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LP Show Preview: Remote Work, No-Code, and Products that Sell Themselves (w/ Zapier CEO Wade Foster)

Limited Partner Episode

February 24, 2020
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We're joined by Wade Foster, cofounder & CEO of Zapier, a company that basically hasn’t raised capital, doesn’t have an office, doesn’t have salespeople, and whose product consists solely of connecting other people’s products. And yet today they are doing well over $50M in profitable ARR, have hundreds of employees and thousands of hyper-passionate customers, and are one of the most interesting private SaaS companies in the world. We’re super excited for Wade to join us and dive into the full story of this came to be!

This episode is a preview of the hour-long LP-only show.

If you're not already an Acquired LP, you can subscribe and listen at: https://glow.fm/acquired/ (works best on mobile)

The Zapier Playbook:

Or, 5 reasons why a company with no headquarters is the go-to for software process automation

Thanks to listener Jeremy Diamond for contributing these Playbook notes! He’s one half of Automatter, a newsletter about processes and the people who automate them.

The Company

  • Founded: October 2011
  • Launched: June 2012
  • Headcount: ~400
  • HQ location: None! 100% remote from the beginning.
  • Outside money raised: $2.7M (per Crunchbase)
  • Users: 3M+
  • Paying customers: 100k+
  • Annual recurring revenue: $50M (as of January 2019; they have likely surpassed $100M by now and are generating real profits)
  • Integrations: 2,000+

Getting to $50M in revenue while raising a mere $2.7M of venture capital is virtually unheard of in modern tech startups. Some founders will raise more than that in a pre-seed round. But, coming from Columbia, Missouri, the founders avoided Silicon Valley conventional wisdom that lionized fundraising, prioritized growth over everything, and couldn’t imagine how a 100% remote company would achieve massive success.

So how did they do it?

1. They nailed the timing. In 2012, the first generation of SaaS companies (e.g. Salesforce, DocuSign) were building externally-facing APIs and the first generation of API-first companies (e.g. Twilio, Sendgrid, Stripe) were getting off the ground.

  • With the explosion in APIs, there was exponential growth in the number of endpoints developers could tap into: Metcalfe’s Law in action. This meant massive (and increasing) complexity for any company that wanted to plug in manually or via their own tools. Thus, there was a corresponding opportunity for someone to step into the middle and reduce the growth formula for new connections from a multiplicative function to an additive function.

2. They reduced complexity so much that non-engineers were able to start doing engineering work. When the company was founded, Wade was wrestling with the Marketo API and, in his words, “I was a bad engineer… I write code because I have no choice.” In other words, he set out to build Zapier’s core value proposition: “The easiest way to automate your work.”

  • So many companies have run (and still do run) on simple spreadsheets with basic logic and little automation. Zapier alone can make these processes more durable and reliable, which gets companies thinking about automation earlier in their lives. With automation, a spreadsheet can scale (though even a spreadsheet has limits).
  • Zapier also benefited from the rise of complementary companies. Wade notes the rise of a new AWZ stack: Airtable + Webflow + Zapier. Put another way, these three companies represent a user-friendly backend, a user-friendly frontend, and the connective tissue that ensures data moves between the two (and between any other resources a business might need).

3. They took key steps to lock in their network effect. A standard SaaS approach may have directed development resources towards building new integrations in-house, refusing to leave this core element up to chance. Zapier recognized the impossibility of this task and took a different path.

  • The team built 35 key integrations that launched with the product in 2012. They were willing to build in-house to bootstrap their network of integrations.
  • They built the developer platform earlier than anyone expected. By offloading further integration to the other product teams, they were able to speed ahead of the pack and achieve what is still one of their core value propositions: “More integrations than anyone.”
  • This network effect benefits all parties: customers, app developers, and Zapier itself. App developers consider Zapier a more important integration than they do its competitors because every other integration is a potential connection and every connection is a value-add for customers. By the same token, every new integration adds more value to Zapier than it would to a competing network. And customers have greater choice in which apps they can connect and less risk that an app they want to connect will not be on Zapier.

4. They aligned their business and pricing model with customer expectations -- and they didn’t overthink it. The apps Zapier connected early on were primarily purchased via self-service, not through dedicated sales teams. The team knew that their target customers were used to purchasing software this way and so they never invested in a dedicated sales team.

  • According to Wade, the team was still arguing about pricing strategies the night before the product launched until someone said “screw it, none of us know anything” and decided to base the pricing tiers on the Fibonacci sequence and give each tier a whimsical name.
  • Per Wade, if your growth is led by your product, the specific pricing numbers at launch barely matter at all as long as you aren’t off by orders of magnitude.

5. They didn’t leave their distributed work culture to chance. They started building the remote muscle from the beginning when the company was a side project. After they graduated from Y Combinator, the founders wanted to live in different places and the first few hires were already able to work remotely. According to Wade, the keys for Zapier’s remote culture are a disciplined workforce and excellent written communication. These are important elements at much larger companies that come to the fore much earlier in the lifecycle of a company with a distributed workforce.

