The Slack DPO

0:00 That's wood blocks, right? Do your do your best impression. Uh let's see. Yeah, that's good one.

0:11 Welcome to Season 4, Episode 9 of Acquired, the podcast about technology acquisitions, IPOs, and direct public listings. I'm Ben Gilbert. I'm David Rosenpol. And we are your hosts. Today we are covering the spiritual sister of our previous episode on Zoom. Slack.

0:44 and the largest enterprise IPO in history. And of course it wasn't even actually an IPO, but rather a direct listing. Barry McCarthy, he rides again, the acquired superhero. Today we'll talk about what all that means, the cray of Slack's evolution from even before it was founded, where its roots really are, uh, and break down their business and their market cap today. And what it could do in the future.

1:10 All right listeners. Now is a great time to talk about a new partner of ours here on Acquired, Lagora. The agentic operating system that is redefining how the world's best legal teams work. Yep. It's sort of obvious that AI is gonna completely change the legal industry. I bet most of you listening have dropped a contract into some sort of AI chatbot out there. Legora took that insight and asked the question, what if you really built something with that power from the ground up for the legal industry? So the founders did exactly what great founders do.

1:43 operate with obsessive customer focus. They embedded inside a massive law firm. For months. They sat with the lawyers just watching how the work really gets done. And that's how you get features that customers love, like tabular review, where you

1:59 Drop in a folder of hundreds of contracts and it pulls every key term into a grid a lawyer can actually work with. Legor's bet here is interesting, since it lets each lawyer handle more complexity, any given person can increase the quality of their work and do higher value work. And this means that the pie can grow even as each individual task takes less time. And they recently launched Lagora Agent, offering greater intelligence and performance. The agent lets lawyers set an objective. Then it can handle the planning and the execution and delivery of the final product. Legal teams get to maintain full control and transparency since they're still involved where judgment is required. And Lagora works where you already work. You can use it within Microsoft Word while redlining or drafting. The early Lagora numbers essentially speak for themselves. When they have a head to head pilot with their top competitor, they win seventy percent of the time. Lagora now has over a hundred thousand lawyers on the platform from twelve hundred legal teams in fifty countries.

3:00 And crazily, they went from one million To a hundred million in ARR. In about Eighteen months.

3:08 Truly insane numbers. And that is the real test. Plenty of things demo well, but the question is whether a busy associate actually reaches for it during crunch time, or whether a partner trusts it before going into a conversation with a major client. If your legal team wants to check it out, whether you're a law firm or you're in-house at a company, you can learn more at Lagora.com/slash acquired. And just tell'em that Ben and David sent you. So we start

3:35 Pretty far. Away from Slack's gleaming new San Francisco Downtown San Francisco headquarters. Pretty far away from Wall Street. In fact, very, very far. Away from Wall Street.

3:47 We start. In nineteen. Seventy three. In Uh Lund?

3:53 British Columbia. Lund is I'm not sure exactly how far, maybe an hour or two north of Vancouver. In British Columbia. And uh it was where Highway one oh one ended in the mid seventies, uh north of Vancouver. And we start there

4:10 In a small log cabin. Located on a hippie commune. And this cabin does not have electricity. It does not have running water. But

4:21 In nineteen seventy three. There is a boy. Born in this cabin. to parents David and Norma Butterfield, who were, as you can imagine from this scene I am I am setting here and describing Pretty hardcore hippies.

4:35 at the time, in nineteen seventy three. And the boy's name that uh Norma gives birth to, uh this year is Dharma? Jeremy. Butterfield. Dharma is an incredible name for someone born on a hippie commune. Incredible. Incredible. So perfect. Let's rewind just a little bit though. How how and why did we get here? So we start with with David Butterfield, the father of Dharma.

4:59 So David was an American, uh originally. He was from Connecticut and he was a college student at Harvard. During nineteen sixty eight, during the summer of love. And after the summer of love, he decides he's gonna drop out of school. Drop out of Harvard. Um, you know, he's been uh disillusioned by the RFK and and Martin Luther King assassinations, all the uh you know, both great and terrible things that happened that year in nineteen sixty eight. He drops out of Harvard and he moves to France.

5:29 Um but shortly 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. Uh does this explain the Canada thing? This does eventually explain the Canada thing. He comes back to the US and he does enlist and he goes to basic training and he learns, you know, while he's while he's in training that he had wanted originally to be a a medic. He learns though that he's gonna become a sergeant and he's gonna get assigned to active combat duty and he's gonna get shipped off to Vietnam. Very probably he knows to his death.

6:05 He decides one day before he gets shipped off. I don't know exactly where he was stationed for for training, somewhere in the north of the US. Um and he decides to just drive to Canada and not come back one day. He drives across the border. He ends up in Montreal. And while he's in Montreal, he meets Norma uh who I believe was his student at McGill at the time, uh in Montreal, and they fall in love. They get married, and And they decide that they're gonna move out west to British Columbia. So they just start driving. And they drive across Canada, across the country, uh they get to Vancouver and then they turn north. And then the highway ends in Lund. And it turns out there is actually a hippie commune already in Lund, so they uh they joined the commune. Uh it's kind of an amazing story. Uh and uh we're gonna continue it. But um David uh uh sadly passed away in in twenty seventeen and in his obituary, I just love this. It it says

7:00 Um if you asked David who he was, he often said, Who I am is I love my wife. Um you know, David, this is exactly how I thought the episode of the largest enterprise software IPO in history would start. Exactly. Exactly. Back to Dharma. He grows up initially, still no running water or electricity. He's he's on this commune When he gets to be about five though, David and Norma are

7:27 kinda starting to question the whole, you know. Their sort of life choices and anti capitalist uh philosophy. You know, it's now the late seventies, the Vietnam War is long over and they say, you know, maybe Maybe it's time to sort of rejoin normal society. We have a five year old now Um so they move down to beautiful Victoria. the capital British Columbia. Beautiful, beautiful town. Um if listeners, if you haven't been, highly recommend it. Especially uh U Seattleites, it's way too easy to take the clipper.

