Take our 2022 Survey. You could win AirPods Pro 2's! >>

The Slack DPO

Season 4, Episode 9

ACQ2 Episode

June 24, 2019
June 24, 2019

It’s a bird! It’s a plane! It’s an... enterprise software company? We give the full Acquired treatment to newly-public Slack, one of the most extreme and successful pivots of all-time. From a log cabin in Canada to a never-ending game and back again, Slack’s journey has more twists and turns than a Hobbit’s tale. Tune in for one APLUSS story you don’t want to miss!


Carve Outs

Join the Acquired Limited Partner program! https://glow.fm/acquired/ (works best on mobile)



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…

Season 1, Episode 26
LP Show
June 24, 2019

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
June 24, 2019


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.”

Season 4, Episode 1
LP Show
June 24, 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.

Season 1, Episode 11
LP Show
June 24, 2019

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
June 24, 2019

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.

Season 1, Episode 23
LP Show
June 24, 2019

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.

Season 1, Episode 20
LP Show
June 24, 2019

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.

Season 1, Episode 7
LP Show
June 24, 2019

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.

Season 1, Episode 2
LP Show
June 24, 2019

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!


  • 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/

Join the Slack
Get Email Updates
Become a Limited PartnerJoin the Slack

Get New Episodes:

Thank you! You're now subscribed to our email list, and will get new episodes when they drop.

Oops! Something went wrong while submitting the form

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

Ben: Welcome to Season Four, Episode Nine of Acquired, the podcast about technology acquisitions, IPOs, and direct public listings. I’m Ben Gilbert.

David: I’m David Rosenthal.

Ben: And we are your hosts. Today we are covering the spiritual sister of our previous episode on Zoom, Slack, the largest enterprise IPO in history. Of course it wasn’t even actually an IPO but rather a direct listing.

David: Barry McCarthy, he rides again, the Acquired superhero.

Ben: Today we’ll talk about what all of that means, the crazy history of Slack’s evolution from even before it was founded, where its roots really are, and break down their business and their market cap today, and what it could do in the future. In lieu of promoting the Limited Partner program this episode, we have a request. Please fill out the Acquired Season Four survey. It is tremendously important to us here at Acquired World HQ to know who our audience is. First of all to make better content, but second of all to make sure we work with the most relevant and interesting sponsors for everyone and produce a great content there as well.

To sweeten the deal, if you fill out the survey, you will be entered into a raffle where we’ll give out one pair of second generation AirPods and there will be 10 other lucky winners of free LP subscriptions for one year. You can click the link in the show notes or go to acquired.fm/survey. Again, we really, really appreciate you doing this. If you have five minutes to spare right now, I’ll even invite you to pause right here and we promise we will be here when you get back.

Lastly before we dive in, I want to thank the sponsors of all of Season Four, Perkins Coie, counsel to great companies. We have with us today Ned Prusse, a partner in the corporate and securities practice who regularly advises clients working with the SEC. Ned, what is a trend that we’ve observed in these tech IPOs this year that we haven’t seen as much in prior eras?

Ned: I think the biggest thing is the long runway that a lot of these companies are taking prior to their IPO back in the dot-com time period. Usually, companies average about three years from formation IPO where now, recently, it’s about 10–11 years, which means that even a lot more companies that have grown a lot more as private companies have workable business models and usually leads to a lot higher valuations. We’ve seen the likes of Lyft getting a $20 billion valuation here recently and Yahoo and Amazon 20 years ago getting about $500 million. Just the fact that there’s a longer runway has led to, I think, higher valuations here.

Ben: Thank, Ned. If you want to learn more about Perkins Coie or reach out to Ned specifically, you can click the link in the show notes or in the Slack.

David: The Slack.

Ben: It’s definitely Slack but I said the Slack more than 50% [...].

David: It’s our Slack.

Ben: It’s your Slack, listeners.

David: All of our collective Slacks.

Ben: David, that literally is the only time that that will be a good transition unless Slack makes a big acquisition some time in the near future.

David: It’s an embedded transition because collectivism is exactly where we’re going to start here. We start pretty far away from Slack’s gleaming, new downtown San Francisco headquarters, pretty far away from Wall Street, in fact very, very far away from Wall Street. We start in 1973 in Lund, British Columbia. Lund is, I’m not sure exactly how far, maybe an hour to north of Vancouver in British Columbia. It was where Highway 101 ended in the mid 70s, north of Vancouver.

We start there in a small log cabin located on a hippie commune. This cabin does not have electricity, it does not have running water. In 1973, there is a boy born in this cabin to parents David and Norma Butterfield who were, as you can imagine from the scene I am setting here and describing, pretty hardcore hippies at the time in 1973. The boy’s name that Norma gives birth to this year is Dharma Jeremy Butterfield.

Ben: Dharma is an incredible name for someone born on a hippie commune.

David: Incredible, so perfect. Let’s rewind this a little bit, though. How and why did we get here? We start with David Butterfield, the father of Dharma. David was an American, originally. He was from Connecticut and he was a college student at Harvard during 1968, during the Summer of Love. After the Summer of Love, he decides he’s going to drop out of school, dropped out of Harvard. He’s been disillusioned by RFK and Martin Luther King assassinations, both great and terrible things that happened that year in 1968. He drops out of Harvard and he moves to France. Certainly after he gets to France, he receives a telegram one day from the United States government informing him that he has been drafted for the Vietnam War.

Ben: This has explained the Canada thing.

David: This does eventually explain the Canada thing. He comes back to the US, he does enlist, and he goes to basic training. He learns, while he was in training, that he’d wanted originally to be a medic. He learns though that he’s going to become sergeant and he’s going to get assigned to active combat duty and he’s going to get shipped off to Vietnam, very probably he knows to his death. He decides one day before he gets shipped off, I don’t know exactly where he was stationed for training, somewhere in the North of the US, he decides to just drive to Canada and not come back one day.

He drives across the border, he ends up in Montreal. While he’s in Montreal, he meets Norma who, I believe, is a student at McGill at the time in Montreal. They fall in love, they get married, and they decide that they’re going to move out west to British Columbia so they just start driving. They drive across Canada, across the country, they get to Vancouver, and then they turned north and then the highway ends in Lund. It turns out there is actually a hippie commune already in Lund so they joined the commune. It’s an amazing story and we’re going to continue a bit. David sadly passed away in 2017. In his obituary, I just love this, it says, if you asked David who he was, he often said, “Who I am is I love my wife.” It’s just so nice, so great. What a cool person.

Ben: David, this is exactly how I thought the episode of the largest enterprise software IPO in history would start.

David: Exactly. Back to Dharma. He grows up initially, still no running water or electricity, he’s on this commune. When he gets to be about five, though, David and Norma are starting to question their life choices and anti-capitalist philosophy. It’s now the late 70s, the Vietnam War is long over and they said, “Maybe it’s time to start to rejoin normal society, we have a five-year old now.” They moved down to beautiful Victoria, the capital of British Columbia, beautiful, beautiful town. Listeners, if you haven’t been, highly recommended.

Ben: Especially [...] is way too easy to take the clipper. Don’t miss it.

David: Definitely don’t miss it. They moved down to Victoria and they rejoined mainstream society there. He had built the log cabin himself. He ends up getting into real estate development and he becomes a prominent, sustainable real estate developer, really cool in Victoria. Dharma, though, he’s now growing up. He gets his first computer at age seven in Victoria and becomes immediately enamored of it. When he is 12, he decides to change his name to Stewart because he’s probably getting teased at school at this point in time and he wants to be a little more normal. Stewart is the most normal name that he can think of.

He illegally changes his own name at 12 to Stewart Butterfield. He ends up staying local for college. He goes to college at the University of Victoria. He studies philosophy and as you might imagine, given the lineage of his parents, he’s quite smart and does very well in school. He thinks he’s going to become a philosophy professor. That’s his goal. He goes off to Cambridge in the UK and he gets a Masters in Philosophy. I assume those part of a PhD program that he was intending to complete.

Ben: For listeners who have not heard Stewart speak before, it is very apparent when you hear him speak that he has a background in philosophy. He can’t help but dive into the existential and the metaphysical in any topic. I think there’s a great episode with Kara Swisher on Recode Decode where he’s talking about why gaming is interesting for the world, why communication is interesting for the world, entice it to such a strong base in philosophy. I feel like every time I watched her, heard an interview with this guy, you have these aha moments that you otherwise would never ever have.

David: He’s cut from a different cloth, for sure, than your normal tech CEO. We mentioned, though, he got his first computer at age seven. He always also been fascinated by computers and this was the early days of the internet. He also, as legend has it, became really interested in the internet because he was a huge, of course, Phish fan. Phish had a news group at rec.music.phish and apparently young Dharma/Stewart was all over this news group.

Ben: David, what is a news group?

David: We might ask what is IRC. News groups, of course, were the predecessor to Reddit, I guess on the spiritual predecessor.

Ben: It’s the pre BBS, bulletin board system, way of finding community on the internet.

David: Stewart, even though he’s pursuing his academic career in philosophy, he is really into the internet, has gotten in decoding on the side, making websites all through college. After he finishes the master’s portion of his program at Cambridge, it’s now 1998. The web 1.0 bubble is fully inflated and he says, “You know what, I got to throw it. Now is the time. I can’t miss this train.” He moves back to Vancouver in British Columbia and he joins a startup called Communicate.com.

Ben: The domain names were so easy to come by.

David: I know and domain names was the name of the game here. The idea of Communicate.com is they were going to build the everything store on the internet, the ecommerce platform, and they were going to do it by owning domain names for all of the things that you might buy or things you might be interested in. Now is going to be the frontend so you would go to whatever.com and you would buy stuff powered by Communicate.com.

Ben: Which is so funny because this was the year that Amazon IPO, Amazon was already definitely a thing but was books.

David: Only for books at the time. As you might expect, given that business plan I just described and being in Vancouver, it was a total disaster. Stewart shows up and he’s quickly like, “I thought I was going to get rich here, sell out for academia, get into the dot-com.” He decides to head for the exits pretty quickly and that was very prescient because shortly after he does, of course, the company blows up. He leaves and he meets somebody really important there. He meets his co-worker Jason Classon who [...] at Communicate.

Jason, of course, had a side hustle at the time, because everybody had a side hustle. Jason’s side hustle was he was building another website called Gradfinder.com and this was like a competitor to Classmates.com, a Seattle company. They were early, early proto Facebook, find people that you went to high school with or you went to college with, stay in touch with them online, actually a pretty good idea. Steward convinces Jason, “Hey, let’s get out of here from this crazy company. Let’s go build your website, Gradfinder.com as a real company.” They leave and very quickly, I think within a year, they end up selling Gradfinder.com to another dot-com for a small amount of money.

Ben: Stewart’s first exit.

