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Slack + Salesforce Emergency Pod with Packy McCormick of Not Boring

Limited Partner Episode

December 1, 2020
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Acquired is live on the scene covering Salesforce's blockbuster $27.7B acquisition of Slack, with the help of the internet's #1 Slack bull (and top internet analyst in his own right), Packy McCormick of Not Boring. We dissect the deal itself, Slack's relatively short life as a public company, the impact of Microsoft and Teams, and most importantly what this means for enterprise SaaS startups broadly. And oh yeah — we have a ton of fun too. :)

Note: you can find our full June 2019 episode on Slack's history and their DPO here.

Playbook Themes from this Episode:


1. Distribution is still key when it comes to selling enterprise products at the highest levels.

  • SaaS startups can (and do!) land deals with big companies all the time now through the bottoms-up motion of individual teams adopting the product and paying by credit card. And they also can (and do!) expand those deals into large, enterprise-wide contracts. But the massive power of Microsoft, Salesforce, and to a lesser-degree Oracle and Google's salesforces + bundling distribution abilities enables deals to happen at a scale that most independent companies find difficult to match.

2. Enterprise products are like icebergs — 90% of the work is below the surface.

  • This is true both at the tactical level (integrations, permissions, security, etc) and the strategic: providing seamless connective tissue between work apps inside and across organizations is what makes Microsoft so powerful as an enterprise player — not necessarily because their products are better.
  • This is why Slack Connect was such an important initiative for Slack, and why Microsoft trained the full firepower of its Teams marketing against it, while mostly ignoring Zoom even though Zoom is much more directly competitive on the product feature front.

3. Telling your story well always matters, no matter how big you get.

  • Perhaps the biggest reason Slack "failed" as a public company was its inability to effectively communicate what it did that was special, why that was important, and why it was defensible enough to withstand the assault from Teams. Arguably, great answers existed to all of those questions — and the company kept posting impressive numbers to back them up — but Wall Street never bought the story Slack sold.

4. Enterprise collaboration is moving deeper into work apps themselves.

  • Today's native SaaS tools like Figma, Coda, Notion and others are embedding collaboration and chat natively into apps themselves — which reduces the primacy of a centralized platform like Slack, Teams or Discord. While on the one hand this is a threat to dedicated collaboration platforms, it also presents a massive opportunity: if they (or someone else) can decouple the core "collaboration layer" service from their own dedicated apps and also embed it directly into those work apps via APIs, it exponentially increases the surface area of workplace productivity that they can address.

5. The "Outsiders playbook" of growing through acquisition once your original product approaches market saturation works just as well in tech as it did in other sectors like media and industrials.

  • As Will Thorndike outlined in The Outsiders, many of the best CEO capital allocators of all-time utilized the grow-through-acquisition strategy very effectively. Salesforce (and other big tech companies like Facebook) are clearly adopting the same approach.


Links:


Sponsors:

  • Thanks to Tiny for being our presenting sponsor for all of Acquired Season 7. Tiny is building the "Berkshire Hathaway of the internet" — if you own a wonderful internet business that you want to sell, or know someone who does, you should get in touch with them. Unlike traditional buyers, they commit to quick, simple diligence, a 30-day or less process, and will leave your business to do its thing for the long term. You can learn more about Tiny here: http://tinycapital.com
  • Thank you as well to Bamboo Growth and to Perkins Coie. You can learn more about them at:
  • https://growwithbamboo.com
  • https://www.perkinscoie.com/

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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Transcript: (disclaimer: may contain unintentionally confusing, inaccurate and/or amusing transcription errors)

Ben: Welcome to this emergency pod of Acquired, the podcast about great technology companies, the stories, and playbooks behind them. I’m Ben Gilbert and I'm the co-founder of Pioneer Square Labs, a startup studio and venture firm in Seattle.

David: I'm David Rosenthal. I am an angel investor and an independent advisor to startups based in San Francisco.

Ben: And we are your hosts. Well David, here we are live on the scene. We've got a special guest. What are we talking about today?

David: We are talking about Slack being acquired and we have the best in the business. The number one Internet and Twitter Slack bull out there, and probably we're going to discuss how happy, but probably a very happy man here today, Packy McCormick of Not Boring. Welcome to the show.

Packy: It’s so great to be here and I'm both happy and sad, which I'm sure we’ll dive into.

Ben: It comes to us with mixed emotions. Alright David, you've got this lovely introduction written up here. Take us in.

David: This is non-traditional in so many ways because this is a big week here at Acquired. We've got DoorDash, we've got Airbnb, IPOs coming up, we're gearing up for those. We're going to be live on the scene for those. We have Roblox which maybe we'll cover next season, a couple of others happening. We’d literally just recorded an awesome special episode which is coming out later this month, but we knew this was happening. Last week, we dialled up Packy on Twitter. We said, if this happens can you come on the pod? Will you do an emergency pod with us and here he is, super excited to do it.

Ben: Why doesn't every company just leak their acquisitions ahead of time, so that way we have a little bit of warning. I think we got totally blindsided, if I remember, with LinkedIn, with Whole Foods. I woke up to like a frantic text from David around the Whole Foods acquisition.

David: That’s right. I had just moved back to the area, and I did it in my in-laws’ attic.

Packy: LinkedIn was acquired for right around the same amount.

Ben: If I remember, $24 billion?

David: That's right.

Ben: I think that's probably the interesting comp, but I don't get too far ahead of myself. Before we dive into the content, we do want to give a special shout out to Tiny. We didn't have time to record a little Q&A with Andrew, the founder of Tiny, this one. Especially with MetaLab’s involvement in the very beginning of Slack’s journey, it felt appropriate to thank Tiny. For those who don't know, the first business Andrew started was MetaLab which was a design agency that basically did the product design for Slack, at least the first version, the public version that came out, so thanks to Tiny for being season seven’s sponsor.

Also, thank you to Bamboo; that's growwithbamboo.com, and Perkins Coie counsel. Two great companies. We've talked about Slack a little bit here on Acquired before. We did a full episode around their direct listing that we’ll link in the show notes when this comes out as a podcast. If you want to remember Stewart's epic blog post, We Don't Sell Saddles Here.

David: There is the story growing up on a commune in British Columbia.

Ben: Yeah, we will not recount all that today. We’ll focus more on this transaction, but go check out the history there. Packy, you wrote a piece two weeks ago. Tell us what that was about.

Packy: Two weeks ago yesterday. The piece was I have been a long-suffering Slack bull. The piece touched on Slack in a few different cases. This one was once and for all, I'm just going to put down my for my full bull case on the company. From its direct listing, it's kind of suffered, it’s tanked, rises back up a little bit, it tanks again.

I wanted to put out there that I thought that the bears were wrong. Obviously, the big knock on Slack was that teams who are just going to come in and kill it actually report in really strong numbers because the narrative has been so bearish. You look at Slack’s numbers through the lens of they're not doing so great because compared to Zoom, they're not growing, or compared to company X, their net dollar retention isn't so good. But they're really one of the best SaaS companies in so many different categories of metrics. I just wanted to put that bear case.

David: They’re top quartile in just about every metric across the best emerging cloud index, right?

Packy: Exactly, the 5th fastest company and the 2nd best net dollar retention up there in terms of gross margins. All the things that you look for in a SaaS business plus the fact that pretty much any fast growing startup that you can name uses Slack. As they grow, Slack grows with them. Slack, as we'll discuss I’m sure, just reported earnings and the numbers look good, yet again. It's one of these companies that has been underappreciated but I think over time is going to build into a juggernaut.

David: You hit publish on that Not Boring piece two weeks ago. You cc Marc Benioff. He's probably a subscriber at this point, right? He's got to be.

Packy I did. I have to admit that I looked it up and he's not.

Ben: If you see Bruce Wayne.

Packy: Hawaiiguy72 just signed up.