7:58 Don't miss it. Yeah. Um definitely don't miss it. Um so they move down to Victoria and they rejoin mainstream society there. David ends up so he had built the log cabin. uh himself, he ends up getting into real estate development and he becomes a prominent sustainable real estate developer. Um really cool one, Victoria. Storte though, so he's now growing up. He gets his first computer at age seven in Victoria and becomes immediately enamored of it. When or Storte, I should say, Dharma. When he is when he is twelve, he decides to change his name to Store because he's probably getting teased at school at this point in time and he wants to be

8:33 a little more normal and Stuart is like the most normal name that he can think of. So he legally changes his own name at twelve to Stuart Butterfield. He ends up stay local for college. He goes to college at the University of Victoria. Um, he studies philosophy. And as you might imagine, given uh uh the lineage of his parents, he's quite smart and does very well in school, and he thinks he's gonna become a philosophy professor. That's that's his goal. He goes off to Cambridge in the UK And he gets a master's uh in philosophy. And I assume was part of a PhD program that he was uh intending to complete. For listeners who have uh have not heard Stuart speak before

9:14 It is very apparent when you hear his speak that that he has a background in philosophy. He sort of uh can't help but diving into the existential and the metaphysical in any topic. And I think um there's a great episode with uh Caris Wisher on Recode Decode where he's sort of talking about Why gaming is interesting for the world, why communication is interesting for the world, and ties it to such a sort of strong base in philosophy where I I feel like every time I've watched or hurt heard an interview with this guy, you have these aha moments that you otherwise would never ever have. Yeah. He's uh he's cut from a different cloth, for sure. Um than your normal Tech CEO. We mentioned though he got his first computer at age seven. He'd always also been kind of fascinated by computers, and this was kind of the early days of the internet. And he also, as legend has it,

10:02 became really interested in the Internet because he was a huge Of course. fish fan. The band fish. And so fish had a newsgroup at rec dot music.fish and apparently young Dharma slash Store was all over this newsgroup. David what is a newsgroup? Well we might ask what is IRC? Newsgroups of course were the Gosh, I don't know, what do you call it? Like predecessor to Reddit, I guess, on the spiritual predecessor. Yeah. Is it it's sort of the pre BBS uh bolton board system. Yeah.

10:36 Way of finding community on the internet. Yeah. Um, so Stuart, even though he's pursuing his academic career in philosophy, he is really into the internet, has gotten into coding on the side, making websites all through college. And so while he's after he finishes the masters portion of his program at Cambridge, it's now nineteen ninety eight. And the web one point oh bubble is is fulfled and he says, You know what

11:02 I need to I gotta throw in with this. I gotta throw in. Like now is now is the time. I I can't miss this train. So he moves back to Vancouver in British Columbia and he joins a startup called communicate.com. Dude, the domain names were so easy to come to it. Well and domain names was the name of the game here. So the the idea of communicate.com is they were going to build The everything store on the internet, the e commerce platform. And they were gonna do it by owning domain names for all of things that you might buy or or things you might be interested in. And that was gonna be the front end. So you would go to whatever.com. And you would buy stuff powered by communicate.com. Only the things that could be Which is so funny, because this was the year that Amazon IPO'd. So Amazon was already definitely a thing, but was but only for books. Only for books at the time. As you might expect, given uh that business plan I just described.

11:59 And being in in Vancouver, it was a total disaster. And uh so Stuart shows up and he's quickly like, Man, I thought I was gonna get rich here in the you know, sell out from 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. Um, but he leaves and he meets somebody really important there. He meets His co worker Jason Classen.

12:29 Who he sat next to at Communicate. And Jason, of course, had a side hustle at the time,'cause everybody had a side hustle. And Jason's side hustle was he was building a website, another website called gradfinder.com. And this was like a uh a competitor to classmates.com company. It was sort of proto early, early, proto Facebook of find people that you went to high school with or you went to college with and stay in touch with them. Online. Actually a pretty good idea.

12:58 So Stuart convinces Jason, Hey, let's get out of here from this crazy company. Let's go build your website, Gradfider.com as as a real company. Um so they leave And very quickly, I think like within a year, they end up selling gradfinder.com to another dot com for a small amount of money. Stuart's first exit. Stuart's first exit. Everybody celebrates. They take decide they're gonna take the year off. You know, they didn't make life changing money, but enough money to kinda take the year off and enjoy life. During that year, of course. The bubble bursts. And so they all come back to, you know, nuclear wasteland uh in the internet.

13:35 uh sector. During that time though, Stuart starts a blog. He's kinda 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 Katerina Fake, who also famously had and still has

13:53 a very popular blog during the time. And they kind of strike up a relationship through blogging. And one thing leads to another, and they end up getting married, and Katerina moves out to Vancouver. Wow. Yeah, pretty amazing. Another relationship that Stuart fosters online is

14:11 Story. launches this thing initially as w during the year off kinda as just a fun little uh competition he wants to launch called the five K competition. I think it was um uh a play on like a five K, you know, running race. Yeah. Yeah. And the challenge, the five K competition was a challenge for people around the world to build websites That were five kilobytes or less. Difficult then literally impossible. Literally impossible. I think a lot of these websites were like black and white, like very very simple. But um but it was like how cool of a website could you make this with the challenge in less than five kilobytes of memory. Creativity inspire what is it, c constraints inspire creativity. Indeed.

14:54 I don't know if this this probably wasn't Stuart's uh idea at the time, but if you, you know, could devise some ruse to um you know to identify really talented programmers out there, what better wig thing could you come up with than something like this? And so a guy named Eric Costello, who I believe was in Saint Louis at the time, enters the five K Challenge, uh the five K competition and stor's like, wow. When you create it is amazing. Like We should work together on something. Eric ends up also moving out to Vancouver. And this kind of ragtag team of of Stuart and Jason, his co founder from Gradfinder.com.

15:33 Caterina, his wife. And Eric, this whole, you know, web community, they decide, you know, we should do something together. The whole internet gets together in one place. It's almost like a like a commune, one might say. An internet commune. So this is now two thousand two. 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.

16:01 the the kind of power that they're seeing still exists in the internet. And they decide You know. We can use Web browser

16:10 Technology. To create like something pretty cool. And Wouldn't it be cool if we made a game that people could socialize and interact with each other and build these types of relationships? Just online in a browser through like a more rich experience than these, you know, news groups and bulletin boards and things that people are using. And of course that would be very cool, but listeners Just think back to yourselves about websites you were using in two thousand two and web technology that was available in two thousand and two.

16:42 And then even think today how difficult it would be to implement a you know, massive multiplayer online game. using the web today. David, I suspect that that was quite a trying undertaking. And I think they knew this because they decided, you know, like most game companies, they were gonna have a name for the company and then they were gonna have a name for the game. The name for the company was Ludicorp. I think they knew the scale of the undertaking that they were they were um embarking on here.

17:11 They decided to name the game Game Never Ending. Which would be prescient. Also a prescient. So the four of them they they work on it for a while. They ship an early version and people out there on the internet, you know, again, th they're these folks are kinda already sort of internet. Celebrities to the extent that that meant something back then, people start using it. Uh and there's a community of people that really like this early version. But the team, you know, it's just the four of them. They can't get enough money and resources to like actually build out the the real full vision of what they want to try and achieve. And so they figure out that you know they're trying to raise money. They can't raise money. It's in two thousand two it's like if you're raising venture capital at all, it's on

17:51 Terrible terms. It's only for basically sure things or big enterprise software plays. No one's getting funded on a consumer dream to be able to do something like this. Equivalent of modern hippies hanging out in Vancouver who all met on the internet and two of them are married. Like I I could just imagine venture capitalist reaction at this point in time. So uh they realize they gotta do something. They're not gonna be able to raise venture capital, but they gotta get some more money to to make this happen. So Stuart and Katerina, as the story goes in Stuart swears that this is true. They go to New York for a tech conference. And this is all swirling in their heads. And when they get there, Stuart gets food poisoning and he gets really, really sick.

