowing users to view them when moving from a phone to a laptop and back. If you want privacy, you can initiate a "secret chat" that uses E2EE and can be set to automatically destroy messages after a certain time.

Group Features

If users want to communicate with a wider audience, they can do so through "groups." Like other social apps, these groups serve various purposes, from family chats to business negotiations. A recent article pointed out that Telegram groups are popular among students. Students are no longer just sending emails to teachers or texting friends, but are sharing questions and answers in ongoing chats. This is an unexpected highlight of Telegram, reminiscent of Discord.

In some countries, Telegram groups are popular among startups and small to medium-sized businesses. For example, a source noted that in Russia, many businesses prefer Telegram over a Salesforce subsidiary, partly because it is completely free. Opening up to the enterprise market may provide a reliable path for Telegram's future commercialization.

Telegram groups have a life of their own and are exceptionally powerful. Telegram supports up to 200,000 members, while WhatsApp supports a maximum of 256 people. Telegram has established a set of sharing and management tools to handle such large-scale groups, allowing group administrators to create group links for sharing with the world and finely manage the way members communicate with each other.

Channel Functionality

If Telegram's groups mimic Discord, then "channel functionality" emulates Twitter or Reddit. Channels are not for conversation but for broadcasting, with no limit on the number of users. For example, some company channels on Telegram have over 8 million participants.

Telegram has popular channels for memes, images, news, and more. Over 400 million people view Telegram channels every day. Channel owners can view data on a per-message basis. If channel owners want to allow audience interaction, they can embed group discussions within the channel.

Image: Telegram channel with 8 million subscribers

Audio and Video

After witnessing the widespread popularity of Clubhouse, Telegram accelerated its audio development. It initially offered voice calls in its early development. Today, Telegram groups and channels can host "infinite" voice chats, with millions of people able to join, and administrators can invite participants on stage, record their discussions, and share conversation links outside the app. With its large user base, Telegram quickly surpassed Clubhouse in listening time.

The company follows a similar strategy in video, from calls to group calls and then to streaming mode. Telegram can now support up to 1,000 synchronized viewers and allows easy recording and viewing. According to Telegram's blog, "We will continue to raise this limit until everyone on Earth can join a group call and watch our yodel celebration (coming soon)."

Payment Functionality

Although you may not have noticed, Telegram does support in-app payments. The feature first appeared in a test version in 2017, but was limited to interactions with Telegram "bots." Through this interface, users can "do anything from order a pizza to call a taxi to have winter tires changed at home."

How many people have done these things? While a blog update emphasizes that Telegram now collaborates with 15 different payment providers, including Stripe, the company has not celebrated any significant milestones, indicating low user adoption. Over time, payments may become one of the most crucial elements of the Telegram platform. Although the company currently does not charge any commissions, it is conceivable that there may be a small fee in the future to provide continued firepower for Durov's team.

02 Corporate Culture—Spartan Competition

There is little public information about Telegram's culture. It is a company that prides itself on privacy but challenges business analysts. Through investigation, it is still possible to understand how Telegram operates and what makes it unique.

Leadership

A friend at Amazon once told me that, like many other companies, the e-commerce giant organizes itself into "tiers." Entry-level engineers might be at level 4 or "L4," while VPs might be at L10. The highest level is L12, with only one member: Jeff Bezos. (This always struck me as a bit comical: why the need for a whole new tier that no one else can touch? To reinforce Bezos's supreme status?)

Telegram gives off a similar vibe. In terms of control, Pavel is one of a kind. He not only injects funds into the company but also guides its vision. So, what is Durov's leadership style like?

As we mentioned, he seems to be a mercurial, contradictory figure. He comes across as fiercely committed to an ascetic lifestyle, wanting to break free from the trappings of vanity and wealth. Despite claiming to be a rebel, he has been accused of colluding with the FSB, and his choices in financing and Telegram's headquarters (based in Dubai) are not rebellious.

While Abu Dhabi is a modern city, the UAE is not a tolerant fortress. Critics and activists are often imprisoned on vague charges, and women's rights are still violated. Of course, no country is perfect, especially the United States, but some of Durov's most important life and business decisions show a softness and flexibility in his ideology. (On the other hand, technology can be a force for progress. By establishing a social media giant in the Middle East, Durov may contribute to a more liberal cultural environment.)

Apart from this disconnect, Pavel is also a highly intelligent coordinator with a keen product sense. An employee described him as a "visionary" who can recruit highly talented engineers and unite them towards a common goal. He insists on high standards of work and demands rapid delivery.

Although nominally the CTO of Telegram, Nikolai Durov does not seem to take on managerial responsibilities. Matching his technical genius, Nikolai is not swayed by such worldly influences, and his task is to build and improve the core architecture. It is rumored that he single-handedly created MTProto and the TON specification. According to sources, Telegram's Android client was almost entirely created by him.

Nikolai is a quirky character. In a Medium post, a childhood friend recounted stories he had heard about Nikolai, finding them to be very true. This "genius among geniuses" once unknowingly ate a bowl of cereal with bugs, and his mind is always occupied by more important matters.