David: Everybody celebrates. They decide they’re going to take the year off. They didn’t make life-changing money but enough money to take the year off and enjoy life. During that year, of course, the bubble burst. They all come back to a nuclear wasteland in the internet sector. During that time, though, Stewart starts a blog. He’s always on the leading edge of what’s going on on the internet and he meets somebody in the blogosphere. He meets a woman named Caterina Fake who also famously had and still has a very popular blog during the time. They strike up a relationship through blogging. One thing leads to another, they end up getting married, and Caterina moves out to Vancouver.

Another relationship that Stewart fosters online, Stewart launches this thing initially during the year off as just a fun little competition he wants to launch called the 5k competition. I think it was a play on a 5k running [...]. The 5k competition was a challenge for people around the world to build websites that were five kilobytes or less.

Ben: Difficult then, literally impossible now.

David: I think a lot of these websites were black and white, very simple. It was like how cool of a website could you make, this was the challenge, in less than five kilobytes of memory.

Ben: Constraints inspire creativity.

David: Indeed. This probably wasn’t Stewart’s idea at the time, but if you could devise some rules to identify really talented programmers out there, what better way or thing could you come up with than something like this? A guy named Eric Costello, who I believe was in Saint Louis at the time, enters the 5k competition and Stewart is like, “Wow, what you’ve created is amazing. We should work together on something.” Eric ends up also moving out to Vancouver. This ragtag team of Stewart and Jason, his co-founder from Gradfinder.com, Caterina, his wife, and Eric of this whole web community, they decide, “We should do something together.”

Ben: The whole internet gets together in one place.

David: It’s almost like a commune, one might way, an internet commune. This is now 2002, it is nuclear wasteland in tech and the internet from a business perspective, but the four of these folks, they’re really inspired by these relationships they’ve built online, the power that they’re seeing still exist in the internet. They decide, “We can use web browser technology to create something pretty cool. Wouldn’t it be cool if we made a game where people could socialize and interact with each other and build these types of relationships just online in a browser through a more rich experience than these groups, bulletin boards, and things that people are using.”

Ben: Of course that would be very cool. Listeners, just think back to yourselves about websites you were using in 2002, web technology that was available in 2002, and then even think today how difficult it would be to implement a massive multiplayer online game using the web today. David, I suspect that that was quite a trying undertaking.

David: I think they knew this because they decided like most gaming companies, they’re going to have a name for the company and then they’re going to have a name for the game. The name for the company was Ludicorp. I think they knew the skill of the undertaking that they were embarking on here. They decided to name the game, Game Neverending.

Ben: Which would be prescient.

David: Also a prescient thing. The four of them, they worked on it for a while, they shipped an early version. These folks are already internet celebrities to the extent of that meant something back then. People started using it and there’s a community of people that really liked this early version. The team, it’s just the four of them, they can’t get enough money and resources to actually build out the real full vision of what they want to try and achieve. They’re trying to raise money, they can’t raise money.

Ben: In 2002, if you’re raising venture capital at all, it’s on terrible terms. It’s only for basically sure things or big enterprise software place. No one’s getting funded on a consumer dream to be able to do something like this.

David: Not to mention here are these equivalent of modern hippies hanging out in Vancouver who all met on the internet and two of them are married. I could just imagine a venture capitalist’s reaction at this point in time. They realized they got to do something. They’re not going to be able to raise venture capital, but they got to get some more money to make this happen.

Stewart and Caterina, as the story goes and Stewart swears that this is true, go to New York for a tech conference. This is all swirling in their heads. When they get there, Stewart gets food poisoning. He gets really, really sick. He’s up all night in their hotel room in New York, he can’t sleep, very sick. He starts getting basically fever dreams and hallucinating. I’m pretty sure this isn’t the first time Stewart has hallucinated, but in this particular time, when he’s hallucinating, this idea comes to him. The idea is, “Hey, we’re using some pretty cool technology in the browser that we’re trying to make this game with but we could use the same technology to build some other cool tools and services for consumers more broadly. If we did that and we built something, we could probably sell it pretty quickly.” Remember, he and Jason have sold Gradfinder.com already. They’re used to these quick flip ideas. Stewart is like, “If we make a side project, maybe we could flip it pretty quickly for a million dollars or so. We could use those proceeds to keep funding the game and then we can build out the game.”

Ben: All in the service of the game, of course.

David: He writes out all the ideas of things they could do on scraps of paper at 5:00 AM in the hotel in New York. He realizes that photo sharing and photo uploading is something they could do. I believe it was that they had built a photo uploader for the game that you could upload your profile picture, I believe that was the core of the technology.

Ben: I think, if I’m remembering it right, there was even an ancillary thing where you could upload alternative photos other than the profile picture. If people looked at your profile in the game, there were photos in there that you could use for other things.

David: “We could just repurpose this technology and let people share photos, more probably digital cameras are a thing.”

Ben: It should, theoretically, be an explosion of digital photography.

David: Totally. I was heading off to college at this point in time and all my classmates that were showing up as freshmen at college, everybody had their point and click digital camera.

Ben: You get your cool pics, you get your power shy, you get your Sony Digital ELPH. This is the era.

David: Oh man, the Sony Digital ELPH, I haven’t thought of that in years. The four of them, they decided, “We’re going to have a vote on this. Are we going to keep plugging away at the game or should we pause the game, go work on this photo sharing idea?” They do the vote and they decided not to do it. Stewart is outvoted.

Ben: Look Stewart, you seem like you got to get ahead on your shoulders.

David: But he literally came up with this during a fever dream. This would presage his skills and power as an executive, a CEO, and a broker of influence. He starts going to work on Eric. He sees Eric as the weak link here. He thinks he can get him to change his vote and he does. He gets Eric to change his vote, that pushes it over the edge, and the service that would become known as Flickr is born. We’re now in December of 2003.

Ben: Keep in mind, too, that the proposal that we should do, a photo sharing site, is still seven or eight years from being a meme. The notion of, “Yeah, we’re just going to pivot into photo sharing.” Not only were they the first ones to do that, they were a whole technology way before the set of people that you’re all laughing about in your heads on, “You had another photo sharing app. We are so far in the early innings.”

David: Photo sharing is not on anybody’s mind in technology. They realize, though, that if they’re going to really commercialize this service, they need some extra engineering resources. It’s just the four of them, again, isn’t going to be enough. What turns out, where do they turn, there is this guy in the UK, just outside of London, named Cal Henderson who is a hardcore fan of Game Neverending in the early prototype.

Ben: That’s how Cal and Stewart met?

David: This is how Cal and Stewart meet. Cal was such a hardcore fan. He’s active on the bulletin boards about Game Neverending. He wants to really get in there and help. He hacks their email servers.

Ben: “Hey, guys. I just want to say hi. I’m super talented.”

David: “Look at me, look at me.” I imagined, before this idea to start working on Flickr, they were like, “What are we going to do with this guy?” Stewart, again, in just showing these flashes of brilliance as an executive and marshal way of resources, he’s like, “You know what? Cal really cares about the game. We’re doing this new thing to get the resources to build the game, maybe Cal would help us.” He gets in touch with Cal and he convinces him to not work on the game but come help them build this service. It turns out, of course, as you would imagine, by Cal hacking into their email service, Cal is an incredible developer, a truly world-class developer.

Ben: Do they move him from the UK to Vancouver?

David: Eventually they do, but at first, remember they don’t have any money, Stewart’s like, “The way I’ll pay you is,” Cal [...] like all nerds at this time, he has an Amazon wish list, “how about as you start working for us, I’ll just buy you stuff off your Amazon wish list?”

Ben: Raised on a commune and somehow never left.

David: Amazing. Once Cal is onboard, things just fly very quickly. It was December 2003 when they decided to build Flickr, by February 2004 it’s ready. We’re talking 60 days or less, like 45 days.

Ben: You have some existing infrastructure to build it on because Game Neverending had servers and the ability to bring different people together on the internet. There was infrastructure, but it’s not like there was cloud services.

David: No, and no development frameworks, no Web 2.0 technologies. This is the invention of Web 2.0 technologies here.

Ben: We know from the name. Every Web 2.0 company after them copied the no E in Flickr.

David: Indeed. It’s now February and Stewart’s like, “We’re ready to go. Let’s ship this thing,” and the rest of the team is like, “Uh, we’re shipping that thing?” Stewart’s like, “Yeah, I’m going to go talk at this conference. O’Reilly’s putting on their ETech conference in San Diego. Rather than talk about the game, I’m just going to launch Flickr. We’re going to do it.”

Ben: Up on the stage, it will be [...]

David: He does, he announces and demos. The team works through the night before the presentation. They launched Flickr on stage at the ETech conference. Remember, all the bloggers, the blogging, this is where they’d all come together, they’re part of this community, all the bloggers there, people are just blown away. Nobody has ever seen anything like this, a web service, native in a browser where you can actually do something useful. It’s an actual application built on the web.

Ben: If you think about the web to this point, it had been mostly unidirectional content. They were flat websites, you would go, you could potentially see some pros, there were images that were uploaded, we had the advent of ecommerce with Amazon having successfully navigated through the dot-com bubble. You’ve got the first place where you actually start to buy things but they’re still not the notion that we have today that websites are interactive, that I can upload things, download things, interact with other people.

David: That’s not on the actual site itself. You needed to download something like Napster in order to do that. The presses are blown away there and some mainstream press, but even more importantly, all these other bloggers that are there. The blogosphere ends up being the perfect early adopters for Flickr because all of these people have blogs, most of them run on Blogger. At this point, Google had already bought Blogger, Evan Williams’ company, but Blogger didn’t have native photos in it. What does Google and Blogger do? They see this and they’re like, “Great, use Flickr for photos if you want to host photos on your blog.” It just starts to spiral.

Ben: This is like the Google of yesteryear where rather than saying, “We’re going to clone that and do our product. It’s so cool, that’s great. We don’t have to build it, we’ll just put button to make your thing work. Sure, you can have some users.”

David: These are the young idealistic, don’t be evil days of the internet or I would say the post dot-com crash. People had seen evil where we’re going to be idealistic once again. Flickr really starts to take off. They quickly get a lot of M&A interest. Stewart’s plan is coming true. Google, Yahoo, Ask Jeeves, the big three, they all want to buy the company. Yahoo becomes the most serious and moves the fastest. By the end of 2004, the deal is done, Flickr is acquired by Yahoo.

Ben: I don’t think I ever realized how short the independent life of Flickr was.

David: It was a brief Flickr in time. Oh boy, okay, I’m sorry. By the end of 2004, the deal is done, Yahoo acquires Flickr for “between” $22–$25 million.

Ben: That’s a pretty narrow range. I feel comfortable not knowing the exact number.

David: Everyone high fives and celebrates, but there’s just one catch, though, Yahoo is paying them all this money but they want the team in addition to Flickr. They put a three-year earn out so there’s no going back to Game Neverending right away. Yahoo moves them all down the San Francisco, the plan is that they are going to continue to build and grow Flickr within Yahoo with all of the resources and reach that Yahoo, as a major internet company, can give them.

Ben: David, you know as a person who does podcast on the internet about technology acquisitions, that’s how it tends to go. You have this amazing resource, engineering pool, and brand of big company, you have this widely disruptive product that gets bought, surely it’s a match made in heaven.