18:37 And he's up all night in their hotel room in New York. uh, you know, can't sleep, very sick, and he starts like getting kind of basically fever dreams and hallucinating. I'm I'm pretty sure this isn't the first time Stuart has hallucinated, but but in this particular time when he's hallucinating, this idea comes to him. And 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 this same technology to build

19:06 some other cool like 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 kind of quick flip ideas. And it's so starts like, man, if we make a side project, we could maybe we could flip it pretty quickly for like a million dollars or so. We could use those proceeds to keep funding the game and then we can build out The game. So All in service of the game, of course. All in service of the game. And so as as he says, he he like writes out all the ideas of things they could do on scraps of paper at five AM in the hotel in New York. And he realizes that

19:44 Photo sharing. is and photo uploading is something they could do. And I believe it was that they had built a photo uploader for the game that you could upload your your profile picture. Uh yeah, I believe that was the core of the technology. Yeah, and I think if I'm remembering right, there was even sort of an ancillary thing where you could upload alternative photos other than the profile picture. So if people looked at your profile in the game, there were photos in there that you could use for other things, too. Uh okay, cool. So like man, we could just repurpose this technology and let people share Photos, you know.

20:17 More broadly, digital cameras are a thing. I mean, I remember It should theoretically be an explosion of digital photography. Totally. I was I was heading off to college at this point in time and All my, you know, classmates that were showing up as freshmen at uh at college, everybody had their point and click. You got your cool picks, you got your power shy, you got your Sony Digital Elf. I mean, this is like this is the era. Yeah. Oh man, the Sony Digital Elf. I hadn't thought about that in years. Okay, so they the four of them, they decide, well, we're gonna have a vote on this. Are we gonna keep plugging away at the game or should we pause the game? Go work on this photo sharing idea. Um they do the vote and

20:55 They decide not to do it. Stuart is outvoted. And um Look, Stuart, you seem like you got a good head on your shoulders and you got a nose for, you know. But you literally came up with this during a fever dream. Yeah. Um Stuart, though, in in this would uh Presage his skill and power as an executive and a CEO and a broker of of influence. He starts going to work on Eric. He sees Eric is 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 what?

21:30 The service that would become known as Flickr. is born. We're now in December of two thousand three. And keep in mind too that the proposal that we should do a photo sharing site It's still seven or eight years from being a meme.

21:45 Like the the the notion of oh yeah, we're just gonna pivot into photo sharing. Like not only were they the first ones to do that, they were a whole technology wave before the set of people that, you know, you're all laughing about in your heads on oh a photo yet another photo sharing app. Like we are so far in the early innings here. Photo sharing is is not on anybody's mind in technology. They realize though that if they're gonna Really commercialized this service, they need some extra engineering resources just for them. Again, isn't gonna be enough. Well it turns out so where do they turn? There is this guy

22:19 In The UK just outside of London named Cal Henderson, who is a hardcore. fan of game never ending in the early prototype. Oh that's how Cal and Stewart met? That's how Cal this is how Cal and Stewart meet. And Cal was such a hardcore fan. You know, he's active on the Bolton boards about Game Never Ending. He wants to like really get in there and and help. He hacks their email servers. Hey guys, just wanted to say hi, I'm super talented. Yeah. Look at me, look at me. And so they were like, I I imagine before this idea to to start working on Flickr. They were like, man, what are we gonna do with with this guy? And story again in, you know, um just uh showing these flashes of brilliance as an executive and marshaler of of resources, he's like, you know what

23:08 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. Uh, so he gets in touch with Cal and he convinces him to Not work on the game, but come help them build. this service. And it turns out, of course, as you would imagine, by Cal hacking into their email servers, Cal is like an incredible developer. Just incredible, like a truly world, world, world class. Uh developer.

23:34 So do they move him from the UK to Vancouver? Eventually they do, but at first remember they don't have any money. Stuart's like Uh the way I'll pay you is um You call, you know, like all nerds at this time, he has a 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. Raised a commune and somehow never uh never left. Yeah. Amazing. Amazing. So Once Cal is on board.

24:01 Things just fly. Very quickly. So it was December two thousand three when they decided to build Flickr. By February two thousand four It's ready. And so like I mean, we're talking sixty days or less.

24:14 Uh what would that be like? Less like forty five days. Yeah. I mean you have some existing infrastructure to build it on'cause you know, Game Never Ending had servers and you know, the ability to bring different people together on the internet. So like there was infrastructure there, but it's not like there was cloud services. No. And no development frameworks, no no web two dot oh technologies. This is the invention of web two dot oh technologies here. When we know from the name, I mean every web two point oh company after them copied the no e and Flickr. Yeah, indeed. So it's now February and Stor's like

24:47 Man, we're ready to go. Like Let's ship this thing. And the rest of the team's like, Uh shipping the thing and starts like Yeah, I'm gonna go uh go talk at this conference O'Reilly's putting on uh their e tech conference in San Diego. Great name. Yeah, rather than talk about the game. I'm just gonna launch Flickr. Like we're gonna do it. I'll have a stage and so he he does. He announces and demos the the team works through the works through the night the night before the presentation. They launch Flickr on stage at the e tech conference. And and remember All the

25:18 bloggers that you know the blogging is sort of like this is where they it all come together. They're part of this community. All the bloggers there, people are just Blown away. Uh they had never seen nobody had ever seen anything like this. A web service native in a browser. Where you can actually Do something. Useful. Like it's it's an actual application built on the web. And you know, if you think about the web to this point, it had been mostly

25:44 sort of unidirectional content. Like they were flat websites. You would go, you could potentially see some pros, there was uh images that were uploaded You know, we had the advent of uh e commerce with Amazon having, you know, successfully navigated through the dot com bubble. So you've got the first place where you can actually start to buy things, but there's still not the notion that we have today that websites are interactive. Yeah that I can upload things, download things, interact with other people. Yeah. That's not on the actual site itself. You needed to download something like Napster in order to do that. So the press is is blown away there and and Some mainstream press, but even more importantly, all these other bloggers that are there. And so the blogosphere ends up being

26:29 The perfect early adopters. for Flickr because all of these people have blogs. Most of them run on Blogger. So at this point Google had already bought Blogger Ev Williams' company. But Blogger didn't have native photos. uh in it. And so what does Google and Blogger do? They see this and they're like, Oh great, use

26:50 Flicker for photos if you want to host photos on on your blog. And it just starts to spiral and This is this is like the Google of yester yester year where Rather than saying, Oh, we're gonna clone that into our product. It's oh cool, that that's great. Then we don't have to build it, we'll just put a button to make your thing work. Sure, you can have some users. Don't be evil days of the internet. Yep. Or I would say the the post dot com crash. People had seen the evil where we're gonna be idealistic once again. Um And so so Flaker really starts to take off. Uh they quickly get a lot of M and A interest. So the Stuart's plan is coming true. Google, Yahoo Ask Jeeves. Remember Ask Jeeves. Three, man. The big three. They all want to buy.

