The Telegram application is booming, but it needs advertisers – and soon $ 700 million

Telegram is one of the few significant social media provocateurs on Facebook Inc.,

FB -2.00%

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

But first, Pavel Durov, the Russian emigrant from Dubai who owns Telegram, must figure out how to turn 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,” Mr Durov wrote on his public Telegram channel late last year. “As we do this, we will remain independent and stay true to our values, redefining how a technology company should operate.”

To pay the bills, Mr Durov is issuing corporate debt of $ 1 billion to $ 1.5 billion to investors, with the promise of cutting equity if the company eventually goes public, people said of the plans. He also announced plans to start selling ads on public channels Telegram immediately after this year, as well as provide 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 that Telegram’s equipment and bandwidth costs are rising, as it has consistently seen an annual increase of over 40% in users.

Telegram offers audience-oriented channels that are something of a cross between Twitter TWTR -0.53%

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

Messaging applications are growing in popularity, but their business models remain uncertain. Facebook WhatsApp is not yet generating significant revenue for the social media company and recently announced pressure for companies to use the customer service app. Signal is owned by a nonprofit foundation and is largely based on donations. Chat start Discord Inc. generated revenue of $ 130 million last year by selling premium subscriptions to users, but it is still not profitable.

Telegram will have to convince advertisers that its audience is wide, which could be a challenge following reports that far-right groups and white supremacists came to the app after being banned from other platforms. . Mr. Durov will have to satisfy Apple as well Inc.

AAPL -0.76%

and Alphabet Inc.

Google -2.50%

Google – whose app stores control most of the Telegram distribution – says the app may limit threats of violence and coordinate illicit activities, such as the sale of weapons and drugs.

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

Mr Durov launched the Telegram in late 2013 with his brother, Nikolai, just months before he was ousted from VK, the Russian social networking platform he founded. Mr Durov launched his new application – funded by proceeds from the sale of VK – less as a business than as a way for people to send messages while avoiding government oversight and censorship.

For some time, Mr. Durov and several dozen employees did not have a fixed headquarters, but rather traveled around the world, setting up shop in one city after another, he told the newspaper in 2016. The company now has its operational base in Dubai, however. it is said not to keep the servers there.

Mr. Durov maintains a friendship for many years from 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 which is so rare among founders”, with “a bit of mystery there for a good measure”. Asked if he had invested in Telegram’s bond offer or if he would invest in a possible initial public offering, Mr Leto replied: “What is the first rule of the wrestling club?”

Mr Durov was proud of the use of the application by dissidents in Iran, Russia and elsewhere, writing that “the Telegram never gave in to pressure from officials who wanted to censor it.”

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

The company also began removing terrorist propaganda from public channels when it was reported. A Telegram spokesman said the company was now “using a robust moderation system” for public channels, including automatic content monitoring and manual review systems.

At the end of 2017, Telegram started requesting investments in a new cryptocurrency. The company eventually sold about 200 investors early access to monetary units – known as grams – in two rounds that brought in $ 1.7 billion. Some investors said they bought because it was the next best thing for shares – which Mr Durov was unwilling to sell.

The US Securities and Exchange Commission sued Telegram in late 2018, before it could issue the currency, claiming the company was illegally selling securities, which Telegram denied. During the trial, the SEC said Telegram financed more than 90% of its operating costs using investors’ money.

Telegram finally settled the case, agreeing to pay a $ 18.5 million fine in June 2020. Telegram reimbursed all remaining funds to investors, which at the time amounted to 72 percent of the total, the spokesman said. .

Some of those who had invested say they feel burned. But Mr Durov offered non-US investors the opportunity to convert their repayments into one-year loans which, with interest taken into account, would pay 110% of the initial investment on April 30, 2021, according to a copy of the loan agreement consulted by to the Journal. These loans are now valued at about $ 700 million, according to people informed about Telegram’s plans.

A Telegram spokesman said some investors’ losses were unfortunate, 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, people said of the company’s plans, with a sweetener that those who buy the bonds would have a preferred 10% discount on the price listing if Telegram becomes public.

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

It remains to be seen whether Mr Durov will bring his company to the public. Several investors have said they doubt the founder would like to give up any control. In a Telegram message, Mr Durov told the newspaper that he preferred an IPO to financing from venture capital firms. “Advertising is an open and democratic way to raise capital, which is more in line with our values,” he said.

Instead of selling advertisements per se, Telegram said it is likely to initially use an agency model to enter into agreements with foreign companies in different regions to manage commission sales.

Large, brand-sensitive companies may be wary of appearing 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, chief intelligence officer for conglomerate business GroupM.

Even marketers targeting clicks and sales – rather than building a reputation – could struggle with Telegram’s refusal to collect and share data about its users because performance marketing requires detailed analysis, Mr Wieser said. .

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

Mr Durov said last month that he considered using user data to target advertising immoral. The Telegram spokesman said advertisers will instead be able to target ads by selecting topics or even on a specific channel in which to display ads.

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

—Jeff Horwitz contributed to this article.

Write to Sam Schechner at [email protected]