  • To support the dissemination of important written communication, the team built an internal tool called Async, which Wade describes as “a blog meets Reddit.” Async isn’t nearly as fast-paced as Slack, but it also isn’t meant to be a permanent knowledge base like a Wiki. The team treats it like a replacement for internal memos.
  • Every week Wade writes a multi-paragraph email to the team to lay out what's on his mind. This is a key process for building alignment throughout the company: Because everyone can see it, it doesn’t have to filter down through layers of management. And if it’s posted on Async, it can attract feedback.
  • According to Wade, the biggest drawback of a distributed workforce is that there are no physical interactions to celebrate what Wade refers to as “epic moments.”

We finally did it. After five years and over 100 episodes, we decided to formalize the answer to Acquired’s most frequently asked question: “what are the best acquisitions of all time?” Here it is: The Acquired Top Ten. You can listen to the full episode (above, which includes honorable mentions), or read our quick blog post below.

Note: we ranked the list by our estimate of absolute dollar return to the acquirer. We could have used ROI multiple or annualized return, but we decided the ultimate yardstick of success should be the absolute dollar amount added to the parent company’s enterprise value. Afterall, you can’t eat IRR! For more on our methodology, please see the notes at the end of this post. And for all our trademark Acquired editorial and discussion tune in to the full episode above!

10. Marvel

Purchase Price: $4.2 billion, 2009

Estimated Current Contribution to Market Cap: $20.5 billion

Absolute Dollar Return: $16.3 billion

Back in 2009, Marvel Studios was recently formed, most of its movie rights were leased out, and the prevailing wisdom was that Marvel was just some old comic book IP company that only nerds cared about. Since then, Marvel Cinematic Universe films have grossed $22.5b in total box office receipts (including the single biggest movie of all-time), for an average of $2.2b annually. Disney earns about two dollars in parks and merchandise revenue for every one dollar earned from films (discussed on our Disney, Plus episode). Therefore we estimate Marvel generates about $6.75b in annual revenue for Disney, or nearly 10% of all the company’s revenue. Not bad for a set of nerdy comic book franchises…

Marvel
Season 1, Episode 26
LP Show
1/5/2016

9. Google Maps (Where2, Keyhole, ZipDash)

Total Purchase Price: $70 million (estimated), 2004

Estimated Current Contribution to Market Cap: $16.9 billion

Absolute Dollar Return: $16.8 billion

Morgan Stanley estimated that Google Maps generated $2.95b in revenue in 2019. Although that’s small compared to Google’s overall revenue of $160b+, it still accounts for over $16b in market cap by our calculations. Ironically the majority of Maps’ usage (and presumably revenue) comes from mobile, which grew out of by far the smallest of the 3 acquisitions, ZipDash. Tiny yet mighty!

Google Maps
Season 5, Episode 3
LP Show
8/28/2019

8. ESPN

Total Purchase Price: $188 million (by ABC), 1984

Estimated Current Contribution to Market Cap: $31.2 billion

Absolute Dollar Return: $31.0 billion

ABC’s 1984 acquisition of ESPN is heavyweight champion and still undisputed G.O.A.T. of media acquisitions.With an estimated $10.3B in 2018 revenue, ESPN’s value has compounded annually within ABC/Disney at >15% for an astounding THIRTY-FIVE YEARS. Single-handedly responsible for one of the greatest business model innovations in history with the advent of cable carriage fees, ESPN proves Albert Einstein’s famous statement that “Compound interest is the eighth wonder of the world.”

ESPN
Season 4, Episode 1
LP Show
1/28/2019

7. PayPal

Total Purchase Price: $1.5 billion, 2002

Value Realized at Spinoff: $47.1 billion

Absolute Dollar Return: $45.6 billion

Who would have thought facilitating payments for Beanie Baby trades could be so lucrative? The only acquisition on our list whose value we can precisely measure, eBay spun off PayPal into a stand-alone public company in July 2015. Its value at the time? A cool 31x what eBay paid in 2002.

PayPal
Season 1, Episode 11
LP Show
5/8/2016

6. Booking.com

Total Purchase Price: $135 million, 2005

Estimated Current Contribution to Market Cap: $49.9 billion

Absolute Dollar Return: $49.8 billion

Remember the Priceline Negotiator? Boy did he get himself a screaming deal on this one. This purchase might have ranked even higher if Booking Holdings’ stock (Priceline even renamed the whole company after this acquisition!) weren’t down ~20% due to COVID-19 fears when we did the analysis. We also took a conservative approach, using only the (massive) $10.8b in annual revenue from the company’s “Agency Revenues” segment as Booking.com’s contribution — there is likely more revenue in other segments that’s also attributable to Booking.com, though we can’t be sure how much.

Booking.com (with Jetsetter & Room 77 CEO Drew Patterson)
Season 1, Episode 41
LP Show
6/25/2017

5. NeXT

Total Purchase Price: $429 million, 1997

Estimated Current Contribution to Market Cap: $63.0 billion

Absolute Dollar Return: $62.6 billion

How do you put a value on Steve Jobs? Turns out we didn’t have to! NeXTSTEP, NeXT’s operating system, underpins all of Apple’s modern operating systems today: MacOS, iOS, WatchOS, and beyond. Literally every dollar of Apple’s $260b in annual revenue comes from NeXT roots, and from Steve wiping the product slate clean upon his return. With the acquisition being necessary but not sufficient to create Apple’s $1.4 trillion market cap today, we conservatively attributed 5% of Apple to this purchase.