27:35 The company. Yahoo becomes the most serious and and moves the fastest. And by the end of two thousand four The deal is done. And Flickr is acquired by Yahoo. within you know the I don't think I r ever realized how short the independent life of Flicker was. It was it was a brief Flicker in time.

27:56 Oh boy. Okay. Okay. Okay. I'm sorry. I'm sorry. By uh so by the end of two thousand four, the deal is done, Yahoo acquires Flickr for, quote, between twenty two to twenty five million dollars. It's a pretty narrow range. Like I feel comfortable not knowing the exact number. Everyone high fives and celebrates, but there's just One catch though. Yahoo uh is is paying them all this money, but they want the team in addition to Flicker. And uh they put a three year earnout. So There's no going back to game never ending right away. Yahoo moves them all down to San Francisco. Uh the plan is that they are going to continue to build and um and grow

28:37 Flicker within Yahoo with all of the resources and reach that Yahoo as a major internet company. can give them. Now David, you know as a a person who does a podcast on the Internet about technology acquisition, that's kind of that's how it tends to go, right? You have this amazing resource and engineering pool and brand of big company. You have this wildly disruptive product that gets bought. Surely it's a match made in heaven. Surely. Well actually today

29:03 Depending on who the acquire is or how much they listen to acquire, there might be a good chance that That could be the case. But back in two thousand four and with Yahoo at the time Yeah, uh No. So uh

29:16 The team gets there and it is um Not a match made in heaven. Oil and water. Yeah, let's uh let's just leave it at that. Stir talks about this a lot. He says a couple things. One Just the decision to sell and do that, you know. Obviously that was the plan from the beginning with pivoting into Flickr. Um But even more than that, you know, everybody he knew

29:36 All the you know, people advised him and they were like Yeah, sell the company. Like, of course, man. You're like a couple of months in. Yeah, you got this traction, like you're not going to raise a lot of money. There's not a ton of employees like you guys are gonna get rich eventually from the world. Rich. Like this is it. This is the dream. Like, yeah, twenty two to twenty five million dollars, hit that bid. And um and and it wasn't even a question. Um But now of course, like nobody would ever do that. Like never, ever, ever would somebody do that. You know, Instagram selling for a billion dollars to Facebook. Like people wouldn't even do that. You know, if you have a Tiger by the tail like this. You know, you're gonna be flooded with

30:11 offers to invest from venture capitalists, everybody telling you not to sell, build go big, you know, build a big independent company. N none of that existed back then. So it was like I don't think the thought even crossed their minds once not to sell. Two, then, you know, he talks about the experience at at Yahoo and um I think it actually, you know, as we've I think seen so far in this history. Stuart has a lot of

30:33 raw potential. Certainly creatively, but also on the business and and leadership side. Yep. And while I think his time at Yahoo was oil and water. Like he says you know, he learned a lot there too. Like he saw how a real big company is run, uh for better or for worse. You know, how and he worked for Brad Garlinghouse, um, who was a really talented uh executive there at Yahoo. I mean, these were the days like Jeff Wiener was there. There were a lot of great folks at Yahoo. Um how long did Stuart stay, do you know? So he stayed so the whole team was a three year earn out. And they stay they stayed for the three. The whole team stayed for the three year earnout, but right at the end of it Everyone else leaves. Uh Katerina leaves. That was a big deal. And um so we're now in two thousand eight.

31:15 And folks might remember these are the days when Yahoo is a mess. These are the the um Uh the Carol Bart's days and everything. Oh my gosh. And Kara Swisher is all over the company. This is like the heyday of Kara Swisher. Uh and uh Take down after take down Oh just blog post after blog post on all things D. Just painting a picture of what's going on and and internally and it's not pretty. And one thing to remember about why Katerina leaving was such a big deal was because even though Flickr was a photo sharing website, uh everyone who was on it felt like they were a member of the community and like it was a a lifestyle they had opted into and and Katerina and my sense to it, but uh Katerina was a Largely the public face.

32:00 of this is the community that I belong to and these are the types of people that, you know, I love to leave comments on their pictures. I love it when they leave comments on mine. You know, I think there was a social graph. There was an amount of following and friends that you could have on there. And so It was like you joined a hippie commune and your your leader left. It was more than a hippie commune. I mean Stuart and Katerina were on the cover of Newsweek. Yeah, I shouldn't I shouldn't try and belittle that. Yeah. No, but I mean it was the same ethos but it was it was this was like big. This was um This was really mainstream, uh, especially among younger demographics. All of this with everything going on at Yahoo, like they were really upset. And so they actually convinced Stor uh so

32:44 Jason, Eric, and Katarina all leave as soon as the airnat's done. They convinced Dort to stay a little longer. Um so he does. He stays a few extra months. Ultimately though, he can't take it either. And so in the summer of of two thousand eight, he leaves and uh he writes Brad his boss makes him write a he's like dude you gotta you can't just leave you gotta write like a resignation he writes something like Nice, like the company's in all this trouble that they're like, talk about your time here. And Stuart writes this hilarious resignation memo that's still on the internet, uh, where it's just complete like absurdism. He talks about how uh Yahoo is like a uh a metals, you know, production company and tin is uh the tin the metal is in Stors blood and he joined to like mine tin and now they're doing it's r it's absurd. Uh I'll look it up after the show. Yeah, it's funny. We'll link to it in the show notes. Anyway

33:33 That is the end of Flicker, uh, and the end of Stuart's brief internment at Yahoo. Unfortunately though, and and sadly, it's also the end of Storm and Katerina's marriage. Right after Storyt leaves, uh the marriage ends. Uh Katerina 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 Ubay and Katerina also becomes the chairwoman of Etsy.

34:01 Um really talented and Great career she's had since. Stor though, he's kinda like. Well I grew up on a commune. And here I am. Yeah. I'm I'm done. He he needs to just take a break. He leaves San Francisco and he moves back to Vancouver. Uh Take some time off through the rest of two thousand eight.

34:22 Um, but by the beginning of two thousand nine, you know, the other the other folks, Cal and she's got timing, by the way. Like both of these companies are started in the rubble of financial crashes. Totally. Totally. Um yeah, it's beginning of two thousand nine. The world has fallen apart. Eric and and Jason and Cal.

34:43 Uh they've they've all left Yahoo too. And and remember, you know, 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. And they're like case story like We're ready to get the band back together. What's next, man? You're our fearless leader. And so they they come back up to Vancouver and

35:05 And they say, You know? Game never ending. The time wasn't right. It didn't happen the first time, but it's now two thousand nine. 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's the time to to take another shot at this. So they do. They start uh they start the company. Once again, it is a different company name from the game name. Uh they call the company Tiny Spec.