David: Actually today, depending on who the acquirer is or how much they listen to Acquire, there might be a good chance that that could be the case, but back in 2004 and with Yahoo at the time, no. The team gets there and it is not a match made in heaven.

Ben: Oil and water?

David: Let’s just leave it at that. Stewart talks about this a lot. He says a couple of things. One, just the decision to sell and do that. Obviously, that was the plan from the beginning with pivoting into Flickr. But even more than that, everybody he knew, people advised him and they’re like, “Yeah, sell the company. Of course, a couple of months in, you got this traction.”

Ben: [...] raised a lot of money, there’s not a ton of employees, you guys are going to get rich.

David: This is it, this is the dream, $22–$25 million, hit that bid. It wasn’t even a question. But now, of course, nobody would ever do that, never ever, ever would somebody do that. Instagram is selling for a billion dollars to Facebook. People wouldn’t even do that. If you have a tiger by the tail like this, you’re going to be flooded with offers to invest from venture capitalists, everybody telling you not to sell, go big, build a big independent company, none of that existed back then. I don’t think the thought even crossed their minds once not to sell.

Two, he talks about the experience at Yahoo. I think it actually, as we’ve seen so far in this history, Stewart has a lot of raw potential, certainly creatively but also on the business and leadership side. I think his time at Yahoo was oil and water. He learned a lot there, too. He saw how a real big company is run for better or for worse. He worked for Brad Garlinghouse who was a really talented executive there at Yahoo. These were the days like Jeff Weiner was there, there were a lot of great folks at Yahoo.

Ben: How long did Stewart stay? Do you know?

David: The whole team was a three-year earn out.

Ben: They stayed for the three.

David: The whole team stayed for the three year earn out but right at the end of it, everyone else leaves, Caterina leaves, that was a big deal. We’re now in 2008 and folks might remember, these are the days when Yahoo is a mess. These are the [...] days and everything, oh my gosh. Kara Swisher is all over the company. This is like the heyday of Kara Swisher.

Ben: Take down after take down.

David: Blog post after blog post on all things, just painting a picture of what’s going on internally and it’s not pretty.

Ben: One thing to remember about why Caterina leaving was such a big deal was because even though Flickr was a photo sharing website, everyone who was on it felt like they were a member of the community. It was a lifestyle they had opted into and Caterina—this is somewhat a sad story—was largely the public face of, “This is the community that I belong to and these are the types of people that I love to leave comments on their pictures, I love it when they leave comments on mine.” I think there was a social graph, there was an amount of following and friends that you can have on there. It was like you joined the hippie commune and you’re leader left.

David: It was more than a hippie commune. Stewart and Caterina were on the cover of Newsweek.

Ben: I shouldn’t try and belittle that.

David: I mean it was the same ethos but this was big. This was really mainstream especially among younger demographics. All of this with everything going at Yahoo, they were really upset. Jason, Eric, and Caterina all leaves since the earn out’s done, they convinced Stewart to stay a little longer. He does, he stays a few extra months, ultimately though he can’t take it either. In the summer of 2008, he leaves. Brad, his boss, he’s like, “You can’t just leave. You got to write a resignation.”

He writes something like, [...] the company is in all this trouble, talk about your time period. Stewart writes this hilarious resignation memo that’s still on the internet where it’s just complete absurd where talks about how Yahoo is like a metal pseudo production company and tin the metal is in Stewart’s blood and he joined until [...], it’s absurd. We’ll link to it in the show notes. Anyway, that is the end of Flickr and the end of Stewart’s brief internment at Yahoo. Unfortunately, though and sadly, it’s also the end of Stewart and Caterina marriage. Right after Stewart leaves, the marriage ends.

Caterina ends up moving back to New York. She then co-founds the company Hunch with Chris Dixon in New York, ends up getting acquired by eBay. Caterina also becomes the chairwoman of Etsy. It’s a really talented and great career she’s had since. Stewart though, he’s like, “I grew up in a commune and here I am.”

Ben: Sure those words are his first words at Yahoo.

David: “I’m done.” He needs to just take a break. He leaves San Francisco and he moves back to Vancouver, takes some time off during the rest of 2008.

Ben: He’s got timing, by the way. Both of these companies are started in the rubble of financial crashes.

David: Totally. It's the beginning of 2009, the world has fallen apart, Eric, Jason, and Cal, they’ve all left Yahoo, too. Remember, they made certainly a good amount of money on the Flickr acquisition but not enough that you can survive forever especially after the financial crisis. They’re like, “Hey, Stewart. We’re ready to get the band back together, what’s next? You’re our fearless leader.”

They come back up to Vancouver and they say, “You know, Game Neverending, the time wasn’t right, it didn’t happen the first time, but it’s now 2009, so many more people are online, gaming is so much more a thing, World of Warcraft is huge, massively multiplayer online gaming is so much more a thing, maybe now is the time to take another shot of this.” They do, they start the company once again. It is a different company name from the game name, they called the company Tiny Speck where the four of them start and they called the game Glitch. I don’t know if it's a Glitch in the Matrix are exactly where the name came from.

They see World of Warcraft, they see how popular that is, they say once again much like with Flickr in the original vision for Game Neverending, “We can do a lot of what World of Warcraft is doing. We can do it on the web natively in the browser and then people don’t have to go buy a disk,” because people are still doing that at that point in time, “or download the game, they can just play within the browser. Again, we’re idealist, the thing that sucks about World of Warcraft is people are killing each other, it’s all about violence. What if we made this game Glitch about nonviolence and let people create and collaborate together?”

Ben: Sounds great to me.

David: Sounds great. Stewart and team, again, they’re pretty famous at this point. The investor community is also like, “That sounds great, here’s a lot of money.”

Ben: Yeah. We saw he did last time, kind of, “What you’re doing is irrelevant, but it sounds like it’s sufficiently large swing. We’re in.” I will say, I would kill to be on Stewart’s next gaming company.

David: Absolutely. I don’t think there’s going to be a next gaming company. I’m calling in that now. They raised $1½ million from angels right out of the gate including super angels at this point, Marc Andreessen and Ben Horowitz, who are just in the process of starting their firm. Accel also participates in this angel round and it is hot. Tons of people, engineers want to come work for them, people are giving more money.

In 2010, they raise a Series A led by Accel $5 million. In August of 2010, Kara Swisher flies up to Vancouver—we’re going to link to this in the show notes, this is amazing—to interview Stewart. This is during her flip cam era where she was taking a flip camera around the tech companies in impromptu video interviewing people.

Ben: I remember this, that was also the summer that I interned at Cisco when we bought them and everyone was wildly confused on why that happened. That’s a good episode.

David: It’s all because of Kara. She flies up to interview Stewart and get an early look at Glitch. Man, it’s crazy. You can understand why nobody played this thing. 2011, it’s still so hot, the company raises another almost $11 million from the firm entries in Horowitz.

Ben: This is now $17–$18 million in the bank for a thing that hasn’t shipped and is a little suspect.

David: Nonviolent MMO. Interestingly though, the team and Stewart, they’re such celebrities. They have reached really across America, across the world for engineers and designers who want to come work for them. They’re like, “We’re in Vancouver but we’ll set up a remote team.” They have a place in New York, they have a place in San Francisco, in Vancouver, all over the place. They end up staffing up to about 40 engineers and designers working on the game. It becomes pretty hard to collaborate, these are preZoom days.

Ben: It’s pre anything days. Who knows how else you could communicate online with a remote team.

David: They realize they need some tools to help them get work done and collaborate remotely. Given the hippie internet routes of Stewart and team, they turned to the natural solution to this problem, Internet Relay Chat. IRC, baby.

Ben: It’s 1988 all over again. For folks who don’t know IRC, it’s an early, early internet protocol that is used to allow people to connect to a common server using a terminal-based interface, basically have chat rooms where you can directly message people, you can talk in a room about a designated topic, you can stand this up for the open source project of your choice to be able to communicate about anything that you and other software developers are working on.

David: You lost me at connect to a server and that actually was the point. IRC was super cool and widely used, and has this really cool concept of channels that are persistent where you can have discussions around topics that are independent of users but it’s not exactly accessible. The team at Tiny Speck, they start using it and they’re like, “We can build some really lightweight stuff around IRC to make it more accessible as we onboard new team members for all these new engineers and designers that we’re hiring.” They may or may not have used IRC before, still the onboarding process is difficult.

They build a bunch of tools. They internally called the system Linefeed. It really helps them be productive. So productive that finally, two plus years after starting the company—sensing a theme here—they finally launched Glitch at the end of 2011. Big, big press, Kara has done all these interviews, the tech community knows all about what they’re working on, they’ve raised all this money from these great venture capital firms and it’s a flop. Nobody uses the thing.

Ben: Hundreds of people flood in to try out.

David: Literally hundreds of people flood in to use the thing. Very quickly, they launched in September of 2011. In November, they dialed back into beta, never gets out.

Ben: I think Stewart branded that they unlaunched the product.

David: They keep tinkering, releasing, playing back into beta, re-releasing, trying to make this thing work, and it just doesn’t.

Ben: Beta Neverending.

David: Beta Neverending, indeed. Finally, a year later, one night in October 2012, they’ve been pounding on this for a year, Stewart has another sleepless night. I don’t think he had food poisoning this time. He’s got all his people, his 40 people that depend on him and he’s like, “This is just not going to work, I know we’re supposed to keep trying, we still have money in the bank, but I’ve lost faith. It’s done.” He talks about it, he said it was like the feeling that you get when you know you have to fire someone and you don’t want to, you want to try and make it work but that thought, that feeling is just constantly in your stomach over your mind. He said that’s how he felt about the game and the company.

He wakes up the next day and he writes an email to the board, he says, in typical story fashion, “I do not feel that we are pouring gas on a fire here, more like pouring good whiskey on a drugstore heating pad. It is unlikely to burst into flames.” The board is like, “You’re right, we were thinking the same thing.” Stewart then, after that, he calls an all-hands meeting from Vancouver, gets the San Francisco, New York teams, and all the remote people on the phone and he just burst into tears. He starts crying and he says, “Guys, it’s over.”

Nobody on the team saw this coming, they still have plenty of money in bank, they thought they were working at this hot company, and here is Stewart saying, “I’m calling it. I’ve lost faith. We’re done.” They lay off all but the four co-founders and they keep four employees. But before they do anything—Stewart’s just devastated by this—they do everything they can and they get jobs for everybody else.

Ben: Yeah because importantly and we’ll see this come back to be a huge asset for the company later, the way that they did these lay-offs was incredibly humane and the way that they took care of everyone, the sentiment leaving was, I would 100% go work for Stewart again even though this thing completely fireballed.

David: They take a few months, literally the mission is get everybody a job. They set-up a website called Hire A Genius and they create profiles for all of the former employees on the website. It’s pretty cool what they do. They also upload all of the code and all of the art and design from Glitch to a server and put it in the public domain. They’re like, “We’ve built all these, we want it exist.”