David: He got the memo. He got the post today in Salesforce earnings, $27.7 billion, total purchase price, works out to $45.86 a share in cash and stock. A little heavier on the stock in the cash piece (I think) if I'm right, but roughly 50/50, like 55% or 57% stock. That's a 55% premium to where Slack was trading before the news was leaked last week, 85% premium to the most recent Slack stock price crash after their earnings in September.

Ben: We should be clear. Is this the first time that the price per share is above the very first day of trading? I think so.

David: I think it might be. Certainly I don't think it’s been this high.

Ben: Reminiscent of Dropbox in that way or it traded down and then flat, and then down, and then flat. We've been in one of the flat spots for a while.

David: Slack is going to remain independent. You’re staying with the company. You’re staying as CEO of Slack. The deal is expected to close next year. Still has to get shareholder approval from Slack shareholders which we might discuss. We might discuss Packy’s thoughts on that. It is the largest software deal since IBM bought Red Hat two years ago in 2018.

Ben: Wow, is it really? I guess you don't see these public-to-public mergers that often.

David: I think, though, actually pure software deals. I can't think of anything else that's happened since.

Ben: I definitely feel like it's the most akin to LinkedIn. At least the way that its big $100 billion plus valuations or market cap tech company buying something that was started probably multiple decades after their founding, one was Salesforce. Salesforce was early 2000.

David: No, I think it was the late 90s. I estimate 1998 or 1999 since it was started.

Ben: They're buying into the next generation of enterprise software.

David: Yup, and of course, the other bidder for LinkedIn was Salesforce. They filed an antitrust suit against Microsoft about it, I think.

Ben: Really?

David: I think they sued to block the deal.

Ben: I think we're already on to the sort of early theme of this episode which is going to be the battle with Microsoft.

David: First Packy, let's unpack the emotions. How are you feeling? I'm like a sideline reporter here. How are you feeling? Are you ready to go to Disney World? Are you declaring victory? Is this a tough loss? Is this both? What’s going through your head right now?

Packy: I think it's a little bit of both. When I wrote about the company, it was trading in the mid-20s. For anybody who bought after reading Not Boring, awesome win for me, great win. I love all of that, but wherever this ends up in the $45 range, depending on where Salesforce trades. Even if you look at just the other top quartile BVP cloud companies and how they've traded, assuming they just traded in line with those companies from the beginning of the quarantine, I think that puts them in the low $50 share range.

That's right now and I really think Slack’s potential as a long-term as they build and grow, and they keep retaining and growing with customers. I was really hoping that this was a 3X–4X stock. It's just such a rarity right now during coronavirus to find a SaaS company that you think is somehow undervalued. Now, I have to go back to the drawing board and find what the next Slack is. Under-priced SaaS companies that are growing at 49% year-over-year are hard to come by right now.

David: Totally. We might as well just get right into it. What was the disconnect here? Because this is crazy. Every other SaaS company, especially a work-from-home stock has been off to the races. What has kept Slack so beaten down for so long?

Packy: The biggest number one thing that kept Slack beaten down is just the threat of Microsoft teams. Not just the spectre of Microsoft teams, but Microsoft teams and Microsoft generally has gone after Slack by name. To hear Stuart talk about it, that's because if Slack threatens email, then Outlook is threatened, and then the whole Microsoft Suite is threatened. They’ve put particular emphasis on the fact that they're crushing Slack.

Slack has 12 million users or whatever and then Microsoft reports that they're just flying by Slack. When they released their charts showing that they're passing Slack, atypically they put Slack’s name right on the chart and call them out.

According to Stuart, nobody except maybe Larry Ellison at Oracle a couple decades ago ever would have done calling out a competitor by name. This is a real threat that Microsoft felt again according to Slack. They put everything they had going after Slack. I think you can look at the numbers a couple of different ways.

You can either say Slack is growing faster than 49 of the 54 companies, or Slack and Zoom are really the two most public facing or consumer-y of all of the work from home stocks. Zoom is growing at 300%. Slack is only growing at 49%. What's wrong with this company?

That's one of the reasons that I love it so much long-term. I think switching costs and moats, in general, are these double-edged swords. Zoom doesn't really have a moat, but it's really easy to hop on a Zoom. We don't have a shared Zoom account. We hopped into Zoom in one link. It's really easy for Zoom to grow. Whereas Slack, you have to set up an org. You have to build your integrations. You have to do all those things that pay off over time.

David: And there's no reason why anyone would join Slack, let alone join Slack as a paid member unless you're part of a company. Whereas, especially post-covid, there are a million use cases, like my parents have a paid Zoom account now.

Packy: You get sick of that 40-minute limit. You’re just going to pay $14 a month and you go for it. I think that's been the big thing. There are other things, like chat is just annoying and distracting, and in particular right now, people are like, another Slack notification? I'm sick of this. The real reason that kind of suffers is that I think that Teams’ bear case.

Ben: Packy, give us a sense of the relative user accounts of Microsoft Teams versus Slack. On the Microsoft Teams one, you made a great point that it's actually more of a Zoom competitor than it is a Slack competitor. Can you dive into that a little bit?

Packy: I would say that Microsoft Teams has about 10 times the number of users as Slack crossed (maybe) 100 million user range recently, whereas Slack’s in that 12 million range and haven't really reported numbers recently on that. They also have a really growing and we'll talk about Slack Connect because it’s one of the reasons Salesforce bought it, but this growing connection between companies and that's growing super, super-fast.

Microsoft Teams is not architecturally the same way that Slack is, that you can just continually add teams within your organizations and have different kinds of sub channels. It's limited in the number of teams that you can set up. You have to be really, really thoughtful from day one and how you set up your channels in your teams within Teams. It’s getting confusing with the nomenclature there.

It's not meant to be a 10,000-person org chart tool. It's meant to be a hub for all things Microsoft within an organization. That's really good because you're able to grow. Microsoft is phenomenal at distribution. I don't use a PC but my wife and my mother-in-law do. I go to the computer sometimes when they're opening it, Teams just pop up even though they're not Team users. The active users kind of think—and Slack has this called out in the past—it is potentially a bit inflated.

David: Microsoft has been there forever. Back in Azure days, they were including O365 in the Azure numbers. They've reported numbers and they're like, Azure’s on fire.

Ben: It was Microsoft's fastest business ever to $1 billion in revenue, but I'm pretty sure that included the internal accounts as revenue drivers.

Packy: They're up to their old tricks again. In this case, depending on how you think Salesforce competes with Microsoft, it kind of works. If you really do think an independent Slack is a threat, then Microsoft's strategy and Microsoft using its distribution bully pulpit really knocked out a competitor here.

David: This is super interesting. We’ll get back to Slack itself and Salesforce in a minute, but why do you think Microsoft took this approach of directly comparing Teams to Slack? As you point out in your piece, it's really not. Zoom is the big competitor for Teams and yet you don't hear Microsoft talking about Zoom at all. What's their thinking here?

Packy: Zoom is not a platform and doesn't have line of sight to being a platform, whereas if you're on Slack, you can use G-Suite and it's integrated, you can use Figma and it's integrated, and you can use the 2400 different integrations that they have, then Slack all the sudden becomes is hub for essentially an office suite that is comprised of best in class software and then all brought into one place together. By the way, it potentially kills email, certainly internally and may be increasingly externally. It's just a more direct threat.

Whereas the people that use Zoom, they use Zoom, but you're still going to go back and use Excel, Power Point, email, and all the other things that you would’ve used otherwise. It’s not a threat to Microsoft's cash cow in the way that Slack would have been.

David: Interesting. That's one of my big questions here, too. Why wasn't Zoom the one that acquired Slack here? To me, that's a very compelling combination.

Ben: Your stock is potentially trading at a value that's worth a lot more, it's cheap currency. Why wouldn't you use it to go make acquisitions?

Packy: I wrote a whole piece on Zoom and this exact point that what do you do when you have a stock that is by all measures incredibly expensive and you have no moat? The answer is you go out and acquire companies. I didn't have Slack as one of them, probably because I just wanted Slack to remain a public company.

