The Telegram app is growing, but it needs advertisers – and $ 700 million soon

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

FB 1.63%

on a path towards one billion active users each month by the end of 2022, compared to about 550 million today.

But first Pavel Durov, the Russian emigrant based in Dubai and owner of Telegram, needs to figure out how to convert the momentum of his application into a self-sustaining business.

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

To pay the bills, Durov is issuing investors $ 1 billion to $ 1.5 billion in company debt, with the promise of a discount on the share price if the company goes public, people informed about the plans. He also announced plans to start selling ads on public Telegram channels later this year, as well as offering other premium services for companies and users.

A Telegram spokesman declined to comment on the bond issue or the amount of debt the company has. The spokesman said Telegram’s equipment and bandwidth costs are rising because it has registered an annual growth of more than 40% in users.

Telegram offers channels open to the public, which are something of a cross between Twitter TWTR -0.97%

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 does not yet offer significant revenue to the social media company, and recently announced an incentive for companies to use the app for customer service. Signal is owned by a non-profit foundation and relies primarily on donations. Startup Discord Inc. generated $ 130 million in revenue last year from selling premium subscriptions to users, but it is still unprofitable.

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

AAPL -0.08%

and alphabet Inc.’s

GOOG -0.32%

Google – whose app stores control most of Telegram’s distribution – that the app may contain threats of violence and coordination of illicit activities, such as weapons and the sale of drugs.

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

Durov launched Telegram in late 2013 with his brother, Nikolai, just a few months before he was kicked out of VK, the Russian social media platform he founded. Durov launched his new app – financed from the proceeds from the sale of VK – less as a business than as a way for people to send messages, avoiding government surveillance and censorship.

For some time, Durov and a few dozen employees had no fixed headquarters, but traveled the world, settling in one city after another, he told the Journal in 2016. The company now has its operational base in Dubai, although he says he doesn’t keep the servers there.

Durov maintains a friendship for years of his VK days with actor and technology investor Jared Leto, with whom he shares an ascetic lifestyle that avoids meat and alcohol.

Mr. Leto described Mr. Durov as having “that X Factor that is so rare in the founders”, with “a little mystery there for good measure”. Asked whether he had invested in the Telegram bond offering or whether he would invest in a possible initial public offering, Mr. Leto replied: “What is the fight club’s first rule?”

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

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

The company also began removing terrorist propaganda from public channels when flagged. The Telegram spokesman said the company now “employs a robust moderation system” for public channels, including automated content monitoring and manual review systems.

In late 2017, Telegram began to request investments in a new cryptocurrency. The company ended up selling around 200 investors early access to currency units – known as grams – in two rounds that yielded $ 1.7 billion. Some investors said they had bought it because it was the second best option after equity – which 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 process, the SEC said that Telegram financed more than 90% of its operating costs using investors’ money.

Telegram eventually settled the case, agreeing to pay a $ 18.5 million fine in June 2020. Telegram returned all remaining funds to investors, who at the time represented 72% of the total, the spokesman said.

Some of those who invested say they felt burned. But Durov offered non-American investors the ability to convert their repayments into one-year loans that, with interest included, would pay 110% of their initial investment on April 30, 2021, according to a copy of a seen loan agreement. by the newspaper. These loans are now valued at about $ 700 million, according to people informed about Telegram’s plans.

The Telegram spokesman said the losses of some investors were unfortunate, but added that investors were warned about regulatory risks. To pay its creditors, Telegram is selling five-year bonds that pay about 7% or 8% a year, people informed about the company’s plans said, with a sweetener that those who buy the bonds would have a preferential allocation of 10% discount on the listing price if Telegram goes public.

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

It remains to be seen whether Durov will make his company public. Several investors said they doubted that the founder would want to give up any control. In a message on Telegram, Durov told the Journal that he preferred an IPO to financing venture capital firms. “Going public is an open and democratic way of raising capital, more in line with our values,” he said.

Instead of selling ads alone, Telegram said it is likely to initially use an agency model by which it would make deals with outside companies in different regions to handle commission sales.

Large, brand-sensitive companies may be afraid to appear on a platform that prides itself on refusing to cooperate with governments and where it is easy to find hate speech and conspiracy theories, said Brian Wieser, head of business intelligence in purchasing GroupM conglomerate media.

Even marketers looking to drive clicks and sales – instead of building a reputation – may struggle with Telegram’s refusal to collect and share data about its users, because performance marketing requires detailed analysis, Wieser said.

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

Durov said last month that he believes using user data to target advertising is immoral. The Telegram spokesman said that advertisers will be able to target ads by selecting topics, or even through a specific channel to show the ads.

“Telegram aims 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]