Ben: I bet that’s been like, what’s the visual equivalent of sampling. I bet it’s been used in other games.

David: I bet. It’s up there. Anyone can go grab it, use it, do whatever with it. It’s still there. It’s funny. On the sidebar of the page that’s hosting it, it says, “It’s about Tiny Speck and about Glitch,” and then it’s like, “Tiny Speck is working on a new project, it’s called Slack. Check it out.” It’s pretty funny. They have enough [...].

Ben: “We thought of a new name since Linefeed.” Before you take it back to the story, you mentioned that email that went out to the board. John O’Farrell forwarded an email to Marc Andreessen and the whole Andreessen Horowitz team.

David: John O’Farrell was a board member for the partner at Andreessen Horowitz, their board member.

Ben: Marc Andreessen presciently replies, I think it’s the whole Andreessen Horowitz partnership, “It is what it is… If history repeats itself and they come up with the next Flickr, all will still end well. –Marc”

David: Spoiler alert, they don’t come up with a next Flickr. They come up with something about a thousand times bigger.

Ben: Sounds about right.

David: It could be even bigger. In my notes I often break these, the sections into chapters. This chapter is called the phoenix arises. They still have $5 million left in the bank. The reason that they kept four of the employees and then the four co-founders stayed on together is they wanted to do something. They felt like they’ve been through this experience together. They had this incredible core team. Stewart has this quote, he says, “When you go through a trauma together with a group of people, you get bound together and you just want to keep working.” It’s so true. I can totally relate to this.

What’s super cool is they end up eventually being able to hire back a lot of the people that they laid off, which is great. What are they going to do? Remember, this is the end of 2012. Something else had happened in 2012 that not many people outside the tech world took note off but lots of people in the engineering world we’re aware off. There’s a company called Atlassian, covered on a previous Acquired episode. Atlassian in 2012 in March acquired a little San Francisco company called HipChat. HipChat had become all the rage amongst developer teams.

Ben: All the cool dev teams were using it. You wanted to be at a company where you could develop and talk to the rest of your team in HipChat.

David: It was like the foreshadow what becomes of Tiny Speck here but almost like a perk companies, engineering teams were like, “Come work for us, we’re at HipChat chat.” It was like, “Yeah, these guys get it.”

Ben: You’re cool, you’re using modern communication tools.

David: Indeed. HipChat had been launched by a bunch of young guys. They launched in 2010, within four months they had a thousand companies that were signing up, mostly dev teams using HipChat.

Ben: Sounds like they must have used a very self-serve way of onboarding.

David: When they get acquired by Atlassian, of course the DNA of Atlassian is developer-focused tool, self-serve, no sales. Famously, when we talked about the Atlassian episode, there are no sales people that work at Atlassian. It’s all just organic adoption by mostly development teams. That really turbocharged HipChat. Of course, as well also talked about on the Atlassian episode, the major investors, not venture capital backers, but they’ve done secondary deal Atlassian were Accel. Of course, who is the largest shareholder in Slack? Accel. Interesting.

Now, we don’t know for sure that all of this was on Stewart and the team’s mind as they were casting about for what to do next but it’s important to know that this was happening in the background. The moment was arriving for modern chat-based communication software.

Ben: Pulling forward the tech theme here, this seems to come up, I don’t know, every other episode that there was a moment in time where the world was ready for a thing, multiple parties arrive at it simultaneously. You think about ride sharing, you think about social networking, you think the Instagram acquisition and all the other Instagram-like companies that started right around that same time.

David: Famously, Andreessen Horowitz, which had invested in the seed round of Burbn which became Instagram, they did not invest in the Series A because they were [...] and they backed [...].

Ben: An interesting thing about this is sometimes it’s driven by a technology. Mobile’s taking off, cameras are finally good enough, it seems like mobile photo sharing is going to be a thing. Other times, the line is less clear on the technology, that it’s more of a social moment has arrived where people are comfortable with where technology is. You can use technology that’s been available for several years to make something happen where there’s a cultural understanding that people are ready.

Of course I’m sure Slack and HipChat, there had to be some sufficient advancement in Ajax—I don’t know if people are still calling it Ajax at the time—the ability to have web pages that refreshed without refreshing the whole page. It’s certainly wasn’t like the iPhone shipped and then it made possible this multiparty text communication thing.

David: I think what we’ve seen in our last couple of episodes here on Acquired and we’re going to see here, the really truly huge great companies get built at the Venn diagram intersection of a technology shift, a cultural shift, and a business model shift. HipChat hit the technology shift and they cultural shift, they didn’t hit the business model shift quite right. We’re going to talk about what Slack does here now.

Tiny Speck realized, “We got this tool, Linefeed, that we built around IRC. The interface is cleaner, it’s more modern, sort of like HipChat. More importantly, it’s really easy to join.” If you wanted to join in IRC channel, you had to connect to the server. No normal human is going to do that. There are all these benefits of Linefeed and within a week after they’ve got the team jobs, they were like, “Linefeed, we’re going to do that. Let’s make that the product.”

Ben: Most pivots take much longer to arrive.

David: It’s funny. When Stewart talk about this, he’s like, “It felt like an eternity that we are trying to figure out what to do.” Then I went back and looked at the history in Linefeed and it was a week. By the end of the week we’re like, “Yup, we’re doing this.” They go to the investors, they go to Accel, and Andreessen Horowitz and they’re like, “We’re going to build out a team chat communication.”

Ben: The word enterprise wasn’t uttered out of Stewart’s mouth for a while.

David: The story now is that the investors we’re like, “Great, we believe in you. It’s Flickr all over. We’ll do it again.” I think the reality was a little more nuanced than that. Remember, Accel is the largest outside shareholder in Atlassian at this point. I think they were more like, “Okay, fine. You guys are doing productivity software? Okay.” Fortunately, they say, “All right, do it. We’ll let our money ride. Keep the $5 million and see what you can do.” They started working on it and they have to decide what to call it, the team is like, “Linefeed, that’s not accessible enough.”

Ben: That’s like the IRC of names.

David: Exactly. Stewart came up with the name one day and he’s like, “I have it, we’re going to have an acronym for the company, Slack. I love the word Slack. The acronym is Searchable Log of All Conversation and Knowledge, SLACK.”

Ben: Which fortunately they never used in any marketing material and was just known by the name Slack.

David: We’ll link to this in the show notes. He posted a few years ago on Twitter the actual screenshot of the conversation with the team online feed about this, he’s telling everybody his idea and I think it’s Eric, he’s like, “That’s not good.”

Ben: Actually I haven’t clicked this yet, I’m not clicking the link. How similar does this actually looked to the Slack UI?

David: Not similar.

Ben: It’s just IRC.

David: MetaLab had not been involved yet.

Bad: Because this is literally just text.

David: Yeah, but Linefeed internally, they’d made joining easier and they’ve done a lot of nice improvements, but there’s no nice UI on top of it yet. He really was having a pretty big vision to see that you could turn this into what would become Slack. The team hates it.

Ben: Stewart says, “[...] it’s just a code name. Oh yeah, we’ll just use that for now,” and then Eric says, “Cool.”

David: Again, the Stewart you know, he’s very creative. He’s got a real management and leadership chops. He knows how to broker influence. He’s like, “Hey, yeah. It’s just a code name.” Then he goes off and he’s like, “Alright, I’m going to see with the domain name if this is available for slack.com.” It turns out, the slack.com is registered to an electrical engineer in Wisconsin who is using the domain to host pictures of his cats.

Ben: That’s going to be a hard thing to pry off a guy.

David: If by heart that you mean very easy for a decent amount of money.

Ben: I wouldn’t sell, but okay.

David: Of course I would sell. They get the domain name, Slack becomes the name. They build out the product within a couple of short months. Once again, echoes back to the Flickr days. They bring on really importantly MetaLab.

Ben: MetaLab is a Victoria-based company, right?

David: They’re based in Victoria, in Victoria BC.

Ben: I finally just put that together.

David: MetaLab is a UI design firm, really, really truly world-class based in Victoria.

Ben: They’ve done some cool productivity apps of their own, was it Flow? They had a GTD or a todo list tool at one point.

David: Ah, he’s competing with you and seize the day.

Ben: Yeah. Theirs was very nice.

David: I’m sure yours looks nice, too. Maybe not quite as nice.

Ben: Thank you, but yes.

David: They bring on MetaLab to redo the UI and the UI is so different from anything anyone’s ever seen.

Ben: These guys do Tiny now, right? Is that the same group? It’s a basically small cap private equity shop that owns really, really design-focused beautiful cash-flowing technology products like Dribbble. They bought Dribbble.

David: Cool. Everyone, I assume, knows the Slack UI because hopefully you’re in our Acquired Slack. If you’re not, go to acquired.fm and signup to join. It is accessible to the normal person to a degree that even HipChat can’t come close to.

Ben: You join in, Slackbot welcomes you. Just by interacting with Slackbot, you get a feel for how you’re supposed to use the product.

David: Yup. So, mid-2013, again after just a couple of months, they’re ready to take it out to the world. They go out to some of their friends in other companies trying to convince them to try it. It turns out that they had a hard time because people are like, “What is this? Why should I use it? I use HipChat.”

Ben: I have my own story about that. I witness launched it. I remember seeing on Hacker News and this was like a darling of Silicon Valley, check out this new “it’s the new way to work.” People were billing it as like, “This is the new way that teams work together.” I’m like, “Okay, I got to give a shot.” I’m working at Microsoft at the time. I go, I sign up for it, I make whatever obscure team name @microsoft.slack.com was, I’m sending it around and people are (a) reticent to join, (b)...

David: ...I’m on link, I use Yammer.

Ben: Yeah. It’s like, “What is this? It’s link, it’s replacing chat, or replacing email?” and I was like, “Oh, it’s sort of in the middle, it has all these integrations.” Being the first person trying to sell it to your team, if your team wasn’t already using some type of ever persistent chat, it’s actually a hard thing to get people to understand why it would be useful.

David: Through the summer, they worked with a couple of friends, companies to land this messaging. They figured out, they get really good at explaining because most people have never used something like this before. What it is, why you should use it, why it helps, why it’s better than email, and more importantly just making the onboarding process super, super easy and fast. The first decent sized company they get to use it is RDO. RDO is about 120 person organization. They sign up. First, it’s the engineering team that starts using it, then it starts to spread. Pretty quickly the whole company is using it and they’re addicted.

From these RDO and a couple of other companies, what happens is the company start evangelizing and all the employees in the company start telling their friends at other companies, “We’ve switched to this thing called Slack. It’s amazing. It’s changing the way we work,” and that starts to build a ton of buzz.

Ben: Which I’ll say is interesting. It’s that popping out the playbook for a second. It requires a word-of-mouth, not usage because there is an intracompany network effect with Slack where you’re inviting all your colleagues but there’s not a cross company network effect. Whereas you take the flipside of that like Zoom, there’s a cross company network effect because to communicate with someone at another company, you need to click the Zoom link to join and then you’re a user. With Slack, it has to be that I’m getting so much utility out of it at my company and it’s growing within my company that now I go and tell somebody at a different company.