A Telegram employee noted that Nikolai seems shy and rarely communicates in large groups. They stated that Pavel shows exceptional care for his brother, acknowledging Nikolai's creations and providing him with the environment needed for success.

Setting Sail

As mentioned, Telegram is known for its swift action. Employees I spoke to emphasized that while Telegram initially lagged behind WhatsApp, it quickly caught up and then surged ahead through innovative features. Now, WhatsApp and Messenger lag behind Durov's company, launching product updates that Telegram had introduced years ago.

This may be partly attributed to a flat management structure—if Telegram operates similarly to VK. Former employees I spoke to pointed out that there were almost no managers in the VK work environment. Instead, employees worked on the product and acted quickly. In many cases, decisions were made by Durov. Telegram may operate in a similar manner.

According to reports, Telegram has excelled in recruiting engineers. To some extent, this can be attributed to Pavel Durov's reputation. In Russia, he is seen as a symbol of a generation of entrepreneurs and technological progress. An insider explained how this has helped shape Telegram's image, saying, "Telegram in Russia is a symbol. You could say it's a symbol of resistance."

This allows the company to pick elite developers from Russia. According to some accounts, the country's software engineers are among the best in the world, with Russia winning more international university programming competitions than any other country. Telegram has taken creative measures to support talent acquisition: launching "contests."

On contest.com (what a great domain name!), Telegram initiated "Developer Challenges" to improve its products and find new teammates. For example, the company recently held a "GIF Contest" to create more "GIF-style videos." Winners could receive $50,000.

According to an employee, thousands of people participated in these contests. Telegram hired the "top two or three" from the contestants. This is part of the reason the company has managed to stay lean throughout its lifecycle. The engineers it hires, it's safe to say, are in the top 0.1% globally.

03 Default Inventory—The Dilemma of Survival

Paul Graham, in addition to being a co-founder of Y Combinator, is known for his articles on company culture. In his famous framework, startups either "default to living" or "default to dying."

Startups defaulting to living can achieve profitability without further funding. They can continue operating without additional injections of capital.

Startups defaulting to dying do not have this freedom; their survival depends on financing.

Graham's advice is for startups to ask themselves whether they are defaulting to living too early rather than too late.

He says, "It's not so dangerous to default to thinking you're defaulting to dying too early, but it's very dangerous to default to thinking you're defaulting to dying too late."

Thanks to Durov's personal wealth, Telegram has been able to postpone answering this question. However, starting from 2018, the company seems to have realized that its founder's wealth is not infinite, leading to the ill-fated TON ICO and the eventual bond sale. While the $1 billion debt financing provided some breathing room for Telegram, there is no doubt that the company is now "defaulting to dying." This money will not last forever. Assuming Telegram maintains a burn rate of several billion dollars per year, it could exhaust its cash within three years.

How does the company get out of this predicament? It either needs to raise more funds from the private or public markets, or find a reliable way to commercialize.

Valuation

While Telegram could opt for private investors, Durov may prefer to raise funds through an IPO. The company reportedly aims to go public in 2023. This timing may be influenced by the terms of the bond issuance—if it takes more than three years for Telegram to go public, the discounts given to bond supporters will increase.

Reports from the Russian newspaper Vedomosti indicate that Durov has begun engaging with investment banks and is looking for suitable listing venues. Durov is apparently considering SPACs and direct listings, with a preference for the latter. While the New York Stock Exchange is a controversial destination, Asian exchanges are also being considered, including the Hong Kong Stock Exchange.

If Telegram were to go public today, what kind of valuation would it receive?

When WhatsApp was acquired in 2014, it reported 400 million active users, meaning Facebook paid about $55 per user. Assuming Telegram's active users have surpassed 600 million, its valuation could reach $32.7 billion.

However, the market has changed in the eight years since WhatsApp was acquired. Social media companies have further demonstrated their commercial potential, fintech has permeated various products, and tech giants have gained prominence. Using the same user value to assess Telegram's valuation feels outdated.

We may need to turn to the private market for better comparisons. In September last year, Discord raised $500 million at a valuation of $15 billion. At the time, the company reported 150 million active users, equivalent to $100 per user. By this measure, Telegram's value would be close to $600 billion, a figure that better represents the company's current worth.

Of course, the difference between Telegram and Discord lies in revenue. Discord CEO Jason Citron has focused on the chat business for gaming, generating $130 million in revenue, which has grown at a compound annual growth rate of 126% over the past five years. If Telegram is making money, it's certainly not at that level.

Can Telegram go public without revenue? While investors today are more willing to underwrite rapidly growing social media companies compared to when Facebook first went public, they want to see signs of commercial demand. For this, Telegram needs to find a way to commercialize.

Commercialization

In some ways, Telegram is an impractical application. Despite having popular products and market fit, it has yet to achieve product-market fit. Despite some experimentation, Durov's team has not settled on a final business model. It needs to be constantly changing, testing the effectiveness of advertising, subscriptions, and payment features.

