The Slack Effect

Now that the frenzy has passed a bit, I wanted to share a few brief thoughts on Slack, their latest investment round, and all the chatter it all created. Whenever a company breaks out under our noses and simultaneously hit that billion-dollar mark, the peanut gallery (myself included) try to figure out why. Incidentally, a few days before that, I wrote my annual “Breakout Tech Company Of 20__” post and concluded that 2014 didn’t produce any singular breakouts, but instead the new incumbent elite (Uber, Stripe, Snapchat) widened their gap from the pack. While I don’t think I was directionally wrong, my post was premature and I should’ve waited and picked Slack rather than just mentioning them in the comments.

As usual, it’s the founders who make moves and prove the rest of the field wrong. I overheard so many people around town talking about Slack, the really high valuation, how investors are piling money into companies, how this provided 60 years of runway, but no one mentioned that the team may want to grow fast, it’s hard to hire right now, companies need cash in the bank for extra leverage if they enter any kind of bigco M&A discussions, and with all the SaaS seeded companies out there that won’t make A, they may elect to acquihire some of them. We just don’t know.

With that said, here’s what’s interesting re: Slack’s rise and $1B mark, from my point of view:

SaaS Attack & Connective Tissue: We live in a time when there are *so* many SaaS companies. Both private and public investors love the predictability of the SaaS model, and it’s of course a huge evolution from having to sell licenses and require updates in the old school ways. As a result, however, it’s become more difficult to suss out which early stage SaaS companies have breakout potential, and enterprises themselves (the end customers here) experience fatigue in the same way consumers and consumer investors experience app fatigue. Slack addresses this by having done the “schlep work” of integrating with a variety of 3rd party SaaS services and adding a communication layer on top that’s different than email. In a sea of disparate SaaS solutions, Slack becomes critical connective tissue.

Email Overload: Ask anyone at a startup or larger company if their use of Slack at work cuts down on email, and the resounding answer is “yes!” That’s not only a threat to Google Apps, but something employees don’t want to lose. People don’t like to be on threaded, cc’d conversations that are 17 or 80 strings long.

Humanized Conversations: On top of this, a friend remarked to me that the interactions at his work on Slack turned more conversational, and as a result, more humanized. People didn’t feel they were being told what to do and managed over email, but that they were part of a conversation, and people were polite, casual, and focused on helping each other. I’m sure that varies from place to place, but that’s quite a powerful endorsement.

Valuations On Multiples Vs Intangibles: So, much was written about Slack making $12m a year, but we don’t know churn yet, and the price of the round valued the company at $1.2B, about 93x earnings, so that’s crazy, right? But, let’s step back…Dropbox and Box need workflow layers to compete with the big companies, Google has tried and failed at collaboration, Asana and Trello are great but don’t yet have the product that will breakout nor a distribution strategy to get there (I say this with love as I like both products very much). So, who is going to do it? And if Slack does, does a $1B or $1.2B price tag matter? Remember, the folks at KP are close with Google and Google Ventures also was in this round. And, then there’s the founder — first time lucky, second time for real? Who knows, but from what I’ve heard, this guy doesn’t mess around and figured out a widespread problem to solve and did so with cross-platform software. It’s the people that venture investors back. This person led his team to this point. Who is going to bet against him now? And, therein lies all the answers to the valuation the company earned.

Updated June 2015 below

The Slack Effect: There are lots of B2B startups trying to build and sell products to enterprise customers. But, if everyone is going to being working out of Slack as the “collaboration layer,” how will your service compare, and will it even be noticed? Or, will it be relegated to just a little logo integration button, next to 200 other indistinguishable SaaS offerings? I’ve now heard lots of early-stage B2B SaaS startups wonder about this. It’s a double-edged sword: Product and design-driven consumery products now work in larger corporate settings (after Yammer, etc.), but Slack is the layer where workers’ eyeballs will be fixed, both on desktop and an on the go. The silver lining is many of these startups view Slack as a potential distribution powerhouse for their apps and services, and that part is exciting, indeed.

The Next Big Thing? I don’t see how Slack will need to spend money. It’s CAC must be close to $0. It may be one of these most-rare businesses that operate on negative-working capital. It can be valued toward the size of an Uber, but doesn’t need all the offline operations and logistics, nor any of the regulatory morass that comes with moving atoms in the real world. Gmail has 400M active users. Slack users move over to paid. Facebook Messenger and Whatsapp are huge, obviously. So, the only question remains is – what could stop Slack? Things like product-fatigue, not making the right platform moves, etc. Sure, it could happen, but right now, it’s hard to see what stops this engine.