David: You didn’t want to trade your shares in for Zoom shares?

Packy: None at that valuation, I didn’t. They’ve tanked a little bit over the past day or so. I think Zoom should be more acquisitive here.

David: Totally. That's a good point on Microsoft. It's a new Microsoft under Satya and all that, and it totally is in many respects. The strategy remains the same which is we have the best distribution channel in the world for enterprise software. We have core use cases where we’re the dominant app in the vast majority of businesses that exist in the world, primarily being email, but also Word, Excel, and PowerPoint too, and we feed stuff into that channel. The stuff that they feed into the channel is great and additive of which video is super important, and that's why they're doing what they are on the products side with Teams.

Slack, as small as it is compared to Microsoft, and Stuart has said many times we want to be the next Microsoft. You don't hear Eric saying we want to be the next Microsoft.

Packy: Eric is happy having some very well-running video product.

David: Exactly.

Ben: I do think and I can give a couple more data points, too. A couple years ago, Microsoft decided to go all the way on Teams. They're rolling in Skype into Teams. The communicator at length are long since dead and rolled into the Skype brand but all of that is becoming Teams now. Same with a lot of what used to look like Office 365 dashboards. Teams is becoming that sort of central hub for everything. I know they did a lot of internal re-orgs, too, to put a lot of people who are working on suite-wide or cross platform things under the auspice of Teams.

They really are looking at it like, well, we can bring a lot of users right away even if they don't know that their users, and then increase time in app, engagement, and usefulness of this app over time. The thing I go back to is let's say Microsoft has that 120–130 million active Teams users. Most of them are probably using that either because they have Office 365 and it's a launcher of sorts, because their team technically uses it whether or not it's their main mode of communicating. More importantly, because we’re all in work from home and they're using it for their video calls, because it's the free and corporate-approved video calling software that they can use.

I really like the point that you made. It is a total red herring to continue comparing Slack users to Teams users because it's complete apples and oranges, and the Slack share price is depressed because it doesn't look good compared to this thing that you really shouldn't be comparing it to.

Packy: Exactly. If you compare it to video products when everybody is on seven video calls a day and it's very easy to set up, it's not going to look nearly as good as it would if you compared it to anything else. It's a little bit tougher to set up and involves the full team’s participation.

Ben: My thesis on this whole thing is what we’re really seeing I don't think is an alliance. It's really like the anti-Microsoft consolidation.

David: This isn't like the rebel alliance here. This is like another empire stepping in.

Ben: A blog post just went up by Aaron Levy talking about how this is a show of force from best in breed applications. Whenever you see best in breed in the enterprise, the codespeak that is, Microsoft is not best of breed. Microsoft is the full integrated system that's best at nothing. I don't know if I totally want to make these my words, but this is the viewpoint of the best of breed argument. They're best at nothing, but they're the best integrated.

If you're buying for one single provider, it's the proverbial enterprise one throat to choke. It works best together. You can have one person for your support, you can have one rep, you can have one license, you get bundled pricing, all that stuff. When you see best of breed, what that usually means is people buying from a bunch of different vendors, but it's the best purpose-built software for each of those things.

It's very interesting to start to see consolidation among best of breed applications being from one company. One does have to wonder, is this the first of several? Slack might be the most important, because it is the platform, the entry point, the place where you can branch out to many of the other apps from there. If Zoom weren't so expensive, when do we see that? Is there some way that Salesforce has ambition to find other best of breed applications and bring them into the umbrella too?

David: You have to think, regardless of whatever Aaron and Box wants to do themselves, this is fantastic news for them and for their evaluation because at a minimum, file storage is going to be a big part of that puzzle. Either Box or maybe Dropbox is one of the next items on the list for Salesforce. If not, at a minimum, they just got a lot more strategic. I'm sure they already have a partnership with Salesforce as a distribution channel, but that's going to become even more important.

If salesforce is now going to be pushing this, hey best of breed, not the easiest to buy for your IT department. This is going to be a tailwind to all other—I'll use this term, I don't mean that pejoratively—subscale software and productivity companies out there. I just mean subscale in that you're not Microsoft or Salesforce. This is just going to be great for their go-to market and distribution.

Ben: Yeah. The developer equivalent of this is the Microsoft stack versus the open source ecosystem. Now you sort of have the Microsoft productivity stack versus the best of breed ecosystem of which Salesforce is now the very credible centerpiece. In the open source ecosystem it was like—this is a decade ago—I use PHP as my scripting language which means there's this whole variety of open source vendors that I use for all the different pieces in my stack, or now Python, Node, or whatever. I think the way they think about that in the productivity world is like, yeah we use Slack. This is the leap. We use Slack and Salesforce…

David: Didn’t you read the press release?

Ben: I have this queued up, I need to quote this. Here's the key line in the press release, combining Slack with Salesforce customer 360 will be transformative for customers in the industry. The combination will create the operating system for the new way to work, uniquely enabling companies to grow and succeed in an all-digital world. Then you scroll down and you see Slack will be deeply integrated into every Salesforce cloud as the new interface for Salesforce customer 360. Slack will transform how people communicate, blah, blah, blah.

What does it mean to be this new interface to Salesforce customer 360? What does that actually mean in practice? Does that mean that the Salesforce customer 360 is the very best Slack bot to ever exist and people interact with 360?

David: You're going to [...] Slack bot to a Salesforce bot.

Packy: I hope not. I was talking to my friend about this deal earlier and he's like, getting Salesforce as a company is like somebody giving you the chassis of a car and then a box of parts, and then having to figure out how to put them all together before you drive it.

The last company I was at, the Salesforce implementation was one of those things that every month was about a month from being done. It's really hard and maybe that's why Slack over time becomes kind of the on-ramp to the whole Salesforce ecosystem, and they do figure out a way to integrate it. Slack, for all the work that they've had to do to make their onboarding a little bit easier, have struggled there. It’s certainly a much easier product to onboard to your organization than something like Salesforce might be.

David: I don't know. I read all of that and I'm just like, that translates to me as Slack just upped their own salesforce by 100X in terms of headcount in power. That's what that translates for me.

Ben: Yeah, in the classic acquisition category that we always do on episodes. This is a distribution deal. The product velocity is not going to change. Salesforce's is probably not going to integrate the Slack product deeply into the existing Salesforce. They say they are, but it's unlikely. I think it looks a lot more like LinkedIn where it's a totally separate thing and they leverage the Salesforce distribution to be able to get it into more enterprises.

Packy: That sounds right.

David: Packy, I think you made this point several times. Slack’s growth story, really it's whole life as a company has been we get small innovative organizations to start using the product—sometimes that's small innovative teams within larger companies, but oftentimes it’s startups—and then it grows. As those companies grow, we grow.

You made the point that yes, you’re spending all the sales in marketing to acquire these customers early on, but then as those customers grow and they retain and expand with you, that's going to lead to a free cash flow monster, hopefully in the future. What's missing from that playbook is a credible way to go get the big organizations. This feels like they unlocked that.

Ben: That makes sense. The only question in my mind is if you look at it like Slack is a great way to index startups. Basically, if you want to make a bet that startups grow and have lots of money to spend in the future because they're cash-generating machines and need lots of great tools. Maybe the place that Salesforce actually ends up investing is a migration path from you've loved Slack and now we make it easy to onboard to the full Salesforce CRM suite. It's probably my product background but I don't see that. It's hard for you to imagine what that bridge looks like, where you're like, oh great, you and your team have all been communicating in this place. Therefore, somehow, your Salesforce CRM implementation will now be easier.

Packy: I think the big thing here—they mentioned it in the press release as well—is Slack Connect. To the extent that you think that Slack Connect will be a way that the company can communicate with all of the different partners or clients that it has, then that makes a ton of sense for a Salesforce integration where you're not just plugging into email and tracking your email conversations, but you have your lead right there. You click Start a Slack Connect channel, and then you're in conversation right within the Salesforce products to the extent that there is integration. That's where I see that happening.