35:34 Uh where that the four of them start. And they call the game Glitch. I don't know if it was Glitch in the Matrix or exactly where the where the name came from. But They see World of Warcraft, they see how popular that is. They say Once again, much like with with Flickr in the original vision for game never ending, we can do a lot of what what World War Craft is doing. We can do it on on the web natively in the browser, and then people don't have to uh go buy a disc because people are still doing that at that point in time or or download the game. They can just play within the browser.

36:04 But again, like we're we're idealists, like, you know, the thing that kinda sucks about World of Warcraft is people are killing each other. You know, it's all about violence. Like what if we made what if we made this game glitch about nonviolence and let people, you know, create and collaborate together. Yeah, sounds sounds great. Um And Stuart uh and and team again, they're pretty famous at this point. The investor community is also like Yeah, that sounds great. Here's a lot of money. Yeah. We saw what you did last time. The kind of what you're doing is irrelevant, but it sounds like a sufficiently large swing. We're in. So right now I will say I would kill to be in on Stewart's next gaming company. Absolutely. I don't think there's gonna be a next gaming company. I'm calling that now. Um So they raise one and a half million from Angels right out of the gate, including uh super angels at this point, Mark Andrews and and Ben Horowitz, who are just in the process of starting their firm.

36:59 And Excel also participates in this angel round. And it is H Tons of people engineers want to come work for them. uh people want to give them more money. In 2010 they raise a series A led by XL five million dollars.

37:13 In August of two thousand ten, Kara Swisher uh flies up to Vancouver. We're gonna link to this in the show notes. This is amazing to interview stories. This is during her flip cam uh era where she was taking a flip cam around to tech companies and just like impromptu video interviewing people. This was yeah, like I remember this because 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. It's all'cause of Kara. Um so she flies up to the interview store and uh you know sees uh get an early look at Glitch and Man, it's crazy. You can understand why nobody played this thing. Twenty eleven, it's still so hot. The company raises another almost eleven million dollars from the firm Andreason Horowitz. This is now seventeen, eighteen million in the bank for a thing that hasn't shipped and is Uh a little suspect. Nonviolent MMO. Interestingly though. they you know, the team and story they they're such celebrities. They have reach really across

38:14 America across the world uh for engineers and designers who want to come work for them. And so they they're like, Yeah, like we're in Vancouver, but we'll set up a remote team. So they have employees, they have employees in New York, they have employees in San Francisco, in Vancouver, all over the place. Um, they end up staffing up to about forty engineers and designers working on the game. Um and it becomes pretty Hard to Collaborate. These are pre Zoom days. And uh pre anything days. Uh they need who c who knows how else you could communicate online with a remote team. They realize they need some some tools to to help them, you know, get work done and collaborate remotely. So they turn

38:53 to given the you know, hippie roots, uh hippie internet roots of of Stored and Team. They turn to the natural uh solution to this problem. Internet relay chat. Woo IRC, baby. It's nineteen eighty eight all over again, and uh uh for folks who don't know IRC, it's a early internet protocol that is used to uh allow people to connect to a common server and using a terminal based interface basically have chat rooms where you can uh, you know, directly message people, you can talk in a room about a designated topic, and there can 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.

39:35 You lost me a connect to a server. Uh And that actually was the point. Uh IRC was super cool and um still is still is widely used. Still is super cool and widely used and has this really cool concept of of channels that are persistent where you can have discussions around topics that are independent of of users, but uh so uh the team at Tiny Spec, they start using it and they're like, you know, we could build some just 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 we're hiring. They may or may not have used IRC before, certainly the onboarding process is is difficult. So they build a bunch of tools. They internally call the system Line Feed. And it really, you know, helps them be productive. So productive that Finally.

40:26 Two plus years after starting the company. sensing a theme here. They finally launched Glitch at the end of twenty eleven. Big, big, you know, press. You know, 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 can venture capital firms. And it's a flop. Oh yeah. I mean, Nobody uses the thing. Hundreds of people flood in to to try it. Literally hundreds of people flood in to to to use the thing.

40:55 So Very quickly they launch in September of twenty eleven. In November they dial back into beta. Never never a good sign. I think Stuart branded that uh they unlaunched the product. Exactly. Exactly. So they keep tinkering and Releasing and pulling it back into beta and re releasing and and trying to make this thing work And it just

41:15 Doesn't beta never ending. Beta never ending, indeed. And so finally A year later, one night in October twenty twelve, they've been Pounding on this for a year. Stuart has another sleepless night. I don't think he had food poisoning this time. He's he's got all these people, these 40 people that depend on him.

41:34 And he's like, Man. This is just not gonna work. Like it's I I I know We're supposed to keep trying. We still have money in the bank, but

41:44 But I've lost faith. It's it's done. And uh he he talks about it. He said it was like the feeling that you get when um you know you you kinda you know you have to fire someone and you just like you you don't want to, you want to try and make it work, but but that thought, that feeling it's just constantly like in your stomach over your mind. And he said that's how he felt about the game and the and the and the company. So he wakes up the next day and he writes an email to the board. And he says quote. Yeah.

42:12 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. And uh The board's like.

42:27 Yeah, I mean you're right, like w we were thinking the same thing, dude. And so uh Stuart then after that he calls an all hands meeting from Vancouver. gets the San Francisco and New York teams and all the remote people on the phone and He just bursts into tears and he starts crying and he says Guys. It's over. You know, like no and nobody on the team saw this coming. They still had plenty of money in the bank. They thought they were working at this hot company.

42:52 And uh and here start is saying I'm calling it. I've lost faith. We're we're done. And so they lay off all but The four co founders and and they keep four employees.

43:04 So it's like he's he's just devastated by this. They do everything they can and they get jobs for everybody else. I was gonna say importantly, and we'll see this this come back to be a huge asset for the company later, the way that they did these layoffs was incredibly humane. And the way that they took sort of took care of everyone The sentiment. leaving was I would one hundred percent go work for Stuart again, even though this thing completely, you know, fireballed. They take a few months and um And and literally the mission is get everybody a job. So they set up a website called Hire a Genius and uh and they create profiles for all of the former employees on the website. It's pretty cool. It's pretty cool what they do. They also upload all of the code and all of the art and design from Glitch to uh a server and put it in the public domain. So they're like, We've built all this, we want it to exist. Oh, I bet that's been like I don't what's the visual equivalent of sampling? I bet it's been used in other games. Yeah, I bet I bet I mean it's it's it's up there. Anyone anyone can go

44:04 Grab it, use it. Um do whatever with it. It's still there. And and it's funny on the on the sidebar of the page that it that's hosting it. Um you know, it says it's about Tiny Spec and about glitch, and then there's like Tiny Spec is working on a new project. Uh it's called Slack. Check it out. It's pretty funny. They haven't updated the page in a while. All right, listeners, now is a great time to tell you about a longtime friend of the show, Vanta. AI has scrambled the whole security picture.