David: Importantly—we’ll talk about this in a minute—Slack, Stewart, and the team embraced this fact. They realized that Twitter is their friend here. People tweeting about how much they love Slack and then the Slack team amplifying those tweets is a big part of that generating buzz and building up demand.

They officially launch Slack in a preview release to the public in August 2013, again, less than a year after making the pivot. On the first day that they launched, 8000 companies sign up for the waitlist. This is how much buzz had already been building, how much of a celebrity Stewart and the team were. Within two weeks, there’s 15,000 companies or teams that are signed up on the waitlist to use it.

They pretty quickly launch paid [...] the business model in a minute ago with the paid plan and we’re going to talk about the freemium model. Within a couple of weeks on launching paid, they’re at a million dollars in ARR. Most SaaS companies takes a year, two years to get to that level. They’re there in weeks. By February 2014, they have 10,000 new users signing up a day, these are not companies but users within the companies, signing up a day. They have 135,000 paying users and it’s even at large enterprises.

Ben: That’s like $5 a seat.

David: It’s $7 a month or $80 a year or $8 a month, I think. What’s cool is that they're not trying to target the enterprise yet, but they have all these huge organizations. There are teams that have organically adopted like you did at Microsoft. At this point in time in February 2014, there are nine different teams at Adobe that are all paying users of Slack.

Ben: It’s funny, there was a little security exploit for a while where you could figure out what the names of teams at a company were because Slack had built this really ingenius user-friendly feature that actually exposed information companies may not have wanted to at the very beginning. I remember trying to sign up with an email address because the way that they made sure you’re at the company is by looking at your domain name. So, I’m like, “Okay, ben@apple.com. Let’s see if they’ll let me sign up as an Apple employee and join the Apple Slack,” Of course, it doesn’t. What it does say is, “Hey, your company already has eight teams using Slack, here’s the name of each of those Slacks.” I was like, “Oh my God, I’m learning the names of teams within, What is P42X?”

David: Project purple?

Ben: No, I’m making something up. It just goes to show you though how well-thought through it was for someone at a company is going to try and join because they’re just poking around and figuring out, “Does my company have an account or not or how does that even work?” because this was a different way than software was sold and adopted before, let’s make it easy for people to find the team that they’re looking for within their company once we know they have that email address.

David: On the back of this, April 2014, they raised $43 million in a Series C led by Mamoon Hamid at Social Capital, he’s now at Kleiner Perkins, which is an amazing venture investment. Let’s take a step back here, I talked a minute ago about the Venn diagram of clearly technology shift, cultural shift, these are happening, that’s the background for Slack and HipChat before it, but the third piece, the business model. What Slack did that was so brilliant—the parallels to Zoom are perfect—is they nailed how to structure the freemium model for this product and service.

When HipChat launched and everything else, certainly all the Microsoft products and what not in this chat base collaboration space, the freemium gate was number of users. HipChat was free for up to five users, once you had more than five users, you had to pay. Of course, that makes sense. When you’re taking an enterprise approach to things, you’re charging on a per-seat basis like you said. A lot of people try it a little bit.

Ben: You run a tried and true playbook there.

David: Gate the real value. Stewart and team came from the consumer world. They came from the gaming world more than that. When you’re trying to get people to play games online—a lot of them are freemium—you want to encourage usage and you want to show as much of the value of the product to as many people as possible without having the gating item of paying.

Ben: If you think about the freemium gaming world, they notoriously only monetize 1% and the vast majority of people who are using it are using it at basically its full functionality but never paying.

David: Yes. So, what did they do? They set the freemium gate not on number of users. Slack is free as evidenced by the Acquired Slack. We have thousands of people in there not paying a dime and we probably never will. Believe me, it’s a good marketing for Slack. It’s full featured, it’s the full Slack product. The pay gate is for the number of messages in the recent archive that you can search and access. A relatively smaller feature.

Ben: I can’t imagine not having that at the office where it’s like, “We definitely talked about that in Slack eight months ago, what was it?”

David: Certainly there’s that use case, there’s also the new team members are joining, they’re not up to speed on everything going on. They join all these channels and then they’re like, “Oh, okay. I want to find out what’s going on on my team or what’s going on on this project.” If you can’t go back and look at the archives and search the archives, that’s impossible to do. It’s a really important feature for work teams to be able to do this. Slack uses that as the freemium gate and that’s huge.

Ben: I think there’s some other more add many type features that requires paid as well.

David: And the number of integrations that you can do, you’re cap to 10 integrations, third party integrations on the free tier, other important stuff. The main thing is that they allow people and teams to come on for free and get real work value out of the full product without having to pay. That is just super, super critical and nobody was thinking about enterprise monetization in this way at the time. Honestly, I fully believe it is because of the background of Stewart and the team that they brought this approach to the market. Even Atlassian but certainly not Microsoft or anywhere else was going to think about freemium tier.

Ben: This is how we structure a productivity application. This is another good thing we’ve seen across a lot of episodes. For a lot of this disruptive innovation, you need to smash together the learnings and best practices from one corner of the world into a different corner of the world that is not used to thinking about things that way and to be able to say, “What would it look like if a team of idealistic game designers built productivity?” Of course it’s going to look different than a shop like Atlassian, that’s only ever built enterprise collaboration software.

Of course, yes in the business model which I think you’re right. I hadn’t thought about it before but in this classic question of why did Slack win when HipChat was already a thing. There’s UI reasons why Slack appealed to non-engineering teams. Atlassian always said, “Anyone can use HipChat.” That was more lip service than it was actual product work, but Slack was truly, from day one, designed to be something that anybody in the organization could use and not just engineering teams.

David: I think it’s also for other teams within organizations that weren’t used to this category of software using anything like this. The way they structured the freemium model made it accessible for those organizations to try to use it. Even if Slack were designed to the pixel the same way but you had to pay for more than five people to use it, there’s no way that the New York Times newsroom would’ve tried that. They were really thoughtful about this. In the story from the beginning, they were creating a category. When you’re creating a category, you need to take this approach.

Ben: A lot of education you need to do, your product has to do education, your marketing has to do education. By the way, the New York Times newsroom now uses a home-rolled Slackbot that they created to manage the approval workflow for the push notifications that go out. At one point I tweeted something like, “What a killer job to be the person that approves the New York Times push notifications.” A New York Times employee sent me a thing, that’s a cool medium post on here’s how that actually works in Slack and how people go back and forth, edit, make suggestions, and then submit it or approval into the cue.

David: That was so cool. I think we talked that about on the Atlassian episode. That was the moment for me and I think a lot of people in tech when we’re like, “Wow, the New York Times newsroom is using this.” This is way more than HipChat. This is something that has the potential to be as big as Slack has become. On the back of this, at the end of 2014, they raise $120 million over a billion dollar valuation led by GV and Kleiner Perkins, and it’s just off to the raises since day one when they launched out of preview.

At the beginning of 2015, they’re adding a million dollars in paid ARR every month and the growth just keeps accelerating from there. Super interestingly, in July 2018, we didn’t do an episode on this but we could’ve done a follow-up, Slack ends up buying HipChat. Within Atlassian, Atlassian had rebranded HipChat to Stride.

Ben: Wasn’t that a different product?

David: Yeah, they rebuilt the product and then they sunsetted HipChat. They still had HipChat but they also had Stride.

Ben: They were transitioning everyone to Stride. Also with Stride, can you come up with a name that’s more different that couple of letters from Slack?

David: Slack must have been high-fiving one another. They’re like, “We’ve won. It’s over.” Indeed, probably one of the smartest things Atlassian has done is they recognized that quickly, too. They sold essentially those users to Slack.

Ben: In one of the best deals in history ever negotiated, Stewart managed to get all the users. What was the equity arrangement that happened to that?

David: I don’t remember exactly how much equity but Atlassian got a small amount of equity in Slack for it.

Ben: That was a highly triumphant moment for Stewart as a [...].

David: And you have to imagine, probably Accel helped there given that they were major shareholders in both companies. Late 2018 following that, rumor start circling that Slack is considering a DPO for their public offering.

Ben: Much like Spotify, just before them, 30 years before Ben & Jerry’s.

David: Barry McCarthy, we refer to Barry at the top of the episode, Acquired superhero, former Netflix CFO, [...] in Netflix’s history and then CFO Spotify and engineered their direct listing inspired by Ben & Jerry’s.

Ben: I think not at all but it is a fun piece of trivia.

David: Super fun piece of trivia. Maybe Barry had a fever dream one night from eating too much [...].

Ben: Let’s real quick go through what the differences are in an IPO and a direct listing. David, you and I have talked about this a few times. Listeners, we are extremely excited about the future of direct listings. At least, I personally feel like it is a more modern way to go public than an IPO process that just has tons and tons of baggage to it, and not every company can do it. Let’s talk about why not every company can do it.

David: The IPO process was architected for a different era when venture capital was a cottage industry. Now, venture capital on private market financing are an enormous, global, highly professional worldwide industry where that money managers of all sizes participate in. Companies like Slack can raise billions of dollars in the private markets, and grow to have a global brand in a way that just wasn't possible before.

When you’re going public, you needed to do an initial public offering where you are selling stock doing a financing event to do that because the IPO was your way to raise real growth capital. That’s no longer necessarily the case. For companies like Slack, honestly, like Zoom, although Zoom did a traditional IPO, but companies that are profitable that don’t need to raise a profitable or close to profitable, that don’t need to raise a huge amount of money.

Ben: Which declares Slack as not profitable but it does have $800 million of cash on the balance sheet and has great economics.

David: Yeah. Capable of becoming profitable. Making a choice to invest significantly in marketing, so they’re not profitable at the moment. They don’t need to raise that money. A DPO has a lot of advantages.

Ben: In a DPO, the only shares that start trading are all the existing shares, so there have to be selling shareholders rather than 10% of new liquidity created by creating a bunch more shares in the company.

David: So there’s no delusion to the company like the DPO.

Ben: Yup, no delusion. Of course, because of that, they don’t actually raise any cash. It’s just investors, money, and employees taking money off the table.

David: There’s one other big benefit for the ecosystem as a whole and for employees of the company. There’s no lock-up when you do that.

Ben: Yes. I should say that, the ‘but’ to this whole thing is it seems like there might be a lot of volatility involved in this. There’s no lock-up here and employees can sell right away. A great benefit to employees, maybe a little bit dangerous to the signaling for a company. How do you manage this? Well, one thing is, as much as we’d like to say in this era of the direct listings, the investment bankers are no longer making a big payday. They’re out of the process.

David: The investment bankers are never out of the process. It’s like a law of thermodynamics.

Ben: Yes. They move from a role that is underwriting which is saying, “I commit to buying 50,000 shares in this range that you have quoted me at approximately this price the night before the IPO, before it starts trading. Maybe I’ll get a pop.” It’s this underwriting process that occurs where you commit to buying some amount of the shares that are being created.