Slack just reported their numbers and they grew (I think) from 380,000 Slack Connect endpoints to 520,000 Slack Connect endpoints in the last quarter alone. This has been a huge area and focus for the business (maybe in retrospect) running up for a Salesforce acquisition because this certainly does make them a lot more attractive as—like Ben Thompson called it—The Work Social Network. I think that's the most appealing piece of the product if I'm Salesforce.

David: Let's talk a little bit more about Slack Connect. Why is this so strategic for Slack? This has been the drum that they've been beating basically, not their whole life as a public company but most of it, right?

Packy: Yeah. I think it's strategic for Slack. When Stewart talk about the product and how to describe it—I wrote about this in the piece; I'm repeating myself here—they've always said, it's hard to explain, but when you try it you know it. I think what Slack Connect represents is, if you want to work with Stripe, or if you want to work with Amazon, and the Stripe or Amazon team thinks it’s a lot easier for you to communicate in a shared channel, guess what? Law firm, finance firm, lender, all of that, you're going to join Slack and then you're going to try it, because the product is better than a Microsoft Teams, you're going to love the product. Then maybe you'll start paying for Slack. Maybe it'll spread in your organization. I think more than anything, it's a way for people to try before you buy the Slack product, because your innovative partner has told you that they want you to use that product.

Actually when I was at Breather before, Cushman & Wakefield the first time that they used Slack was to set up a Slack channel to talk to us. I think that's not an accident. You can see that happening kind of really large just so the companies can keep that whole conversation in one place and one interface that they're familiar with.

Ben: How does shared channels between organizations play into that?

Packy: I think shared channels have become a part of Slack Connect and that's what Slack Connect is. Shared channels are just the first iteration, but what Slack Connect is, is a bunch of shared channels between organizations.

Ben: That makes sense. For what it's worth, we have a super unique use for Slack at Pioneer Square Labs because we have one for the studio and then we have one for every company. It actually is very meaningful and helpful in the transition. We spin out a company to be able to have shared channels until that company starts closing them off to us and then actually uses them on their own, but at the very beginning for the whole team except for the founders. It's great to have that bridge setup.

I do wonder, it seems that in Slack’s pre public lifetime, they were an internal tool and email was the external tool. It seems more and more that Slack is trying to also find natural ways to be your external tool, which is an interesting analogy to Salesforce. Salesforce is an internal tool but it measures all of your external communications and external deal status. There's got to be some loosey-goosey on the actual product implementation, but you can see how that philosophically aligns with where Slack wants to go.

Packy: There is this great thing. I think they are kind of trying to articulate it at this point. There's this Slack Tweet from 2013 that goes like, people are saying we want to email dead. If we wanted email to be dead, it will be cold and in the ground. They've been kind of dancing with whether or not they're an email killer for a very long time, but it seems like that's exactly what they're trying to do.

David: One of the best parts is you can use the Wayback Machine and you had Slack’s marketing positioning. To me this is the whole point of the story here which is, there are pros and cons to Slack. They've done some really good stuff for the past year, and they've done some toxic good stuff. I think one of the things they've done not so good on it is like, what the hell is this positioning?

I get Stewart’s quote. I get it on Slack, too. You got to use it to know it, but you're an 8-year-old company at this point. You're a public company. You have to be able to explain what you do succinctly. Even as a public company, they've been massively changing their main marketing message several times.

Ben: I give them credit for that. They went from a thing that was trendy in startups to useful in addition to all your other forms of communication, to oh my God, we're all working from home, and now it's essential. Their full pivot to we’re your virtual office; I can't remember exactly what the phrase is, but I think it transitioned from where work happens to your virtual office. More power to them for that.

David: Fair enough. But there was the moment in there where I was like, we’re the email killer.

Packy: That resonates with people. I think it doesn't describe fully what they do, but something as simple as we kill email is something that people can really rally behind, versus we're where work happens. People don't know what that means. Stewart was a philosophy major and a logician and all of that. Maybe there is too much of an emphasis on getting those words exactly right versus just resonating with what people wanted the product to do.

Ben: It is also a classic sort of PR move to describe a problem, let people assume you are the answer to it, and assume it in their own way. In fact, Salesforce has a great example of this. We tweeted a snarky comment about their old no software slogan. People hated all the configuration the came with on-premise software. They just made their tagline, no software. Software with a thing crossed out of it. That doesn't say what they are, but it does say, oh yeah, I hate that. Awesome, you guys are the answer to that? You can imagine what the answer would be.

One of the funny things about enterprise software, broadly, and Salesforce, specifically, is unless you are an individual contributor whose job it is to use that software, you actually rarely get a glimpse of it. It's not like an indie-developed software that probably shows screenshots on the website, it's sort of like the UI is hidden from you until the very last moment when you actually have to use it. Often in sales demonstrations, it’s not actually shown to you, especially if you're not the actual end user. This is a little bit of a roundabout way of me saying, have either of you ever seen Salesforce’s new lightning interface? I've heard it talked about a lot. Have either of you seen it?

Packy: No.

Ben: I think that is in stark contrast to Slack’s philosophy. Everybody listening to this knows what Slack looks like. Even if you didn't use it at your company for a while, you were well aware of what the feature set of that software is. Salesforce is the ultimate embodiment of enterprise software sold through traditional enterprise ways. We don't need to show you pixels until we absolutely need to, which is often post sale, we're going to sell you on a dream. I don't exactly know a point I was making there, but yeah.

David: It is true, though. I remember the first time that I actually used Salesforce, not the lightning interface, whatever that looks like. I was just appalled at how bad it was.

Ben: Yeah, but it wasn’t software. Whoever bought it...

Packy: That's not a pretty software.

Ben: Whoever bought it sort of assumed that it would solve their problems.

I think this is an interesting time to move into pricing and conversation around they paid $27.7 billion. Let's contextualize that in the size of the business in revenue. Obviously, they're not profitable. Packy, you're one of the best educated people in the world on this, having just done a bunch of research. How big of a business is this and then how reasonable of a price is it for that business?

Packy: They just release their numbers for this quarter, $235 million for this quarter. Next year, this is a billion-dollar run rate company with 86% gross margins that just became free cash flow positive and grew from $10 million (I think) to $36 million in free cash flow this quarter. That's a really nice improvement for the company and the thing that you’d expect to happen when you spend a lot of money to acquire customers upfront. Then over time, they retained, and more of the cash drops to the bottom line. It's a moderately-sized business. You're paying 27.7 times the next 12 months revenue. It's not a cheap multiple on the business there by any stretch of the imagination.

David: What is cheaper expensive these days? I don't even know.

Packy: It's not cheap. Nothing's cheap right now. It depends. We'll see if you think it is strategic if they just push it through the Salesforce distribution channel. You're essentially paying 27–28 times next 12 months revenue for this business, but a business that is still growing 40%–50% year-over-year, a business that does have phenomenal margins and a business that is increasing its free cash flow at a pretty rapid rate here.

David: I don't know if you had time to look yet at the… you said it was $240 million revenue for this quarter, or $235 million, something like that?

Packy: $235 million.

David: $235 million. What is the year-over-year growth rate? Is that still sustaining in 40%—

Packy: That might be why they sold. The last quarter, it was 49% year-over-year. This quarter, it was 39% year-over-year. It’s a pretty dramatic growth.

David: They had a bunch of good news to announce this quarter in Slack Connect, but that's got to be a pretty concerning top line number. There's no reason that should be slowing. There should be tailwinds at the company's back. It should still be getting that expansion.

In the beginning of the pandemic, that expansion got hit because companies were laying people off and that was leading the contraction in monthly revenue in their existing accounts, but I think most of that's behind them, so it’s interesting.

Packy: Paid customers are up 140% year-over-year. Slack Connect endpoints are up 140% year-over-year. I'm looking to see if they talk about an expansion, because that's obviously been something that they've been pretty proud of that does not show up at least in the press release. Maybe if that contracts again from 130% before the pandemic, to 125%, to now 120%, and revenue slows a little bit, then that begins to paint a picture that maybe you want to get out before that happens.