NeXT
Season 1, Episode 23
LP Show
10/23/2016

4. Android

Total Purchase Price: $50 million, 2005

Estimated Current Contribution to Market Cap: $72 billion

Absolute Dollar Return: $72 billion

Speaking of operating system acquisitions, NeXT was great, but on a pure value basis Android beats it. We took Google Play Store revenues (where Google’s 30% cut is worth about $7.7b) and added the dollar amount we estimate Google saves in Traffic Acquisition Costs by owning default search on Android ($4.8b), to reach an estimated annual revenue contribution to Google of $12.5b from the diminutive robot OS. Android also takes the award for largest ROI multiple: >1400x. Yep, you can’t eat IRR, but that’s a figure VCs only dream of.

Android
Season 1, Episode 20
LP Show
9/16/2016

3. YouTube

Total Purchase Price: $1.65 billion, 2006

Estimated Current Contribution to Market Cap: $86.2 billion

Absolute Dollar Return: $84.5 billion

We admit it, we screwed up on our first episode covering YouTube: there’s no way this deal was a “C”.  With Google recently reporting YouTube revenues for the first time ($15b — almost 10% of Google’s revenue!), it’s clear this acquisition was a juggernaut. It’s past-time for an Acquired revisit.

That said, while YouTube as the world’s second-highest-traffic search engine (second-only to their parent company!) grosses $15b, much of that revenue (over 50%?) gets paid out to creators, and YouTube’s hosting and bandwidth costs are significant. But we’ll leave the debate over the division’s profitability to the podcast.

YouTube
Season 1, Episode 7
LP Show
2/3/2016

2. DoubleClick

Total Purchase Price: $3.1 billion, 2007

Estimated Current Contribution to Market Cap: $126.4 billion

Absolute Dollar Return: $123.3 billion

A dark horse rides into second place! The only acquisition on this list not-yet covered on Acquired (to be remedied very soon), this deal was far, far more important than most people realize. Effectively extending Google’s advertising reach from just its own properties to the entire internet, DoubleClick and its associated products generated over $20b in revenue within Google last year. Given what we now know about the nature of competition in internet advertising services, it’s unlikely governments and antitrust authorities would allow another deal like this again, much like #1 on our list...

1. Instagram

Purchase Price: $1 billion, 2012

Estimated Current Contribution to Market Cap: $153 billion

Absolute Dollar Return: $152 billion

Source: SportsNation

When it comes to G.O.A.T. status, if ESPN is M&A’s Lebron, Insta is its MJ. No offense to ESPN/Lebron, but we’ll probably never see another acquisition that’s so unquestionably dominant across every dimension of the M&A game as Facebook’s 2012 purchase of Instagram. Reported by Bloomberg to be doing $20B of revenue annually now within Facebook (up from ~$0 just eight years ago), Instagram takes the Acquired crown by a mile. And unlike YouTube, Facebook keeps nearly all of that $20b for itself! At risk of stretching the MJ analogy too far, given the circumstances at the time of the deal — Facebook’s “missing” of mobile and existential questions surrounding its ill-fated IPO — buying Instagram was Facebook’s equivalent of Jordan’s Game 6. Whether this deal was ultimately good or bad for the world at-large is another question, but there’s no doubt Instagram goes down in history as the greatest acquisition of all-time.

Instagram
Season 1, Episode 2
LP Show
10/31/2015

The Acquired Top Ten data, in full.

Methodology and Notes:

  • In order to count for our list, acquisitions must be at least a majority stake in the target company (otherwise it’s just an investment). Naspers’ investment in Tencent and Softbank/Yahoo’s investment in Alibaba are disqualified for this reason.
  • We considered all historical acquisitions — not just technology companies — but may have overlooked some in areas that we know less well. If you have any examples you think we missed ping us on Slack or email at: acquiredfm@gmail.com
  • We used revenue multiples to estimate the current value of the acquired company, multiplying its current estimated revenue by the market cap-to-revenue multiple of the parent company’s stock. We recognize this analysis is flawed (cashflow/profit multiples are better, at least for mature companies), but given the opacity of most companies’ business unit reporting, this was the only way to apply a consistent and straightforward approach to each deal.
  • All underlying assumptions are based on public financial disclosures unless stated otherwise. If we made an assumption not disclosed by the parent company, we linked to the source of the reported assumption.
  • This ranking represents a point in time in history, March 2, 2020. It is obviously subject to change going forward from both future and past acquisition performance, as well as fluctuating stock prices.
  • We have five honorable mentions that didn’t make our Top Ten list. Tune into the full episode to hear them!

Sponsor:

  • Thanks to Silicon Valley Bank for being our banner sponsor for Acquired Season 6. You can learn more about SVB here: https://www.svb.com/next
  • Thank you as well to Wilson Sonsini - You can learn more about WSGR at: https://www.wsgr.com/

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