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46:11 And just tell them. That Ben and David sent you. Before you t take it back to the story, so you mentioned that email that went out to the the board. So John O'Farrell forwarded an email to Mark Anderson and the whole Andreessen Horowitz team. John O'Farrell was the board member for the partner at Andreessen Horowitz. Yep, their board member. And uh Mark Andreessen presciently replies to uh I I think it's the whole Andreessen Horowitz partnership. It is what it is, dot dot dot. If history repeats itself

46:41 And they come up with the next flicker. All will still end well. Mark. Well, Spoiler.

46:49 They don't come up with the next flicker. No. No. They come up with something about A thousand times bigger? Sounds about right. So far.

46:58 Could be even bigger. in my notes I I often break these uh the sections out into into chapters. This chapter is called The Phoenix Rises. So they still have five million dollars left in the bank and and the reason that they kept four of the employees and the four co founders stayed on together is They they wanted to do something. They felt like they've been through this experience together. They had this incredible core team. And and Stor has this quote, he says, When you go through a trauma together with a group of people, you get bound together and you just wanna keep working. And like it's so it's so true. I can I can totally relate to this. And what's super cool is they end up eventually being able to hire back a lot of the people

47:37 That they laid off, which is cool. Which is great. Um So What are they gonna do? Well, this is remember, this is the end of twenty twelve. Something else had happened in twenty twelve that um not many people outside the Tech world.

47:52 But lots of people in the kind of engineering world um were aware of. Uh there's a company called Atlassian. Covered on a previous acquired episode. At Lasian in twenty twelve in March acquired a little San Francisco company called Hipchat.

48:08 Hip chat. All the rage. amongst developer teams. Oh yeah. 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 hip chat. Yeah. I mean it was like uh Uh, this will foreshadow what becomes of Tiny Spec here, but almost like a park company's engineering teams were like, Yeah, come work for us. Like we're a hip chat shop. Like it was like, Oh yeah, like these guys get it. And um cool, they're using modern communication tools. Indeed. And so hip chat had been launched by uh a bunch of young guys and um

48:40 They launched in twenty ten. Within four months they had a thousand companies. that we're signing up mostly dev teams using hip chat. And um very self serve way of uh Sounds like it. Well, and then when they get acquired by Atlassian, and of course the DNA of Atlassian is developer focused tools self serve, no sales. Uh famously we talked about in the Alassian episode. There are no sales people that work at Atlassian. It's all just organic.

49:05 adoption by mostly development teams. That really turbocharged hip chat. And of course As we also talked about on the Atlas in episode, the major investors, not uh venture capital backers, but they'd done secondary deal in Alassian were Excel. And of course, who is the largest shareholder in Slack.

49:22 Excel. Interesting. Now We don't know for sure that all of this was on Stuart and the team's mind as they were casting about for what to do next. But uh It's important to note that this was happening in the background. Like the moment was arriving for modern chat based communication software. God, we I mean pulling forward a tech theme here, uh 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. And so multiple parties arrived at it simultaneously. I mean you think about ride sharing, you think about social networking, think about the Instagram acquisition and all the other Instagram like companies that started right around that same time. And famously Andreessen Orowitz, which had invested in the seed round of Bourbon, which became Instagram.

50:06 They did not invest in the series A because they were in Pick please. They were in Pick please and they backed Pickple's. Man. And the interesting thing about this is sometimes it's driven by a technology like mobile's taking off, cameras are finally good enough, it seems like mobile photo sharing is gonna be a thing. Other times the the line is less clear on the technology, that it's more sort of a social uh moment has arrived where people are comfortable with where technology is. So you can use technology that's been available for several years to to make something happen where there's a cultural understanding that that people are ready. And of course

50:45 I'm sure Slack and Hipchat had to use uh like there had to be some sufficient advancement in Ajax, or I don't know if people were still calling it Ajax at the time, but the the ability to have web pages that refreshed without refreshing the whole page. But it certainly wasn't like the iPhone shipped and then it made possible this m you know multi party text communication thing. Well I think what what we've seen in our Last couple of episodes here on Acquire, and we're gonna see here. The really truly Huge

51:14 great companies get built at the Venn diagram intersection of a technology shift. A cultural shift and a business model shift. And Hip chat. hit the technology shift and the cultural shift.

51:26 They didn't hit the business model shift quite right. And so we're gonna talk about what Slack does here now. So Tiny spec they realized, man, we've got this tool line feed that we built around IRC. The interface is cleaner, it's more modern, sort of like hip chat. More importantly, it's really easy to join. Like if you wanted to join an IRC channel, you know, you had to like connect to the server. Like no normal human is gonna do that. And so there are all these benefits of line feed, and they're like Kind of within a week after they got the team jobs, they were like

51:54 Yeah, line feed. We're gonna do that. Let's make that the product. Most pivots take much longer to arrive at the end. It felt like an eternity that we were trying to figure out what to do. And he's like 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, Yep, we're doing this. Wow. Um so they go to the investors, they go to Excel and Andrew Snow Horwitz and they're like

52:15 We're gonna build out, you know. Enterprise uh well, not enterprise, but team tech communication. And you know, now in in the word enterprise wasn't uttered out of Stewart's mouth for a while. Yeah. You know, the the story now is that the the investors were like, Oh yeah, great, we believe in you, like it's flicker all over, we'll do it again. I I think the reality was a little more nuanced than that. Remember, Excel is largest outside shareholder in Atlassian at this point. So I think they were like More like yeah, okay. Fine. But like you guys are doing Yeah.

52:49 Productivity software? Like Okay. But fortunately they say, All right, you know, do it. We'll let our we'll let our money, keep the five million and and see what you can do. They start working on it. And uh they have to decide what to call it. Then the team is like Line feed. That's that's not accessible enough. Uh the IRC of names. Exactly. Exactly. Stuart comes up with a name one night and he's like, I have it. We're gonna have an acronym For the company. Uh SLAC. I love the word SLAC. And the acronym is Searchable Log of All Conversation and Knowledge.

53:23 S L A C K Which fortunately they never used in any marketing material and was just known by the And so we'll link to this in the show notes. Uh he he posted uh a few years ago on on Twitter the actual like screenshot of the conversation with the team on Linefeed about this. And he he's like telling everybody his idea. And I think it's Eric is is it's like man, dude, that's that's not good. Like How how similar actually I haven't clicked this yet. I'm now clicking the link. How similar does this actually look to the Slack uh UI? Metal lab had not been involved yet.

53:55 Oh yeah, because this is literally just text. Yeah, but mine feed internally, like it was They'd made joining uh easier and they'd done like nice improvements, but there's no there's no nice UI on top of it yet. Um so it really was like Having a pretty big vision to see that you could turn this into What would become Slack.

54:17 So the team hates it. Stuart says, Oh, it to sell him, he says, Oh, it's just a code name. Like, Oh yeah, we'll just use that for now. Yeah, we'll just use it for now. And then Eric says, Ah, cool. Yeah, right. Again, the Stuart, you know, he's he's um Uh Very creative. He is, you know, he's got like real management and leadership chops. You know, he knows how to broker influence. Yeah. So he's like, Yeah, yeah, just a code name. Well, then he goes off and he's like, All right, well, I'm gonna see what the what the domain name uh is of if this is available for Slack.com. Turns out he the Slack.com is registered to an electrical engineer in Wisconsin who is using the domain to host pictures. Of his cats.