David: To me that's a big question here. We've talked about a lot of strategic reasons to do this deal—it all makes sense and whatnot—but they did just flipping the cash flow–positive territory, that being Slack. They were still growing rapidly. They're still top quartile in all these best American merging cloud index metrics. Why sell? Unless they just felt like they were going to continue to get hammered by Wall Street and didn't want to deal with that, but…

Ben: It’s a 55% premium David. That's pretty rare as a public company to get. In the past, we've looked at these and we've said 20% premium is basically baseline. If you can get up to 30% or 40% even, that's good. Do the deal. If your stock price hasn't ever hit your listing price and you've been basically flat if not down over the 18 months or 16 months since being a public company and someone offers you a 55% premium, it's hard not to take it.

David: I think that's true. Well, I want to hear Packy’s thoughts.

Packy: That's true. For me, not having to sit inside of Slack and sell against Microsoft every day, I think this could triple on its own in the next year or so. It’s disappointing from that perspective. On the other side of the table, to say yeah, we're going to plug you into Salesforce and you're going to be able to match the distribution power, at least approach the distribution power of Microsoft. You're going to be able to do all of these things that you want to do, to connect the full ecosystem of best in class products.

You can see that that's kind of a tempting thing to be able to do. For the amount that they say that Microsoft isn't that big of a threat, they also sued Microsoft for leveraging their distribution advantage against them. It's not as big. At the very least, it's a big annoyance and a pain to deal with day-in and day-out. Maybe if you combine that with the fact that it's a 55% premium, you're happy to take that deal.

David: I think there has to be some element, though, of just fatigue on Slack’s part to do this because, again to me, they just flipped the cash flow positive. There's no gun to their heads, other than just people being mad at them. I wouldn't have necessarily thought that they would care too much about that.

On the other hand, I also don't think—based on our main show episode that we did on Slack—that adding several more billions to his net worth matters that much to Stewart, so maybe he's like this is going to be the best chance to realize the mission the soonest, but it's just a little perplexing to me.

Packy: You wonder if they couldn't have gone out and just acquired Frank Slootman to come in and rally the troops, rally the Salesforce, and go out and sell against Microsoft. Stewart's very much a product guy and not a sales guy. Maybe that's the other answer here. Instead of bringing on a new CEO who's really more of an enterprise SaaS guy, you just sell the business and you have this successful exit out of 55% premium than all of that.

David: Stewart gets to continue being Stewart and being the product guy, and Slack Connect. It's a big vision, it's a big product, and they've done really well for the product standpoint from that. He doesn't have to go be Frank Slootman and Benioff can be Frank Slootman.

Packy: Exactly.

Ben: You have to wonder if this is the beginning of the rebundling of enterprise sales. If you think back 15 years ago ‘bring your own device’ happened, and then the last 5-8 years it was anybody with a credit card gets to buy any old SaaS service and there's subscription fatigue in a big way at any company.

We're a 22-person company at PSL. We have a spreadsheet to manage all the subscriptions that everybody signed up for and then there's harassing at the end of every month. Who signed up for this and what card? I can only imagine how painful that is at enterprises.

You have to imagine, too, if Salesforce is saying actually we have the opportunity to run the Microsoft playbook here and we're going to continue seeing more consolidation here to alleviate the pain of procurement around people going around procurement.

Packy: I think that's an interesting point. I can't imagine that as the companies that are used to buying Microsoft, Oracle, and even Salesforce, all those age out. The new wave of startups are going to be like we really love to buy from Salesforce or we really love to buy from Microsoft.

Maybe there's a transition period that we're in which is a 5–10 year thing, but I think the way that that ends up getting solved is their company is ramped on the corporate card side that is trying to show you your spend in one place and show you where you can save.

Whether it's a corporate card, whether it's a software solution that comes in and replaces the spreadsheet there, I think there will be other solutions. Growing tech companies are becoming a bigger and bigger part of the market and I can't imagine that they enjoy working with Salesforce more than they hate managing all of those expenses.

Ben: And Packy, you raised a great point, too. I think it's novice of me to say just the point of integration in 2021 would be the same as the point of integration in 2005. The rebundling won't happen in the same way that it got unbundled. The rebundling will be at the credit card level. Someone's not going to go build the Microsoft bundle the way Microsoft built the Microsoft bundle.

Packy: I think that's right. It’s what makes this fun.

David: Indeed. Speaking of prognosticating about the future and strategic decisions in the landscape, I think you read about really eloquently in your piece about your take on the bear case for Slack as an independent company. This actually totally jives with our friend, Jake Saper, over at Emergence—is about to publish a blog post about the flip of this being an investment theme, he calls it deep collaboration—that there are all these other workflow apps out there now, whether it's Figma, or Notion, or whatever that actually have chat and collaboration built into them so you don't need to go over to Slack in order to collaborate on a Figma document or if you're working on a legal document with Ironclad or something like that. Let's talk about that because I think this is a really astute observation.

Packy: That's fascinating. A lot of this comes from Kevin Kwok who's more astute than I am on these things. His point that he makes and a great piece that he wrote on Slack is that once every piece of what a business does has a Figma-like software that has collaboration embedded, then Slack becomes this backup.

Use it for emergencies, something has gotten wrong in the collaboration tool, so let's go over to Slack and chat about it. Or it becomes what email is today. We make a company announcement here or we do things that are more broad. But when we actually want to get work done, then you're right. We go into Figma or we go into Pitch to do our presentations together there. There are all these different things. I think that is a little bit confusing.

His solution—one I think is going to be a pretty hot target right now—is something like Discord that is a chat tool that exists on top of all of the other collaboration tools, and you can be video-chatting. I wrote about remote work, all the work from home products that are being built natively for remote work.

Yesterday, there are five good options that I saw just in a couple days of research that are trying to really build something that isomorphically feels and looks like an HQ, but then also there are different noise levels that you hear when you approach people, or when you go further away from people, or you pull up the code that you're working on right there on the screen you have your little video circles around that. There's a really interesting software being built in the space. To me, that's the bear case.

Your bull case on Slack (which mine is) is that they can acquire all the young, fast-growing companies and become this central hub for everything they do and grow with them. The biggest threat to the company is that there's an even better, newer way of a software that comes in and cuts off that bottom, and takes all of the younger companies that are coming in, and maybe even Stripe’s going up and stealing the Stripes in the other companies there.

To me, that's the big risk because there's one collaboration software that people interact with directly, and then to the next generation of Slacks that are built more for this world where we all have to be collaborating with whatever that software is as the central hub, versus as something that we chat with each other on in the office.

Ben: I love that point. I think it's so astute that the worst nightmare for Slack is that chat gets good in apps and suddenly I'm like oh, yes, Slack, I pop in there to drop a gift in random.

Packy: Happy birthdays or so many other use cases?

Ben: Right, but to the extent that work stops. It's funny where work happens to the extent that work gets federated and happens in apps rather than in the central communication nexus. They're in big trouble. I love your idea of opening up the Slack API, not in a way that builds bots within Slack but in a way that embed Slack in your apps so that you don't have to roll your own Slack because it's a crap ton of work.

Any time anybody's like let's implement chat, see Zoom as example A, its chat is awful. Sometimes randomly, I'll paste a link and it won't hyperlink it. This is a massively successful company with just a chat where every time I try and send a message to one person, I accidentally send it to everyone. I think that there's a huge defensive opportunity for Slack to be the way that you implement chat in your app.

Packy: They just started hitting at it, too, before this. He went on The Twenty Minute VC with Harry Stebbings and talked about being this connective tissue between different apps and what the next level of integration looks like for Slack. That would've been an amazing way to do this (I think) to be able to just embed Slack in different apps because, to your point, everything that they've done that seems really simple that makes chat seem really simple is really, really hard.

I included the graph of all the decision trees that need to happen to decide whether to send you a notification at 8:05 PM if I Slack you, and it's really complicated. It is all that stuff that you can just offer as a service through other products that would've been interesting and maybe will still be interesting in the combined company.