They now move into an advisory role where they say, “Okay. Why don’t you pay us an amount of money? It’s still going to be tens of millions of dollars and we are going to, on your behalf, go and work with all existing shareholders to see who’s going to sell, who’s not, and at what price.”

David: Herd the cats.

Ben: Yes. We’re going to come back to you with a guidance of what we think your suggested initial trading price should be. But again, trade just start happening instantly and there’s some sort of market-making function that happens there where they’re going to trade where supply and demand intersect. And, this is the real crucial part of what they help you do there, is say, “Look, we talked to these set of investors. Each one of them has committed to us, your advisory firm, to sell this number of their shares, so we can guarantee when you start trading that,” I don’t know if this is true enough, but Accel will be selling 25% of their share. So, that would be available. There’s nice liquidity in the market for your new shareholders to have something to buy.

David: It’s organized. It’s not just chaos.

Ben: Yes. You can think of it like algorithmic rather than this previous process of lick your finger, put it in the air, see which way the wind is blowing and say, “$24 shall be the amount for this share.”

David: To be fair, IPO prices are set based on ordered books that are [...] process.

Ben: Spoken like a true performer investment banker.

David: I have to defend. Another important benefit for the DPO versus the IPO process is if you were a company that has already raised the capital privately from many of the traditional public market mutual funds, hedge-type fund investors that would be large institutional buyers in an IPO of the new shares created, you run into a problem like what Uber faced when they were doing their IPO, where all of those sets of buyers were already shareholders in Uber.

Ben: They are heavy exposure. They want the company.

David: Yeah. Their incremental appetite for new shares was relatively low. They wanted to be selling, not buying. When you do a DPO, you solve for that problem if you have it. Now, of course, Uber had to do an IPO because they needed the cash.

Ben: Yeah. That’s the other thing. To do a DPO, one, you have to not need the cash like the companies Uber and Lyft do. Two, you need to already be a brand that doesn’t need a roadshow process, number one, so you don’t have to go make all the bankers aware of your brand so that someone will commit to buying shares. Two, you don’t need those banks to then go and get all of their retail investor clients excited about your company.

Slack and Spotify made sense because they were consumer companies. One of the magical  things about Slack is they’ve managed to turn this enterprise software and it has like a consumer-like brand to it. It has an awareness where you don’t have to go and do a whole bunch of marketing around, “Here’s why you would want to buy this stock.” It already had enough excitement around it.

David: Stewart, I believe, multiple times has been on the cover of Newsweek.

Ben: Why is Newsweek relevant?

David: It used to be relevant.

Ben: Definitely real.

David: But it’s a good sign that people know about this thing. In April of 2019, this year, Slack announces they are going to do a DPO. On April 26, they filed the S1 and then last week, Wednesday, June 19th, they set the reference price in the evening. The bankers have $26 of share. On Thursday, June 20th, the company begins trading, closes up nearly 50% to $38.62 at the end of the first day of trading. Again, the banks aren’t supporting or trading. This is just free market trading.

Ben: It’s organic. One of the ways in which we should be grading this later on in this episode is how volatile was it. Did they manage to keep a relatively stable share price or was it just flying all over the place because there was no underwriting?

David: If by stable, you mean it went up very quickly, then yes. They close the day at $38.62 which is a $19.5 billion market cap.

Ben: Wow.

David: All right. Should we talk about narratives?

Ben: That’s awesome. We should definitely do that. We should also talk about who owned the company at that point just because I think it’s interesting to dive into this a little bit. Obviously, we’ve talked about Accel. Accel owned close to a quarter of the company which is highly atypical. Usually, venture firms will own maybe 10% of IPO if you let around ended north of 20% of that round. What’s very clear here is Accel kept participating in a big way in all future rounds.

David: I believe they were in all the fundraising rounds that were happening along the way. I believe they were actually not just doing a part of it but buying incremental ownership. I think it was one of those rounds.

Ben: That’s a conviction, that right there that’s paying off in a huge way for them. Andreessen Horowitz owned 13%, social capital 10%, SoftBank with 7% which is around the same percentage that Stewart Butterfield himself owned. Stewart is now, at least on paper, a billionaire.

David: Better than the outcome from Flickr, I would say.

Ben: Yes. But it’s also interesting to see all the other Silicon Valley CEOs who have been angels. I think this was reported by Forbes in a great piece recently but Jeff Weiner, Patrick and John Collison, CEO of Squarespace, Biz Stone, former CEO of Yammer David Sacks, Jeremy Stoppelman of Yelp, Dave Morin from Path. This had an amazing cadre of...

David: I think it’s from that angel round, the $1.5 million.

Ben: Oh, was that what it was?

David: I believe so.

Ben: Wow. A lot of these guys I know also came in later on in the low hundred million and low billion dollar valuation rounds as well. Just interesting to know who is a big part of this big liquidity event.

David: Yes. We made this point so many times on the show especially because Stewart, the company, the co-founders, and the history here goes back to the early internet. At least back to the Web 1.0 but really back to the Web 2.0 days. The world was just a smaller place back then. All these same people. It’s like a little club. The world was just not that big. Silicon Valley was not that big. A lot of them worked at Yahoo together.

Ben: The Yahoo mafia is strong. Before narratives, let’s just do some facts to know about the company from their financial position when they went public. I mentioned $800 million in cash on the balance sheet. They’re still growing at 82% a year so they’re close to doubling year over year now as a public company. They’re generating in the fiscal year ending in January of this year they generated $400 million in revenue. The previous year, $220 in revenue. Previous year before that, just over $100 million in revenue so the company’s still doubling. That’s close to in line. It’s a little below...

David: Triple, triple, double, double.

Ben: Yup, a little in line with Zoom. Zoom is growing a little faster, close to 120% whereas you’ve got Slack here around 80%, but it’s fun to keep comparing to Zoom. Zoom has a little less revenue, so $330 million in revenue versus Slack’s $400 million but they are cousin companies in a lot of ways.

David: Absolutely.

Ben: Moving into narratives. Should we talk bulls first? Why do people love this company going into the IPO?

David: Well, there’s a whole lot to love. The dynamics are similar to what you said to the comparison to Zoom. Really, Zoom and Slack represent the new wave of go-to-market in the enterprise of products that are so good that they sell themselves. A freemium business model that is perfectly tailored to maximizing reach and acquisition and has the conversion markers set at just the right places to optimize. Theirs is extremely well-managed, the growth is incredible. Like I said, there’s a lot to like.

Ben: Yup. To get into some other numbers a little bit there, one of the biggest things is crazy strong retention. If you model this out, it looks like only about 10% of newly acquired paying customers churn in their first year. Over 90% retention on paid customers. If you look at a five-year window, about 80% of customers that you paid to acquire are still around and are likely paying more. Just crazy stickiness, great upselling.

David: That is truly world-class.

Ben: It’s amazing. The other thing on top of that which is a secondary metric that falls out of that is their CAC LTV ratio, or the cost to acquire a customer versus the lifetime value of that customer. Again, these are paying companies as the customer is about 13 times. While it cost them a lot to acquire a customer—I’ll talk about this in bears, it cost about $8,000 to get a paying customer—that more than pays for itself in the long run of how long that customer will be with you. Another thing that we have to bring up here is Microsoft launched Teams. Slack took out a full-page ad in the New York Times when Microsoft launched Teams and said something along the lines, “Welcome to the party. The water’s warm. Come join us…”

David: Apple doing the same thing many years ago.

Ben: Yes. Which was both lauded and widely criticized, but a baller move in some form. Microsoft is very seriously competing here. They’ve basically shifted their enterprise product strategy to say, “Hey, if you’re using Office 365 and you’re using OneDrive, Microsoft Teams is the hub,” where it looks just like Slack, you communicate with your people in here and then everything’s shared and mapped through here. This is the way you experience the rest of the Microsoft Enterprise Productivity Suite. Pretty serious head-on competition.

The thing they’ll like if you’re a bull on Slack is that sure, Microsoft has Teams but that’s more about Microsoft leveraging all their existing customer relationships and creating a Slack-like experience for its existing customers rather than the theoretically much broader set over the next 10–20 years of people who currently aren’t Microsoft customers and will be looking for a solution like this. Slack very likely wins those customers.

David: Stewart actually had a quote about this in the very beginning days of Slack. The product up to the public launch he called it something like, “The 15 years slow-motion unbundling of Microsoft as the product of the suite for the enterprise.” Absolutely that story is great if you buy into using all of Microsoft’s services.

Ben: Yup. Which works very well together.

David: Very, very well together, but I think very few organizations, especially new organizations do that today. Now, there may be a story when we get into bears about the famous quote that we talked about here all the time, The Two Ways to Make Money in Business Bundling and Unbundling.

Ben: Jim Barksdale.

David: We’ve been into a 15-year unbundling journey in productivity that maybe it has now reached the Tapex with Slack, with Zoom, with our next episode that we’re going to cover here in Acquired. Maybe the time is right to begin the rebundling, but for the moment, a lot of people like the unbundling…

Ben: Don’t you bring a bear here into this bull section. That’s actually another interesting quote from another time or a very interesting ledge to jump off of when will the rebundling start occurring and what is the point of integration where we will start rebundling around.

One more thing involved before we moved to bears is, like Salesforce, their ecosystem, Slack’s ecosystem and app platform makes them very sticky. Once you really start to loop in a lot of these integrations, which Slack has done a very nice job of building from the very early days, you really start to feel like, “We could move off this thing, but gosh, it works really well together.” I think that’s going to continue to be a story for them.

David: There are integrations, but I think even more important than that is all the persistent archive of all your team’s work over the last like, “We would never leave Slack at Wave. We couldn’t, even if we’re just a three-person organization.”

Ben: Yup. That’s a great point. All right. Bears, the company is doing well, but…

David: Not that well.

Ben: We thought before seeing the financials or at least, I thought I was like, “This could be the first profitable DPO public offering of the year.”

David: Yeah. Then it turns out actually they’re losing quite a lot of money.

Ben: They are losing quite a lot of money. The phrase that I can’t remember where I saw it, but I think this sums it up very nicely, “Zoom was actually the Slack we thought we had all along.”

David: Now this may be a little extreme. I fully do believe that Slack is making the choice to invest heavily here.  

Ben: Yes. Here’s why they’re not profitable. Slack actually has a 2–3-year payback period, since it’s such a low price point and the thing that you don’t like about this is, it’s backloaded. People are paying more in the later years of their customer lifetime. It will continue to incur losses building out its customer base here.

David: You land on it in an organizational team. A few people joined. Maybe they don’t pay for a while then they start paying but then the team grows, more people join the company, then you start paying more per user.

Ben: Absolutely. Another thing to be bearish on here is that, Slack’s net dollar retention—this is the beginning of period revenue, plus your upgrades, minus your downgrades and your churn, also divided by the beginning of period revenues—you’re basically saying, how much does the next quarter or year’s revenue that comes from this set of customers, like what percentage of next quarter’s revenue comes from the revenue that you currently have?

