Canadian startup Kik Interactive raises nearly $40-million in venture capital

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Canada's rising star in the flourishing global mobile instant messaging sector, Kik Interactive Inc., has completed its biggest financing to date, raising $38.3-million in a deal led by several prominent U.S. venture capital firms.

The Waterloo, Ont. startup also announced its first acquisition, a content-sharing app provider called Relay, and said it has nearly doubled the number of people who have signed up for its service over the past year, reaching 185 million users.

"It's becoming clear that [instant messaging] is the core application of the smartphone era," said chief technology officer Chris Best, a 27-year-old University of Waterloo graduate who co-founded the 60-employee company with fellow student Ted Livingston in 2009.

This has been a breakthrough year for mobile instant messaging services, which enable users to "chat" and share content such as pictures or videos on their smartphones separate from their e-mail and text functions. Facebook Inc. paid $17-billion (U.S.) for WhatsApp, with 600 million users, while venture-backed Snapchat Inc., with more than 100 million users, was reportedly valued at $10-billion in a summer financing. In Korea, two chat firms combined to form Daum Kakao, which commanded a valuation of more than $7-billion on Korea's KOSDAQ exchange when the combined firm began trading last month.

Meanwhile, BlackBerry Ltd., which invented mobile instant messaging a decade ago with its BlackBerry Messenger (BBM) service, has struggled to remain a player in the space after abandoning and then reviving plans to make its service available on non-BlackBerry smartphones. BBM now has 91 million active users and chief executive officer John Chen is trying to reposition BBM as a messaging tool for executives, pledging to derive $100-million in revenues in its next fiscal year by selling such services as hosting video-conference meetings and handling mobile payments.

Vancouver-based venture capital investor Boris Wertz said chat apps "appear to still be growing rapidly" and are on track to surpass social networks such as Facebook and Twitter in popularity. But he said consolidation will likely favour Facebook, which not only owns WhatsApp but boasts 500 million users of its own Facebook Messenger service.

"You will only be able to compete if you have a radically different experience or you carved out significant market share in a specific country," or culture and language, he said. That "makes you wonder how the Canadian apps will do. I think BBM has a good chance to fade away in the next couple of years and Kik will need to try hard to differentiate around a platform play. But it's not evident that this will work"

Kik's sweet spot is the U.S. 13-to-24 year-old market, where Mr. Best said active users spend an average of 97 minutes a week on the app. Despite Kik's popularity, Mr. Best admitted it is still trying to build a plan to make money.

"We're a lot further along than we were a year ago," he said, declining to share any revenue figures. "We've started to look at some of our different routes for monetization for the first time … The question we're trying to answer is, 'What is the business model that makes chat a multibillion dollar industry in the U.S. and the rest of the world?'"

Other chat services sell a range of offerings from virtual "stickers" attached to messages to mobile payments services. Kik has experimented with selling "cards," or customized applets, and has recently started offering "sponsored chats," that enable branded content providers like Vice and the boy band One Direction to share specialized content with fans. "We've had some awesome early success… it is a revenue-generating project for us," Mr. Best said.

With Kik's latest financing, it has now raised more than $70-million (Canadian), almost entirely from U.S. venture capital firms, including new investor Millennium Technology Value Partners, which has backed Facebook, Twitter and Alibaba Group. Other emerging Canadian tech companies have had similar success raising funds south of the border, including Ottawa e-commerce software company Shopify, Vancouver's HootSuite and Desire2Learn of Kitchener, Ont.

Kik had a bumpy start after BlackBerry – Mr. Livingston's employer when he was a co-op student – sued the startup in November, 2010, weeks after it signed up one million users in just 15 days. Mr. Livingston had previously told the company, then called Research in Motion, he was launching a BBM-like service for non-BlackBerry devices, promising to abandon his plan if it instead made BBM available on all devices. RIM did not initially object, even inviting Mr. Livingston to a developer conference, only to sue once the Kik platform became popular. RIM later developed its own "cross-platform" version of BBM, and the two companies settled the case a year ago.