David: You are more knowledgeable than me because I've only used the product a little bit. Can we double-click on Discord a bit, talk about how that's different, and why it's maybe more suited to this—I don't know, probably the wrong word—embedded type use case or coexisting with the actual apps?

Ben: Let me first make my snarky comment. If you thought Slack was unintuitive to learn, wait till you see Discord.

Packy: It's the first piece of software that's really made me feel old using.

Ben: The other side of that (which is viewed as a positive) is it's much customizable. Not crazy. It's not MySpace with an open HTML canvas but it's the Android to Apple's iPhone where it allows far more extensibility in the chat canvas.

The question is their go-to markets have been entirely different. Obviously, gaming in neutral [...] communities rather than the enterprise. In fact, Slack has made it difficult to use the product for anything that's not the enterprise and turn the blind eye.

David: <cough> our Acquired Slack. I've been beating the drum with so many people that have been like, please give us some basic features. We are vandalizing your product.</cough>

Ben: Long-time acquired Slack members will know that my particular [...] around that is because we are using it as a community product, it doesn't respect how adminy we want to be, so it will email all users and tell them you're hitting X limit. You're like what? There are thousands of people getting this email and this reporting analytics is like there are many of you active this month or this week. You're like why are you sharing that with all these random…?

David: No, we're not going to pay you $3 million a year whenever we have to for our 6000 people in the current Slack.

Packy: That is such a good point. It's not just the product, it's also the way that they're charging the business model. Whereas, Discord makes people pay for upgraded features like better video or things that super users might want but it doesn't penalize everybody else. I don't know how you do that if you're Slack and how you communicate that to the enterprises that people are getting all these alerts. It's more complicated than just doing what Discord does, but certainly from a business perspective, Discord handles those use cases a heck of a lot better.

David: Much better.

Ben: Yeah, so there's the marketing side of it and the ideal customer profile where Slack targets the enterprise and Discord targets communities. But I think an overly simplistic view of the two products to call them similar or the same other than who they're sold to because I think when you think about all the deeper features of each, they're way different. The ability to have a shared channel between two enterprises or the ability to create a Slackbot that communicates with a time-tracking tool. Those are not the types of things that Discord has ever built toward.

I think it's the classic enterprise offering (especially) but all software is that iceberg where 90% of the real hard work is below the surface, and I think it's only that 10% above the surface between Slack and Discord where it actually feels like the same thing.

Packy: I think that's right, but I do think for this next generation, companies like Huddle are going to come out and combine the best of Discord with all of the below-the-surface-level features of Slack. It'll be interesting to see where those turn out, but I think there's some promise there.

Ben: Frankly, if Slack was going to get cut off at the knees where someone else was going to be the tool for the new upstarts, if that was already true, being owned by Salesforce is going to make that way more true.

If your bet on Slack is the same way that you would bet on Stripe, the next great company is going to use this as an infrastructure choice, that has to be the bet that you can keep making and I would say Salesforce buying it loosens my conviction in that dream scenario staying true.

Packy: I would assign a negative price to the rest of the Salesforce 360 cloud.

David: All right, Packy, there we go. The remaining part of the upside is investing in somebody that's going to build the next messaging deep collaboration layer for the enterprise with Discord-type features for the enterprise. There we go.

Packy: Or as we all know and love, we can just invest in Tencent and own a little piece of Discord that way.

David: Why do I think about Tencent? We should make a disclaimer. I'm a shareholder, I think you are, Packy. I don’t know about Ben, but I feel the same way about Berkshire. I can't even, but if I could go invest in KKR, Sequoia, all these funds and whatnot, that they're going to give me great returns, but I'm going to pay 2 and 20 or 3 and 30 on that.

Or I could just go buy Tencent shares or Prosus shares (which is the spin-off from Naspers) or Berkshire shares. I could pay no management fees and no carry to get access to equally good, if not better, investors globally.

Packy: I looked this up yesterday, coincidentally. Do you know how much—since I wrote about Tencent, call it, in August—the value of their holdings and their top 10 holdings has increased?

David: I want to say it, too. Go for it.

Packy: $55 billion and it's $64 billion if you assume that Epic is growing at the same rate that Unity has and I would imagine that if in public, it would.

David: Which is just wild. Meanwhile, the share price has been up a little bit but relatively flat.

Ben: Do you know what the basis is when you look at all the purchase prices of all those investments?

Packy: I pulled 103 of their 700 investments by translating things in Google Translate from Mandarin to English. Ownership is crazy. I don't have the basis on a lot of them. Snap, their investment just doubled. And Tesla had 5%, so that obviously has gone phenomenal as well. Spotify has doubled. Just all these massive companies that's in their portfolio had doubled plus Epic, plus Roblox which is about to IPO, plus Discord which had this valuation shoot up and is now even more attractive. But any good company that you can think of and be like I wonder who's invested in them, Tencent is probably there.

David: The good news for you is I don't think anybody's going to acquire Tencent so I think you can let that ride for a long time.

Packy: How do you think the US government would feel if Amazon tried to acquire Tencent?

Ben: I feel like the US government would be fine with that. Let’s get off Amazon’s back a little bit. Let's try and get to what's the bottom line here? There’s been a lot of takes. I'm going to close my eyes on price for a minute and let's just talk about the narrative bottom line.

Packy, if you had to summarize the scenario, TLDR, tell me about why is this acquisition interesting and why and what's your take after an hour here of talking about it? What do you think?

Packy: I think the acquisition is interesting for a few reasons. I think the acquisition is interesting because, as you guys pointed out, it gives Slack this massive professional Salesforce to go push their product into all the [...] where it struggled to gain a foothold so far. I think product-wise, it could potentially be interesting if they can figure out a way to integrate Slack Connect and Salesforce and make it really easy for people to communicate both with their clients and even with potential targets on big enough deals that they'd be willing to enter into a Slack channel together.

We haven't talked about this, but Salesforce is the biggest acquirer that didn't get dragged up in front of Congress. Is Salesforce in this really unique position where they can be this under-the-radar company that just picks off all the targets while everyone else is exposed to antitrust scrutiny?

Ben: Microsoft didn't.

David: Did they not? They were involved in some of it.

Ben: Maybe in the later one.

Packy: They were.

Ben: That's a fair point.

Packy: They certainly, for any trust reasons, are probably the only one who actually could not have acquired Slack, whereas everyone else maybe optically it wouldn't look good.

David: Plus Microsoft's got to have such a hangover from the DOJ.

Ben: They do. My data's eight years old but yes.

David: Actually, Ben, you can talk [...], like what are the internal processes and controls within Microsoft to make sure that you never write the word monopoly in a document?

Ben: It wasn't as bad as you would think. It's only if something really gets elevated to serious discussion of a big strategic move that it gets considered. It's not really at the icy level.

I will say there was a whole milestone—I'm trying to remember how long Microsoft's milestones were; maybe six months—in Office where it was the documentation milestone or the cleanup milestone or something like that around the Office file format because a lot of the DOJ stuff was around, wait, you claimed to have this open file format but you're the only ones who have any documentation on how the file format works.

I do know there are billions of dollars that had to go into the manpower of cleanup after that, so there are some processes in place. But there's not a thing that blinks at your computer if you type the wrong word.

Packy: Company game that you can play anything but monopoly?

David: I'm envisioning—it was too big now—the days when Gates used to have all the interns over to his backyard, he'd get up on stage and be like, all right, here's your orientation. You must absolutely not say these things in [...]. Our enemy is the government.

Ben: Let me come in with mine. Packy, great three points. The one other point that I would make that's the thing I've been doodling on that we didn't really talk about is this notion of growing by acquisition, which is something that we've talked about especially on the LP Show with Will Thorndike, author of The Outsiders. It's a famous move by media companies and other outsiders, CEOs, where the core business has growth but not insane growth and you grow the company by acquiring high-growth assets.