It’s still world-class, it’s still 20%, 30%, 40% something like that but it has been declining. There is some amount of churn, there’s [...] churn that’s actually happening. Is it people ditching it for Microsoft teams? Is it people saying, “Uh. It’s actually may be disruptive to my workflow and email might be better”? I don’t want to be too bearish here. Still world-class, but also declining. So, you want to see that bottom out soon.

David: Yup. The last piece is the competition which you could have different views on. I don’t think rebundling is happening anytime soon or at least not in a big way towards Microsoft, but Teams is a viable competitor.

Ben: Very much so.

David: Very much a viable competitor. Ben Thompson has written a lot about this. There are other competitors that are popping up. Interestingly, as I was doing research, it seems a lot of people are starting to use Discord.

Ben: For work? Woah.

David: Actually, yeah.

Ben: By the way, did you know Facebook Work has a ton of organizations? I don’t know how many are active, but it’s a very widely activated product.

David: Wow. That is shocking. That is truly shocking.

Ben: Completely agree.

David: Please. If you’re using Facebook for work, stop.

Ben: Let us know. Come on. All right. The net here is going to take a lot of cash and a lot of time to get profitable but as long as their efficiency of marketing spend and low churn continues investing in Slack, you can see why Slack is plowing these marketing dollars in and it’s a great long-term use of capital.

I found one good quote to put a pen on this bulls and bears section is from my colleague, Ben Rush at Pioneer Square Labs. We were slacking about this last night. He told me, “Basically right now, the way I look at it, it’s a machine where $1 in gets you close to $10 out over 8 years. So you’d be a fool to not keep putting money in unless you believe that something fundamental is about to change to make them much less sticky.” You’re basically saying, “I know it’s going to take a long time to pay back, but boy, it’s going to pay back in a big way.” That’s why we’re seeing the company right now that has such great indicators across the board and their economics, their stickiness, and yet it’s still not a profitable company. It’s just going to take some time.

David: Yup. Well, should we talk about what will happen otherwise?

Ben: We could’ve had the coolest game ever. It actually was among the course set. I used to work with a group that were very hardcore gamers. They basically try every single game [...] and there was a lot of buzz in the gaming community about what Glitch was going to be about the promise that it held.

David: It’s so interesting that, can a game be built? I’m going to guess Minecraft is the perfect example.

Ben: Roblox.

David: Yeah. Roblox. Games where people don’t kill each other. Fortnite is a pretty great example of this. It’s just a great gameplay mechanic. If you take the violence aspect out of it, it’s just hard to top that competition. If you think about it more like a sport, then you do less violence. It’s really hard to find any other mechanic that can top that. I think more interesting about what would have happened otherwise is what if this team hadn’t brought this approach to this market? Would somebody else have figured out how to do this?

Ben: Yes, because you look at what Zoom figured out in the first 40 minutes of your meeting are free. Yes, I absolutely think that someone else would have figured it out, but it may be done later, it may not have been done in this exact way, they may not have gated it on certain number of messages.

David: I don’t think Atlassian would have figured it out though.

Ben: Also they had a product in the market. It would have been too disruptive to their existing product.

David: Maybe we would all be using Discord for work.

Ben: Yeah. There’s a chance that that’s the most reasonable conclusion to draw here.

David: Yeah.

Ben: Well, that’s like a super hedged comment. I should say, I’m in on that. David, I’m in on your prediction there.

David: Yeah but do you know the gaming DNA?

Ben: Yup. Playbook.

David: Playbook. One thing I want us to talk about here that we didn’t really cover in the history and facts is one other discipline that the team brought from the gaming and consumer world to Slack is really a deep understanding and analytics around the funnel of user journey from acquisition, to conversion, to activation, to retention. It is no accident that Slack has world-class metrics around this and it’s because this discipline is so important for gaming and online gaming.

Ben: Yeah. Famously, the PMs at Zynga, who pioneered this approach were not the creative types. They were the spreadsheets types.

David: They were the former bankers, the analytical types. Again, PMs of gaming companies look for these moments which are, what is the signal when a user hit some threshold that they are then going to retain for a long period of time?

Ben: Or being monetizable.

David: Or they going to monetize, or whatever? What’s that magic thing? Then they optimize the game to funnel users to that magic moment. Slack realized pretty early on that, that magic moment is a team that has sent 2000 messages back and forth.

Ben: Which sounds like a lot but if you’ve used Slack, you know that happens real quick.

David: Well, they figured out based on team size, how long it takes for that to happen. So if you’re relatively a smaller team, it takes X amount of time. If you’re relatively a larger team, it takes less than a day for that to happen. They found it, 93% of teams that hit that 2000 message threshold didn’t churn, retained indefinitely. So, they started architecting the product around doing everything to get new teams that were on-boarded to that threshold as quickly as possible.

Ben: That makes sense.

David: Super interesting. Think back to our Zoom episode and the world of enterprise software before this. Nobody was thinking this way at Cisco, at Microsoft, at Salesforce. This is completely new."

Ben: How can I take the CIO to a new dinner he’s never experienced.

David: Exactly. This is also a perfect example of a friend to the show, Alfred Lin at Sequoia, he had a great thing that he said to us at Wave a while back, which is what he really looks for in companies is do they understand, he called it input metrics as supposed to output metrics? The output metrics are, what is your retention? The input metrics are, what is going to get you, what do you understand about your product and your business that is going to get people to retain? This is a perfect example of that.

Ben: Great point. Another thing that they did was, they were their own first customer. A lot of times I think start-ups presume to know their customers and because it’s frankly difficult to go out in the real world and have these sorts of conversations, you often project the needs of the customer into a map that you already have in your head and just start building.

Slack was something where they already with Linefeed had a good amount of development under their bell of what makes it easy to onboard new team members. What are the bells and whistles that we would add on to IRC? They knew better than anyone of what this thing could be and what would make it useful. You don’t often have the luxury of being your own first customer because you’re not building a gaming company that has zero enterprise value, shutting that down, and then pivoting, but to the extent that you can get, a 100% fidelity on what are the needs of your customer? That’s pretty cool.

David: Totally.

Ben: A few more here. Like Zoom, David, you’re talking about they pursued this bottom-up distribution strategy. Low price, freemium, the go-to market is similar, the network effects that they have, you basically have this equation which is the low price in the enterprise, plus network effects, equals unprecedented growth rates. It’s interesting to see how long Zoom and Slack have continued at these really high growth rates. Obviously, their products aren’t incredibly expensive, so the tradeoff you’re making there is that your average customer value—if you’re weighing in all your free accounts—it’s actually quite low but your growth continues to stay high for a very long time.

It’s interesting to understand that equation a little bit. Which gets me to their top of the funnel is operating a free product. So, I want to do a little analysis on this. If you divide their total marketing spend last year by the number of new paying customers that they brought on last year, you end up finding a customer acquisition around $8000 per company. For a consumer company, that would be crazy expensive. For an enterprise company, it’s not that bad but it’s significant, $8000 for a paying customer. However, when they break out the cost of sales it’s only about $600 per company.

David: [...] acquired Slack community.

Ben: Yeah. There are some marketing dollars in there for billboards and stuff like that but basically, what you’re seeing is that there’s a massive expense hosting these free organizations.

David: It may or may not ever convert to [...].

Ben: Why is their cost of sales only $600 and yet there’s somehow spending on average of $8000? It’s the massive amount of free usage of Slack that’s going on out there. So, while it’s a brilliant and disruptive strategy, it’s an expensive one to run a huge free product like that.

David: Great point.

Ben: The other thing that I wanted to talk about a little bit here is a couple of Zoom comparisons. We mentioned that Zoom is externally viral while Slack is internally viral. That ends up showing up in the sales efficiency. When you look at Slack’s return on sales and marketing cost—111%, great—but Zoom’s is 180%.

David: I was expecting 1080%.

Ben: Yeah but it just screams to you like, “Woah.” When you have the capability to promote your thing organically to people at another company, it is just sort of natural. Slack, I would say great but not A+ on that metric. The last thing that I will say on Zoom and Slack—this is not an original thought. This is a collection of some other things that we definitely did some good research on around the web—Zoom made a previous way of working better but Slack invented a completely new use case at scale.

That’s one of my key takeaways as I compare these two companies is I intrinsically understood how to use Zoom at first, great. I’ve used a lot of these, they’re mostly bad, this one’s good. Slack was like, “What is this thing?” And there’s an education curve on that.

David: Have you used Hipchat before?

Ben: I had but somehow Slack was less obvious to me when I came in, what it was supposed to be.

David: Well yes, even if you have used Hipchat. If you’re on a technical team using Hipchat, Slack wanted the whole organization, just to use case is different, right?

Ben: Yeah.

David: You have all these people who’ve never used it before. So even if you have used something like this before, your experience changes because now, the organization experience has changed.

Ben: For sure. All right, let’s do a quick discussion here of a section that we inserted a few episodes back about value creation and value capture.

Value creation here, tons. Oh my gosh. All these companies are paying all this money to have these new way of working that’s frictionless, real-time, live, and highly interactive, but boy, at what cost? I think you see this complaint a lot flying around Twitter. I certainly feel it a lot from co-workers who are saying, “You’ve hijacked the way that I work and it’s now an interrupt-driven workflow instead of me being allowed to go in the flow on something, and then pop my head up, and I decide when I want to check email.” It’s like the opposite of the 4-hour work week. It is always on, always stimulated, always interrupting you.

I think we are early innings and understanding the impact of this very much like the studies that are starting to come out about open office space. I still use open office space, I still like it, I very much recognize the downsides of it. This is open office space in technology, and it’s someone who can always tap you on the shoulder, and of course their settings to change and stuff but there’s a cultural understanding that you are reachable by Slack. When you’re dot is green, or during working hours, or whatever the thing is. I think we don't yet fully understand the negative impacts of that style of communication being the predominant expected one in the workplace.

With all that said, there’s way less to criticize here about this company than sharing economy companies like Uber and Lyft that we’ve talked about the potentially very destructive things in the world like the underpayment of wages and things like that. This company has none of those dramas.

David: I think on the flipside, though, I absolutely agree on it. I think it’s a broader cultural issue we’re just grappling with this one time, a moment in time of being addicted to our technology. I think a big benefit I’ve definitely seen from Slack is somebody who just struggles with email.

Ben: You literally never answer my emails.

David: I’m terrible at email and I used to be much better at email because I like to devote time to it, I want to make sure I’ve written everything correctly and whatnot. Slack has been just the most liberating thing for me. We have shared Slack channels with all of our portfolio companies at Wave. All of the most important people in my work life, internally and externally to me are on Slack. It’s like a weight has been lifted. I can communicate instantly, easily. I don't need to worry about structuring the perfect sentence, or whatnot, or crafting the right narrative. I can just communicate much more simply. It’s been great. My email has suffered as a result of it, as Ben knows, but we text, reach out on Slack, it’s better.

Listeners, if you want to get in touch with me, hit me up in the Acquired Slack.

