The Telegram app is booming, but will need advertisers soon – and $ 700 million soon

Telegram is one of the few major social media challengers for Facebook Inc.,

FB 1.46%

on a trajectory to a billion users active each month by the end of 2022, up from about 550 million today.

But first, Pavel Durov, the Dubai-based Russian émigré who owns Telegram, must figure out how to turn the momentum of his app into a self-sufficient business.

“A project of our size needs at least a few hundred million dollars a year to proceed,” Durov wrote in his public channel on Telegram late last year. “As we do that, we will remain independent and true to our values ​​by redefining how a technology company should operate.”

To pay the bills, Mr. Durov investors will take out $ 1 billion to $ 1.5 billion in corporate debt, with the promise of discounted equity if the company eventually goes public, people said of the plans. He also announced plans to start selling ads on public Telegram channels later this year, as well as offering other premium services to businesses and users.

A Telegram spokesman declined to comment on the bond issue or the amount of debt the company should have paid. The spokesperson said Telegram’s equipment and bandwidth costs are on the rise as it has consistently shown more than 40% annual growth in users.

Telegram offers public channels, which are something like a cross between Twitter TWTR -1.22%

feeds and chat rooms, as well as encrypted communications that are private.

Messaging apps are growing in popularity, but their business models remain uncertain. Facebook’s WhatsApp is still not generating meaningful revenue for the social media company and recently announced that companies want to use the app for customer service. Signal is owned by a non-profit foundation and relies largely on donations. Chat startup Discord Inc. generated $ 130 million in revenue last year selling premium subscriptions to users, but still unprofitable.

Telegram will have to convince advertisers that its audience is broad, which could be challenging following reports that far-right groups and white supremacists flocked to the app after being banned from other platforms. Mr. Durov will also have to satisfy Apple Inc.

AAPL -0.17%

and alphabet Inc.’s

GOOG -0.62%

Google, whose app stores control most of Telegram’s distribution, says the app can curb the threat of violence and the coordination of illegal activities, such as the sale of weapons and drugs.

The Telegram spokesperson said the company’s advertising strategy is likely to focus on Asia, Eastern Europe and the Middle East initially. He added that Telegram has a working relationship with Apple and Google for content moderation.

Durov launched Telegram in late 2013 along with his brother Nikolai, just months before he was pushed out of VK, the Russian social media platform he founded. Mr. Durov pitched his new app – funded from the proceeds from UK sales – not as a business, but as a way for people to send messages while avoiding government surveillance and censorship.

Mr. Durov and several dozen executives did not have a permanent headquarters for some time, but preferred to travel the world and settle in one city after another, he told the Journal in 2016. The company now has its operating base in Dubai. it says it doesn’t keep servers there.

Mr. Durov has maintained a friendship for many years from his UK days with actor and tech investor Jared Leto, with whom he shares an ascetic lifestyle that shuns meat and alcohol.

Mr Leto described Mr Durov as “that X factor so rare among founders”, with “a little bit of mystery there for the record”. When asked if he had invested in Telegram’s bond offering, or would invest in a possible IPO, Mr. Leto replied, “What’s the first rule of a fight club?”

Mr. Durov is proud of the use of the app by dissidents in Iran, Russia and elsewhere, writing that “Telegram has never succumbed to pressure from officials who wanted us to exercise political censorship.”

Those principles were tested after Islamic State terrorist attacks in Europe in 2015 and 2016, in which militants used Telegram as a propaganda tool to recruit and communicate with potential attackers. Mr. Durov initially responded by defending the use of encryption to protect private chats on his service.

The company also began removing terrorist propaganda from public channels when it was flagged. The Telegram spokesperson said the company now “uses a robust moderation system” for public channels, including automated content control and manual control systems.

At the end of 2017, Telegram started requesting investments in a new cryptocurrency. The company eventually sold about 200 investors early access to the units of currency – known as grams – in two rounds that raised $ 1.7 billion. Some investors said they bought because it was the best alternative to stocks – that Mr. Durov was not willing to sell.

The U.S. Securities and Exchange Commission sued Telegram in late 2018 before it could issue the currency, arguing that the company was selling securities illegally, which Telegram denied. During the lawsuit, the SEC said Telegram had funded more than 90% of its operating expenses with the investors’ money.

Telegram eventually settled the case, agreeing to pay a fine of $ 18.5 million in June 2020. Telegram paid back all the remaining money to investors, which at the time was 72% of the total, the spokesman said.

Some of those who invested said they felt burned. But Mr. Durov offered non-U.S. Investors the option to convert their repayments into one-year loans that, taking into account interest, would pay 110% of their initial investment by April 30, 2021, according to a copy of a loan agreement that was reviewed. . by the Journal. Those loans are now estimated at about $ 700 million, according to the people briefed on Telegram’s plans.

The Telegram spokesman said some investors’ losses were regrettable, but added that investors had been warned of regulatory risks. To repay its creditors, Telegram sells five-year bonds that pay about 7% or 8% a year, the people briefed on the company’s plans said, sweetening those buying the bonds a would have preferred allocation at a 10%. discount on the offer price if Telegram goes public.

Some details of the fundraising plans were previously reported by The Information.

Whether or not Mr. Durov will disclose his company remains to be seen. Several investors said they doubted the founder would give up any control. In a Telegram post, Mr. Durov told the Journal that he preferred an IPO to venture capital financing. “Going public is an open and democratic way to raise capital, which is more consistent with our values,” he said.

Rather than selling ads itself, Telegram said it will likely initially use an agency model that would allow it to negotiate deals with third-party companies in different regions to handle sales on commission.

Large, brand-sensitive companies may be reluctant to appear on a platform that prides itself on refusing to cooperate with governments and where it’s easy to find hate speech and conspiracy theories, said Brian Wieser, chief of business intelligence at media buying . conglomerate GroupM.

Even marketers looking to drive more clicks and sales – rather than build a reputation – may struggle with Telegram’s refusal to collect and share data about its users, as performance marketing requires detailed analytics, said Mr. Wieser.

“It’s not enough to know that you can get a billion impressions in the course of a month,” he said. “You have to have a lawsuit to run against those impressions.”

Mr. Durov said last month that he believes the use of user data for targeted advertising is immoral. The Telegram spokesperson said advertisers can instead target ads by selecting topics, or even on a specific channel to show ads.

“Telegram wants to demonstrate that accurate, context-based advertising is not only an ethical alternative to targeted advertising, but can be just as efficient,” said the spokesman.

—Jeff Horwitz contributed to this article.

Write to Sam Schechner at [email protected]