Again, we can debate whether Slack is a high-growth asset relative to some of these other SaaS companies these days, but they're a large enough enterprise company where if what Salesforce wants to do is meaningfully grow their enterprise revenue quarter-over-quarter, they got to acquire their way in the new revenue streams to do that.

Where are there possibly large feature revenue streams that they could acquire? Slacks. If I had to describe why would you do this deal if there's not real product integration to be done but you sure as heck can increase their growth through your own Salesforce, but because the market is relatively underpenetrated with this Slack product, that's how I would describe what Salesforce is up to here.

David, anything else?

David: I think the only thing is we could do a quick what would've happened otherwise on other potential interested acquirers, probably namely Google. We touched on Zoom a little bit. Maybe we can circle back to that, too. Let's do Google and Zoom.

Packy: Actually some months ago, I wrote about a Google-Slack acquisition. I think that one. Part of the press around this is that it's now Salesforce versus Microsoft. I don't think that's really the case unless people start using Quick Documents to replace Word or whatever else.

I do think that a Google plus a Slack, with Google's distribution, really is a powerful combination. When you have G-Suite, you have Gmail as your Outlook competitor. You have Google Sheets. Maybe the finance team still needs Excel, but most of the rest of the company can use Google Sheets, Google Docs and all those things.

You really have the suite that you can onboard a new company by just signing up for Google+, Slack plus Looker, which I like better than Tableau. It feels like they're building this new wave Office bundle versus even Tableau. I love Looker, and my brother loves Looker, and my dad loves Tableau, and so I think that it does make a little bit more sense in that Google Suite, a product which is what I thought they're building.

Google's actually (to me) been maybe the most disappointing thing in terms of their innovation or their growth unless one of the other bets pays off, but they have this ad business which, for now, is spinning off a ton of cash. The idea that they wouldn't play in this, I don't even know how to read that, but it just seems like such an obvious move for Google to come in.

And then, Amazon is the other one. They had a partnership where they powered Slack's video product and Slack used AWS and all of that. That's another one but Google (to me) makes a ton of sense.

Ben: Was Google a bidder at all in this? I didn't see anything about that.

Packy: Nor did I.

David: Haven't seen anything.

Ben: You're right. It makes a ton of sense for them, especially when you consider the startup productivity stack. I would say not the bleeding edge pre-chasm–crossing startup stack like Notion and Airtable, but you think about the 500- to 5000-person companies, it's a Google Docs company that uses Slack for internal communication. That's a natural bundle.

Packy: G Suite is really one of the best integrated things in Slack where the docs pop up. It really is one of the nicest integrations in the product.

Ben: Which is custom, by the way. There was a CEO conversation to custom-build some stuff there, especially around the different types of sharing and how you can grant access from within Slack. That was custom work that Google had to do in order to enable that in Slack.

Packy: All that work down the drain. That's the acquisition that should've been.

Ben: For the founders listening to this who have never sold a company before, that is the typical thing that forms a relationship between companies that then leads to acquisition. That's the way to do a dance where you do a partnership, not a bundle distribution go-to market partnership. What's an interesting product thing that we could do that would provide value for both of our users? Companies get to know each other, they get to understand each other’s user base, and then that's the thing that tends to lead to a deal.

Packy, now that you bring it up, it is surprising to me that we aren't seeing Google's name here.

Packy: Yeah, boring we’re not for that deal.

David: Especially since I hear you, Ben, that 55% premium, but when I think about relative to the potential of Slack and the multiples for some of these other class SaaS companies out there, this price does not feel high to me.

Packy: Right, and what if Google makes free Slack an ad product? Would you guys accept ads to get rid of sending emails to everybody?

David: Maybe, probably. Also the other piece in here is financing. Salesforce is taking out that to finance this. Of course, they have a strong balance, they can do this, it's not a problem for them. Google's just got literally an infinite amount of money sitting there, spending this $27.7 billion purchase price for Salesforce. Google could've spent $35–$40 billion, no problem, wouldn't have made a dent in their treasury.

Ben: When did the documents get disclosed—David, you probably know this—with party A, party B, how the deal went down?

David: Probably when it'll come to a vote to Slack shareholders.

Ben: Okay, we'll know in the next quarter, the next few months, if there was a bidding process here?

David: No other discussions, yeah.

Ben: I love public-to-public mergers.

David: I think the other question—we touched on it at the top of the show—is Zoom. Zoom's market cap now, if I recollect, is 130-ish billion, maybe a little more?

Ben: Sounds right.

David: This would be a big chunk to do a stock deal with Zoom. It would be a pretty big chunk which is probably why it didn't happen.

Ben: Maybe Slack didn't want Zoom's stock at this price.

David: Could be.

Ben: If you work at Zoom and know the answer to this, David, I, and Packy would love to know personally, but I would also chalk it up to (in all likelihood) Zoom has an underdeveloped core dev function where this would have to be a Eric wants to do this deal and is going to shovel over other stuff off of his plate to pursue doing this deal.

Packy: I looked at that stuff. At least two months ago or a month ago and I wrote about it, they have a two-person core dev team that's both a couple months old in the company.

Ben: For a company at that level, maturity would have to be a CEO pet project in order to make progress on it.

Packy: It feels like they want to do video. There are plenty to do in the video space and that has always been their strong suit is how focused they've been on video.

David: This would be fun. Maybe we could do a sidebar here. I would disagree with you a little bit, Packy, on the view on Zoom. I think that view makes sense if you think of Zoom as an enterprise productivity tool which I think a lot of people do, but to me it's actually much broader and the opportunity is this, that we're doing on Zoom right now. They're good. Great. Enterprise productivity product, make a lot of money on that. Perfect. But the huge opportunity is they are the video platform for the entire economy. I totally see Eric being that's our focus, that's what we're doing, I'm not going to get distracted on this.

Packy: There should be a million startup spill on top of Zoom instead of Agora in the next year, so their focus should be on becoming a platform.

David: Yup.

Ben: Grading?

David: Let's do it. Let's do two separate gradings here to bring in home. One will grade Slack's tenure as a public company. I'll render a grade on that over the past, was it 15–16 months or so? And then two, we'll do our looking forward, let's paint an A+, C, and F scenario for the next five years of Slack within Salesforce.

Taking Slack's tenure as a public company, I'll go first. It's really hard for me to come up with reasons not to grade that's pretty harshly.

Ben: For those of you who don't know David Rosenthal personally, that's David being mean. David can't say it. David can't come out and say they've done terribly. You won't hear him say that.

David: This is not in my DNA. This is pretty bad. I'm going to go with a C minus tenure as a public company. Maybe it deserves to be worse, but the outcome here is above the DPO, the first day of trading on the direct public listing. It's not like they destroyed value in the public markets.

On the other hand, didn't come close in trading to 15–16 months as a public company to meeting that day one price or little on eclipsing it. Maybe it would've been impossible to fight this Microsoft Teams’ bullying narrative, so maybe this was an unwinnable battle, but they lost it.

Packy, you have a great point. Teams is not the competitor here. This is a great company with great metrics. And yet, they let this become the narrative that Teams is just going to destroy these guys. I think that's why we ended up here.

Ben: It's interesting because if we're grading the performance as a public company, the stock price movement is a failure of the CEO's ability to give the market confidence in the future of this company.

I think Hamilton points this out in 7 Powers. Packy, I know you're an avid reader of Hamilton's work with 7 Powers, too, and I think it's worth bringing up. Public market investors are not short-sighted, they over-index on recent signals, but the reason is because the stock's price and the enterprise value of the company is primarily formed by an investor's view of what the next 30 years of cash flows are going to be. They, of course, over-index on recent signals if it paints a picture of how those 30 years are going to go.

What we're seeing here is despite relatively strong performance as a business, the market doubted the business's long-term prospects even though the business did even better quarter over quarter over quarter as a public company. It's interesting, depending on what we're grading here, you'd grade different things. I'm in camp B-ish, B+ as actual execution on their goals but F on the ability to generate value for shareholders. Well, not F (I guess) because it didn't go down but C-.