54:59 I mean, that's gonna be a hard thing to pry off a guy. If by heart then you mean very easy for like a decent amount of money. I mean I wouldn't sell, but okay. Yeah. Well yeah, of course I would I would be no. Course I would sell. They get the domain name, Slack becomes the name. They build out the product. Within a couple short months.

55:18 Once again, you know, echoes back to the Flicker days. Yep. Um they bring on, really importantly, Metal Lab. And aren't do I have this right? They're based in Victoria. Victoria based company. I finally just put that together while they would be the Yep. And Metal Lab is a UI design firm. really, really truly world class. Uh based on Victoria. They had done some cool productivity apps of their own. I think was it Fl flow they they had a a GTD or like a to-do list tool at one point. Ah is competing with you and sees the day. Yeah, I th theirs was very nice. Maybe not quite as nice. So they bring on Metal Lab to redo the UI and The UI is so different from anything anyone's ever seen. These guys do tiny now, right? Is that that that's the same group? It's a uh Basically small cap private equity shop that owns really, really design focused, beautiful, cash flowing technology products. So like Dribbble. They bought Dribble. Ah, cool. Yeah.

56:16 Cool, cool. Everyone, I assume, knows the Slack UI because hopefully you're in our acquired Slack. Uh if you're not, come to go to acquire dot FM and sign up to join. It is accessible to the normal person to a degree that, you know, even hip chat. Can't come close to the you join and Slackbot welcomes you, and just by interacting with Slackbot, you get a feel for how you're supposed to use the product. Yep. So mid twenty thirteen, again after just a couple months. They're ready. They're ready to take it out into the world. And they go out to some of their friends at other companies try and convince them to try it.

56:48 And it turns out uh They had kind of a hard time.'Cause people are like What is this? Why should I use it? I use Hipchat. Like So I have I have my own story about that. I mean when this launched and I remember seeing on like hacker news and this was like a darling of Silicon Valley, check out this new cool it's the new way to work. I mean, people were billing it as like this is the new way that teams work together. I'm like, Okay, well I gotta give it a shot. And I'm working at Microsoft at the time. And I go, I sign up for it, I make like whatever my t u obscure team name at Microsoft.slack dot dot com was. Like I'm sending it around and

57:19 uh people are A reticent to join. I'm on link. I use Yammer. Yeah. It's like what is the So it's it's Link, like it's it's replacing chat, or is it replacing email? And I'm like, oh, it's sort of in the middle. It has all these integrations, but like it's actually Being the first person trying to sell it to your team, if your team wasn't already using some type of sort of uh ever persistent chat, is actually kind of a hard thing to get people to understand why it would be useful. Yeah. So through the summer, they work with a couple, you know, f friends, uh companies to land this messaging and they they figure out they get really good at explaining

57:55 Why 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. So the first decent sized company they get to use it is Ardio. Um Ardio's about a hundred and twenty person uh organization. They sign up. First it's the engineering team that starts using it. Then it starts to spread and pretty quickly the whole company's using it and they're addicted. And from these RDO and a couple other companies What happens is the companies start evangelizing and all the employees of the company start telling their friends at other companies, hey, we've switched to this thing called Slack. It's amazing. It's changing the way we work.

58:34 And that starts to build a ton of buzz. And so Wh which I'll say is interesting th it's that popping out to playbook for a second. It requires a word of mouth, not usage, because there is a intra company network effect with Slack where you're inviting all your colleagues, but there's not a cross company network effect.

58:54 Whereas you take the flip of that, like Zoom Zoom there's a cross company network effect. Cause to communicate with someone at that other company, you need to click the Zoom link to join and then you're 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 grown within my company that now I go and tell somebody at a different company about it. And importantly, we'll we'll talk about this in a minute. Slack and and store it in the team like embrace this fact and they make

59:18 They realize that Twitter is their friend here. And people Tweeting about how much they love Slack and then the Slack team amplifying those tweets is a big part about generating buzz and and and building up demand.

59:33 So they officially launch Slack Does in uh preview release to the public in August twenty thirteen, again, less than a year after making the pivot. Um On the first day. Eight thousand companies. Sign up for the wait list. I mean, this is a crowd. This is how much buzz had already been building, how much of a celebrity sort of tip. Yeah, exactly. And then within two weeks, there's fifteen thousand companies that are signed up or teams that are signed up on the wait list to use it. They pretty quickly

1:00:04 launch paid. And I alluded to business model in a minute a minute ago with the paid plan, and we're going to talk about the frame model, within a couple of weeks of launching paid, they're at a million dollars in ARR. And like most SaaS companies, you know, it takes a year two years to get to to get to that level. They're there in weeks. By February twenty fourteen, they have ten thousand new users signing up a day. These are not companies, but users within the companies signing up a day. They have a hundred and thirty five thousand paying Users.

1:00:36 And it's even at large enterprises. So at this point, That's what, like ten bucks a seat? No, five bucks a seat. It's uh seven or eight bucks a month. Or or eighty doll eighty dollars a year or Eight dollars a month, I think. And what's cool is they're they're not trying to target the enterprise yet, but they have all these huge organizations, they're teams that have organically Adopted like you did at Microsoft.

1:00:58 At this point in time in February twenty fourteen, there are nine different teams at Adobe. That are all paying users of Slack. Whoa. Um it's funny. You could 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 ingenious user friendly feature that actually exposed information companies may not have wanted to at the very beginning. I remember uh trying to sign up with an email address, because the way that they made sure you were at the company is by looking at your domain name. So I'm like, okay, like Ben at Apple.com. Like let's see if uh they'll let me sign up as an Apple employee and join the Apple Slack. And of course it doesn't, but what it does say is

1:01:38 Hey, your company already has eight teams using Slack. Here's the name of each of those Slack. And I was like, Oh my God, like I'm learning the names of teams within. What is P forty two X? Project Purple? Uh I no, I'm making something up, but yeah. It just goes to show you though, like how well thought through it was for okay, someone at a company is gonna 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? Cause 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. Yeah. So on the back of this, April twenty fourteen, they raised forty three million dollars in a series C led by Mamoon at uh Mamoon Imit at at social capital, um, who's now Clani Perkins, which is gr an amazing venture investment. So let's take a step back here.

1:02:39 Technology shift, cultural shift, these are happening. That's the background for for Slack and and Hip Chap before it. But the third piece, the business model. What Slack did that was so brilliant and is just the the parallels to Zoom are perfect is they nailed How to structure

1:02:58 The freemium model. for this product and service. So hipchat, when hip chat launched and and everything else, certainly all the Microsoft products and whatnot in the in this chat based collaboration space. The freemium. gate was number of users. So hip chat was free for up to five users. Once you had more than five users, you had to pay.