Ben: I’ll also say a thing that David, you do extremely well. Listeners know this about David. A lot of us are kind of on a hamster wheel with communication, where it’s like, “Ooh. Got a new in-thing in. Got to answer it out.” You’ve been very disciplined for years about saying things like, “Should I actually be just like responding to everything that comes in?” and, “Let me be more intentional about what I let hijack my life and what I don’t,” and, “If I don’t answer this thing, what’s the worst thing that can happen?” I think Slack, in some ways, the antithesis of that very intentional thinking, but you’ve applied it to the fact that you’re going to be very intentional about being on Slack and structuring Slack in a way that works for you.

David: What’s cool is that the cost of that is much lower so it’s much easier on Slack to be like, “Yup. I’ll respond to almost anything,” whereas on email, the cost is so high. Anyway, it’s just super interesting because we talked about the cultural moment that was ready for it. I think this trend is much broader than Slack but capitalized on it.

Ben: Yeah. Slack allows for frictionless, always on seamless communication inside of an organization, but everybody still has email for outside the organization. I’m sure that Slack has spent a lot of time thinking about this, but what does this type of workflow look like? Can we kill email forever?

David: Shared channels in their current form are specific use cases of venture capital form is great for it, but it is amazing.

Ben: But if you’re like a BD person, how are you going to communicate over Slack?

David: You can’t do that. If your workflow and your external partners fit, such that you could have shared channels, it’s truly wonderful.

Ben: Wonderful. I wonder if Slack will ever launch an inbox feature where it’s like, if somebody knows my Slack handle, they can just send a Slack message to my inbox that’s universally accessible anywhere in the world.

David: Or maybe not and listeners will have to stay tuned for our next episode in the season finale. Dropping soon.

Ben: All right. Grading?

David: Grading. Yeah.

Ben: Listeners, as you know, with these recent IPOs or DPOs, we ask the question five years from now. What will an A+ look like and what will an F look like. The big thing in my mind is Slack currently has a revenue of multiple of 46X with their current trading market cap.

David: I haven’t check comps lately, but something tells me that’s high.

Ben: They are a company with no earnings, so you can go on a revenue multiple. What will they need to do to justify that? Is it continue business as usual with a high growth rate and a great CAC LTV ratio albeit over the longest time span, and then just continuing to do that, and hoping that the [...] on the number of organizations that are going to do the thing is really big? Or, do they need to be broader than they currently are, and take the Dropbox approach of going, “Oh crap, it turns out we were a $7–$10 billion feature, and now we need to figure out how do we become a bigger company if we want to be a more valuable institution.” What do you think about that?

David: I think the A+ case, the answer is both. Listeners, do you remember the great PizzaHut or Domino commercial back in the day with Deion Sanders and Jerry Jones?

Ben: I have no idea where this is going.

David: Oh, man. These commercials were so great. Jerry Jones is the owner of the Cowboys, and Deion Sanders when he played for the Cowboys. Deion signed the largest contract ever of $35 million a year. This commercial is, whatever pizza company there, you can get both a deal, you can get both of the two things. There was the negotiation between Jerry and Deion. Jerry’s like, “So Deion, what do you think? $15, $20 million?” Deion’s like, “Both.”

Anyway, long-winded way, I think A+ is both. Both the chat communication market is enormous tons of headroom left to grow and Slack develops new monetized features, products, tool sets around that, that they can start to rebuild a bundle of the productivity suite in the enterprise and go from $80 per year, per user to across a suite of products to $100–$300 per user, per year in the enterprise.

Ben: It’s interesting. If you look at a storage company like Dropbox. Dropbox’s enterprise value effectively comes from the people who share files on it, use it for that, and pay for that. That’s a $10-ish billion opportunity. If you look at group messaging, Slack, that’s a $20-ish billion opportunity. When you look at the aggregate of enterprise email and a full productivity suite with Microsoft Office, it has a trillion dollar opportunity.

It’s interesting to think about what the bundle looks like. What do you need to own to be the most valuable piece of that, and I think identity is definitely a piece of that. Well, Slack own identity, Microsoft has Active Directory, there are others that are taking that for the non-Microsoft world; Google obviously has taken a chunk of it. It’s hard to say what the value of G Suite is since it’s not a thing that Google breaks out, but what is the value of their productivity business? I suspect it’s a lot larger than Slack’s productivity business.

The big question for me is at what point does Slack do the thing that Dropbox did with Dropbox Paper, and then recently with this kerfuffle thing that I need to understand more or whatever the new Dropbox is. Not to be too opinionated here, but when do they decide to go build more of the productivity stack in a way that is not the periphery pieces of the minnows of communication, but the broader heavy-hitting we’re going right for the jugular?

David: Well, I think the other thing that this screams to me and is one of the most important reasons to become a public company, is not just built internally but acquire. Atlassian has done this extremely well within their niche.

Ben: Will Slack go by like Notion?

David: Whomever, yeah. As a public company, it is much easier to do that than it is as a private company.

Ben: Great point. So A+ is they do both, F is?

David: F is we’re all using Discord or Microsoft Teams in the future or Facebook for work.

Ben: Yeah. Frankly, I think the biggest thing that could be really scary for them is Microsoft actually succeeds at acquiring a significant amount of the upstarts and non-Microsoft customers to work into the Teams’ organization.

David: We maybe alluded this a little bit on the Zoom episode, but I suspect we are going to be entering an age of relatively large acquisitions in the productivity world by both the traditional players, the Microsofts, the Salesforces, the Googles, and Slack, Zoom, and these large public upstart companies.

Ben: Yup. Do you have any that you want to go out on a limb and say?

David: No. Nothing I feel good enough to speculate about.

Ben: Consolidation to this space feels sound like a good idea.

David: Yeah.

Ben: Cool. Follow-ups?

David: Follow-ups. Yes. We apologize, we made an error during our Uber episode. Apologies both for the air and that it has taken so long to correct it.

Ben: But thank you so much to all the folks who—I think we have 4–5 people—talked to us about this.

David: Yeah, who reached out about this. We waited so long to correct it because we wanted to do it on an episode without a guest on the part of the deleted Uber story, when at JFK airport with the surge story. We actually had it reversed. The true story or how it actually went down is that Uber had taken a lot of heat previously for when the surge would automatically kick in during periods of high demand. Sometimes that high demand was like there was a disaster happening or something like that. So they had a playbook for turning off surge when in certain cases, and when the protest, when the taxi strike at JFK happened around the immigration ban, Uber ran that playbook and turned off surge. So we had said on the episode that they turned surge on and that’s what people got upset about. But it’s actually that they turned it off.

Ben: Because they wanted people to be able to easily get to and from the airport without being seen. Well frankly, without actually being mercenaries about it and making a bunch of money from people being in a dire situation, but also to avoid the perception of being seen as doing that.

David: I think, partially, and several Uber people who wrote us said, “It is the perception of Uber was so bad at this point,” which was Uber’s fault, that no matter what they did, they were going to get pilloried and in this case, people were like, “You’re trying to break the strike. People are striking to protest this horrible thing that happened, and you Uber, are you in league with Trump? Are you trying to break the strike? Blah, blah, blah.”

Ben: The way I would imagine this, if you want to make a metaphor, is they whittled a bunch of wood shavings on a hot day into a pile, and then you can throw one of two lit matches at it, and they chose which one to have thrown.

David: Anyway, we apologize for the error and we wanted to correct it.

Ben: Yup. All right, carve-outs. Somehow, I never did this carve out. I was looking back at once I previously have done, but I watched all of  The Expanse at the end of last year on Amazon, and is that show a masterpiece. I’m extremely excited for it to come back. Amazon bought the rights. They did three seasons and then it pseudo ended. Then Jeff Bezos, I think, is personally a fan and the Amazon bought the rights and it’s developing season four. If you like really gritty sci-fi, and you like Battlestar Galactica, and shows like that, you’re going to love The Expanse. It’s a great political drama in the gritty future in space.

David: Nice. My carve-out’s full disclaimer, biased because we are investors at Wave as everybody knows who our LP is, our portfolio company, Alma. Dan Hill who was previously the head of growth at Airbnb, we had one of our first LP episodes. They just launched a big product feature previously on Alma.You could use Alma to give to nonprofits through funds around causes so the wildfires in California where a big fund that they created that you could just give to the Alma fund for the wildfires, and they would distribute that to organizations that were addressed in the wildfires. They just launched last week the ability to give to any non-profit in America on Alma which is super cool. Now, finally, there's one place, Alma,  where you can go and easily discover and give to anything rather than having to wrangle with the website or Google the charity.

Ben: Google the charity [...] donation tool.

David: Paypal, if they even have it or whatnot. You can now give to anything which is really cool in and of itself, but also you manage it all through Alma. You get your tax receipts at the end of the year all in one place, all through Alma. You can control the level of communication back and forth. Very cool. I encourage everybody, (a) to give to great causes, and (b)  if you want a modern way to do it, use Alma.

Ben: That’s awesome. David, I have to thank you for bringing Dan Hill into my life. Dan is awesome.

David: He’s such a wonderful person.

Ben: He’s obviously on the LP show and we did a great episode on dissecting Airbnb’s growth and the tactics they use. We end up actually doing a deeper dive with a bunch of PSL companies and him having a round table talk, best practices for growth. He’s awesome.

David: Dan and his co-founder Michelle who’s also a PM for Airbnb, they are in a part of many of the big moments and features that unlock growth for Airbnb. Super excited to work with them. It’s awesome.

Ben: All right. Well listeners, if you aren’t subscribed and you like what you hear, you totally should. We’ll be continuing to cover all the big upcoming tech IPOs and we will actually be rounding out our productivity trilogy with Zoom, Slack, and one more in the next episode. Also, if you are way too excited about this episode earlier to pause and fill-out the season for a survey, now is literally the perfect time. There’s nothing more after this.

David: I thought it was a perfect time earlier?

Ben: No, this is even better because David, I will tell you there is no more interesting content after this. Any remaining time in this episode is literally just me talking about this and then some outro music so I can’t imagine a better time to click.

David: I love our theme music though.

Ben: Oh yeah. It’s great.

David: You don’t want to miss that.

Ben: No.

David: So maybe listen to the theme music and then go do the survey.

Ben: But if you’ve heard it a lot and you’re kind of over it at this point, I would say, you should totally click the link in the show notes, or you should go to acquired.fm/survey. You should take the survey and you could win a pair of second generation AirPods or one of ten Acquired LP subscriptions. I will stop now. Thank you so much for doing that. We really appreciate it.

David: Thank you, everyone.

Ben: Also, thank you to Perkins Coie, the best sponsors in the world, and we will see you next time.

David: We will see you for the season finale, coming very soon.

Ben: To a podcast player near you.

David: After you fill-out the survey. Thank you, everyone.

Ben: Later, David.

Note: Acquired hosts and guests may hold assets discussed in this episode. This podcast is not investment advice, and is intended for informational and entertainment purposes only. You should do your own research and make your own independent decisions when considering any financial transactions.

More Episodes

All Episodes > 

Thank you! You're now subscribed to our email list, and will get new episodes when they drop.

Oops! Something went wrong while submitting the form