Packy: It's interesting that this communications company's biggest problem was communications and telling its own story, but I think my answer actually changes. I've suffered through this bouncing in the 25-30, on the 16 range as a public company below the DPO price and I'm fine with it because I thought that they shared the long-term vision that I had for the company.

If you just asked me to grade it on the spot, it's totally fine. Everybody's misjudging it. They also see that this thing just compounds over time and compounds over time and compounds over time. Obviously, this still changes my perception of how they view themselves. In that case, I have to give it somewhere in the C range as a public company just because it stayed pretty flat, which is average. It's a C. It's underperforming in the market pretty significantly and particularly the time where you're just counting future cash flows to those three years which should be Slack's.

To Slack's great benefit, you're just counting this tiny, tiny, tiny discount rate and yet it's not being reflected in the stock price if they're not taking that long-term view that I think you can't be any better than a C for me, unfortunately.

David: Fortunately for you, you kept buying and that's just the DPO.

Packy: That's part of the legacy as well, the biggest DPO to date.

Ben: Direct listing.

David: I don't know if Slack or Spotify was bigger. They might have been about the same size. Spotify had doldrums for a long time but it's performed excellently recently.

Ben: The one thing I will say is whatever I was there B, or B-, C+ on execution, Packy, before reading your piece and before talking with you, it's much more negative. In fact, I had a joke I was about ready to make on Twitter that—actually let me get it word-for-word—“Slack has basically stopped updating the product and when they do, we all complain about the new worse UI. I think they'll fit in just fine at Salesforce.”

I ended up not tweeting it because I think the work that they are doing is a 90% work that's below the surface where it feels like I haven't gotten an update other than shared channels and multiple workspaces since 2015. If you look at the Apico system and the way that that's been strategic for their business, that's actually huge. I think I want to wave my arms around and say I think anybody who's knocking Slack for decreasing product velocity is just looking in the wrong place.

Packy: Completely agree with you there.

David: All right, A+, C, and F scenarios within Salesforce for the next five years. The F is always obvious.

Ben: To be totally clear, this is how good of a use of $28 billion was this for Salesforce versus the history of other uses of capital by companies both in internal and external investments.

David: Maybe the F is not obvious. I think the F to me—we can all debate—is they're wrong strategically that building a best-of-breed alliance is actually not the right strategy. Big enterprises don't really care about that anymore. They're still happy to buy on credit cards, or distribute across the organization. It turns off all the startups. Innovative, high-growth companies are like, eww, Slack is part of Salesforce, I don't want that anymore. I'm moving over to Discord or whatever. That feels like the F to me.

Ben: I don't know. I don't think that stench is real or it's going to meaningfully impact people's decisions whether to adopt or not. What I do think is real along those same lines is this decreases the likelihood that Slack comes out with that next innovative feature or user experience that makes people go, oh, my God, I have to use this product.

Packy: I think the F for me is trying to integrate Slack and Salesforce the products and failing and turning Slack more into Salesforce than Salesforce more into Slack. I think that's an F for me. Another potential F is I do think that there's a stench if all of a sudden you start getting cross-sold Salesforce when you sign up for Slack. The Acquired FM Slack starts getting hit off for the emails for Salesforce 360, Lightning, and all of that.

David: Look at this Lightning interface.

Packy: Right, which I think of that. If the distribution channel looks at those one way and it's just pushing Slack to Salesforce, then those are corporate buyers anyway (or whatever), but if it goes the other way, then that could be pretty ugly.

Ben: I think the risk of this is very low, to be clear. When you look at Salesforce's other acquisitions, did users of Quip start getting sold on Salesforce and the 365 interface? Or did Heroku users? No, you don't even know that Salesforce was the parent company of those things. Did they both atrophy? Absolutely. Why wasn't Quip Notion?

Packy: Or Coda.

Ben: Yeah, it's actually the better comp. Or why is it that every startup that we start now at PSL is started on AWS directly? You don't need to use Heroku, you don't need that middleman that makes it easier to spin up a Cloud app. Amazon actually has made it both more confusing and easier. They made it more complex but then they've also created relatively simple on-road.

David: To be fair, that's probably not Salesforce's fault. Heroku when all the past players were probably dead anyway.

Ben: But that's the thing. Why did they buy them? Did they think they were buying the next generation of category leaders among those things, that was going to surpass Microsoft in those ways? Or not? Is this their third attempt (or maybe even more than that) to buy the next generation tool? Are they buying it at the peak and it's going to product atrophy from here and there for people? Startups are going to go use the next generation of collaboration software. That is the biggest existential risk in the F scenario. A+?

David: Let's do A+. We'll do the exciting stuff.

Ben: A+ to me is that Slack (on its own) has been a reasonably high-growth SaaS company and Salesforce is successful at buying fast-growing SaaS revenue. Now, they get to pump it through their channel, and their channel receives it well. They just are able to massively increase the revenue growth for Slack, and have more and more companies adopt it.

In fact, they may even be able to convince, maybe not enterprise but large companies that it's now a trustworthy vendor, it's not some startup there buying with the full seal of approval from Salesforce, and that comes with a Microsoft-like—not quite Microsoft, but Microsoft-like—level of yes, I authorize this use at 30,000–50,000 seats throughout my organization. Maybe there's a new market unlocked there.

David: That makes sense. To me, that's an A, A- to A, probably A. I think the A+ is this catalyzes Salesforce. The anti-Microsoft alliance centered around Salesforce as a totally viable and successful new distribution channel for best-of-breed SaaS companies. We see Superhuman go into the Fortune 100, we see Coda go into the Fortune 100, Notion and Figma—well, Figma doesn't need any help—all those new SaaS products now use this as a distribution channel whether Salesforce acquires them or not. Probably not, but now this opens up the door to whole new markets for them.

Ben: I like that take.

Packy: I think mine is somewhere similar and it just revolves a little bit more around Slack Connect really being what they think it's going to be and not just creating the social network at the horizontal layer but also making being the target in Salesforce a better experience, humanizing the whole sales process a little bit versus getting hit with some awful drip campaign. To me, if you can make the sales process writ large a little bit more enjoyable than [...] creating all these links between all these companies and really building this network that backs up.

Ben: Awesome. I think that, listeners, is the complete set of opinions that we have on the deal with the facts that we have today, a mere two hours after the deal was announced. Any closing thoughts before we wrap up and do our little closing here?

David: This is a blast.

Ben: It was super fun.

Packy: It was really fun.

Ben: It's the first time being on YouTube, too. If you're listening to the pod, it's fun. We tried YouTube Live here so we got to read some of the comments in real time and maybe for future emergency pods, we will do the same.

First of all, thank you to Packy. Where can listeners find you and subscribe to Not Boring?

Packy: They can subscribe at notboring.substack.com or I'm on Twitter at @packym. Thank you guys for having me. This has been a blast.

Ben: Of course.

David: So fun. We're so glad you could join and definitely subscribe to Not Boring and follow Packy on Twitter. You're one of the best follows on Twitter, especially tech Twitter.

Packy: Thank you.

Ben: Listeners, thank you so much. Thank you, too, to our wonderful sponsors, Tiny, Bamboo, and Perkins Coie. You can find their links in the show notes. We didn't mention the LP program this time, but I think most folks probably know what it is. If you liked this a little bit more informal-type conversation, we get to have a lot of this conversation.

Packy, you've been in those Zoom calls, how's it been for you?

Packy: It's an absolute blast, I told you guys after the last one but doing The Outsiders book club with Will Thorndike, after having written about The Outsiders and being obsessed with the book is just a cool opportunity with a bunch of smart people, so total blast. I highly recommend it.

Ben: Cool, if you've been teetering on the edge, you can join and we have a link in the show notes to become an LP at acquired.fm/lp. I think that's it. We talked a lot about Slack this episode. We've got one of those, you can join at acquired.fm/slack.

With that, listeners, have a good one.

David: See you next time.



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