While Durov believes that advertising relying on user data is unethical, Telegram is willing to sell the attention of its audience. In October 2021, Durov announced that Telegram will allow promotional advertising on the platform, but without relying on user data. Instead, the company will attempt to provide returns to advertisers by opening up specific channels for them. Sponsoring companies can choose to promote their products in channels specifically tailored to relevant topics, rather than targeting users based on specific age ranges, geographic regions, and interests. So far, advertisers can only access channels with over 1,000 users, and the minimum budget must exceed $2 million. Telegram hopes to try to allocate some of the revenue to channel owners.

Will this work? This seems to be an uphill battle. For advertisers, precise targeting has always been highly appealing, and few would favor a platform with lower precision unless attention is significantly reduced. Even the Telegram employees I spoke to seem to think this will be a challenging approach. Not to mention, Durov seems to have never liked advertising, resisting them even in his VK days. It's hard to imagine him running a business that commercializes through this model happily.

Where else can Telegram make money? Offering various forms of subscriptions is also an option. The company provides a "non-intrusive" product that removes in-app ads. While not a particularly exciting proposition, it can open up click-through rates, similar to Discord's "Server Boosts feature." While these features are limited, they allow users to support the company.

With a broader vision, it's not hard to imagine subscription services being profitable through super users, especially those running large groups or channels. As Telegram has already been used as an alternative to Slack in some parts of the world, it can introduce enterprise users, although charging may detract from its primary appeal.

WhatsApp's "commercialization" products seem to be moving in this direction. However, it is not focused on internal communication but rather provides tools for companies to better serve their customers, including marketing and user assistance tools. While Facebook offers these features for free, it gains by driving businesses to purchase ads on Instagram or Facebook. But Telegram may also charge, and over time, it may seek to compete with companies like Hubspot and Intercom, providing a lightweight alternative for mobile businesses.

Figure: Tools assistant provided by WhatsApp for business users

Payments seem to be the most natural choice. Although this has not started for Telegram, it seems to have the conditions for success. It not only has a large user base, but much of its strength comes from the population without bank accounts, including Armenia, Cambodia, Kazakhstan, Jordan, and Venezuela. Additionally, due to the unfortunate fate of TON, the company has genuine expertise in encryption that it can leverage. At the end of last year, Durov pointed out that the application will support Toncoin payments. Perhaps this is the first step for many towards social embedded encrypted transactions?

Current Telegram employees emphasize that payments are a focus area. They note the lack of a unified global payment system. Just as WhatsApp changed the game by bypassing telecom providers, Telegram can do the same by bypassing traditional payment processors or integrating with them. The result is equally simple: data (in the context of payments, digital currency) can be sent anywhere on earth, which may involve stablecoins or other cryptocurrencies.

Facebook has pursued this with Diem, but Telegram may have an advantage. While consumers are very distrustful of Zuckerberg's company, Telegram is known for its focus on privacy. This image is priceless when it comes to the sensitive issue of money.

Implementing such a strategy would not only make Telegram stronger than WhatsApp, but also make it one of the most influential companies in the world. Even if it fails to achieve global payments, even if it only gets a slice of the market, it would still establish the company.

Reasons to Believe

Although it has not made progress in revenue generation, the good news for Telegram is that it can build a great business on top of a messaging app. While Facebook has not figured out how to use WhatsApp, WeChat and LINE have both made substantial money.

WeChat is top-notch in this regard, more of an ecosystem than an app, providing services such as chat, payments, e-commerce, and games through a single interface. This Chinese company profits through advertising, payments, and purchases. While it's difficult to separate WeChat's revenue from Tencent's other revenue, a report from January last year indicated that the division processed $250 billion in transactions in a year, primarily through its "mini programs" payment.

Encouragingly, WeChat only started its "mini program" initiative in 2017 and now supports over a million partners. From the perspective of active users, it's not far behind Telegram— the same report shows the company has 1.2 billion monthly active users, roughly twice that of Durov's company.

Can Telegram achieve similar multifaceted success? It's not easy. WeChat benefits from strong government support and has a super organization funding its development. But it still presents a possibility.

LINE has flourished despite its smaller user base. The Japanese company has approximately 160 million monthly active users, with 84 million in its home country. With the combination of gaming, payments, and shopping, its revenue reached $1.5 billion in 2020. While in the long run, several billion dollars may not be enough to support Telegram's market value, it would be a good foundation. Again, LINE benefits from wealthy owners, as the app merged with SoftBank subsidiary Z Holdings in March last year.

Regardless of the direction Telegram chooses, it needs to act quickly. Fortunately, this is what Pavel Durov is best at.

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

Time will tell where Telegram and Pavel Durov will go. Throughout most of Telegram's journey, it has been compared and coexisted with larger companies. As it reaches new heights and surpasses 1 billion users, such comparisons no longer make sense.

Telegram will be unique, the only one that has fulfilled the mission of information delivery and has not forgotten to please users. Durov's game has only just begun.

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