1:03:18 And of course that makes sense. Like if you're taking a you know enterprise approach to things like yeah, you're charging on a per se basis. Like you should, you know, let people try it a little bit. But gate the gate the real value. You know, they came from the consumer world. They came from the gaming world more than that. And when you're trying to get people to use to play games online and and a lot of them are freemium. You wanna encourage usage, right? You wanna encourage usage and you wanna show as much of the value of the product to as many people as possible without having the gating item of paying.

1:03:56 So And if if you think about the Freemium gaming world too, they sort of notoriously only monetize one percent and the vast majority of people who are using it are using it at basically its full functionality, but never paying. Yes. So what do they do? They set the freemium gate. Not on number of users. Slack is free, as evidenced by the acquired Slack. Yeah, there's we have thousands of people in there. Not paying a dime. Not paying a dime and we probably never will. Um

1:04:25 And it's full of that Slack Believe me, it's w it's good marketing for Slack. But it's full it's full featured. It's the full Slack product and The pay gate is for the number of messages in the recent archive that you can search and access. So a a relatively smaller feature But if you're a workplace, Oh yeah, I can't imagine not having that at the office where it's like we definitely talked about that in Slack like eight months ago. What was it? And and uh certainly the 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.

1:05:03 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. So it's a really important feature. For work. Teams to be able to do this. And so Slack uses that as the freemium gate. And that's Huge. And then I think there's some other more sort of admini type features uh that that that requirements. And what number of integrations that you can do. Um you're capped at 10 integrations, third party integrations uh on the free tier. Um so uh other important stuff. But but the main thing is that

1:05:38 that they allow People and teams to come on for free and get real work value out of the product, the full product, without having to pay. And and that is just super, super critical. And nobody was thinking about enterprise monetization in this way at the time. And and honestly, it it's I I fully it is because of the background.

1:06:02 of Stuart and the team that they brought this approach to the market. Like if they had got nobody from even Atlassian, but certainly not Microsoft or or you know anywhere else was going to think about Premium tier. This is how we structure a a productivity application. And this is this is another good thing that 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. Yep. And and to be able to

1:06:37 you know, say, uh what would it look like if a team of idealistic game designers you know, build productivity. Yeah, like of course it's gonna look different than a uh a shop like Atlassian that's only ever built enterprise collaboration software. An and 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. I mean there's UI reasons why you know Slack appealed to uh non-engineering teams and Atlassian sort of always said, Oh, anyone can use hip chat, but like if you really They that was more lip service than it was actual product work.

1:07:17 But Slack was truly from day one designed to be something that anybody in the organization could use and not just engineering teams. Well and I think it's also For Other teams within organizations that weren't used to this category of software using anything like this. W the way they structured the freemium model

1:07:38 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 have tried it. You know, it just uh By removing that barrier, and and they were really thoughtful about this, like and s and Stuart from the beginning was talking about like they were creating a category. when you're creating a category You need to take this approach. Yeah.

1:08:09 Yeah. Um by the way, the New York Times newsroom. now uses a home rolled Slack bot that they created. to manage the approval workflow for the push notifications that go out. No. At one point I tweeted something like what a killer job to a be the person that approves the uh New York Times push notifications and a New York Times uh 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 and edit and make suggestions and then submit it for approval into the queue. That was so cool. I think we talked about on the LS in the episode, but that was the moment for me and I think a lot of people in tech when

1:08:45 We're like, Oh wow, the New York Times newsroom is using this. Like this is This is way more than hip chat. This is something that is like has the potential to be as big as as Slack has become. So on the back of this. At the end of twenty fourteen. They raise

1:09:01 a hundred and twenty million dollars at a over a billion dollar valuation led by G V and and Kleiner Perkins. And It's just off to the races since Well well, since day one when they launched out of out of preview. At the beginning of twenty fifteen, they're adding a million dollars in paid ARR every month.

1:09:20 And it growth just keeps accelerating from there. Super interestingly, in July twenty eighteen, we uh we didn't do an episode on this, but we we could have done a follow up. Slack. ends up buying hip chat. So within Atlassian, Atlassian had rebranded Hipchat to Stride. I think wasn't that a different product? Yeah, they rebuilt the product and then they sunseted Hipchat. Also can you come up with a name that's more different than a couple letters from Slack? I mean when that happened to people, you know, the Slack must have just been high fiving one another. Like we've won, it's over.

1:09:58 And and indeed, probably one of the smartest things that Lasian has has done is they recognize that quickly too. So they sold essentially those users to Black. In like one of the best deals in history ever negotiated. Stuart managed to get all the users What was the like equity arrangement that happened? I don't remember exactly how much equity, but um But yeah, Alaskan got a got a small amount of equity in Slack for it. Yeah. I mean that that that was a highly triumphant moment for uh Stewart as a negotiator. Probably Excel help there, given that they were major shareholders in companies. And then

1:10:35 Late twenty eighteen, following that, rumors start circling that Slack is Considering A D PO for their public offering. Much like uh uh Spotify or you know just before them and uh thirty years before Ben and Jerry's Indeed. Uh Barry McCarthy course we we referred to Barry at the top of the episode, acquired superhero, former Netflix CFO, instrumental CFO in Netflix's history, and then CFO of Spotify and engineered.

1:11:03 the their direct listing. Yep. Um Inspired by Ben and Jerry's. And uh I I think not at all, but it is a fun piece of trivia. Yeah. Super fun piece of trivia. Maybe maybe Barry had a fever dream one night from eating too much Ben and Jerry's. Yeah. Let's real quick t go through what the differences are in an IPO and a direct listing are'cause I think it's worth David, you and I have talked about this a few times. Listeners, we are extremely excited about the future of direct listings. And I think at least I personally feel like it is a more modern way to go public than a a sort of IPO process that just has tons and tons of baggage to it, and not every company can do it because

1:11:45 Well, actually let's talk about why not everyone's the IPO process was Architected for a different era. When venture capital was a cottage industry. And now venture capital and private market financing's Are

1:11:59 An enormous global highly professional worldwide industry with that money managers of all sizes participate in. And so companies like Slack can raise, you know billions of dollars in the private markets. Yeah. And and grow to have a global brand. grow to have a global brand in a way that just wasn't possible before. So you needed when you were going public You needed to do. an initial public offering where you were selling stock doing a financing event to do that because you needed that was your

1:12:27 The IPO was your way to raise real growth capital. That's no longer. necessarily the case. So for companies like Slack, Honestly, like Zoom, although Zoom did a traditional IPO. Um but companies that are profitable that don't need to raise uh profitable or close to profitable, um that don't need to raise huge amounts of We should be clear, Slack is not profitable but does have eight hundred million of cash on the balance sheet. And is is

1:12:52 has great unit economics. Yeah. Capable of becoming profitable. Making a choice to invests significantly in in marketing. Um so they are not profitable at the moment. They don't need to raise that money. A DPO has a lot of advantages. Yep. In a DPO the the only

1:13:10 shares that start trading are all the existing shares. So there have to be selling shareholders rather than, you know, there's now ten percent of new liquidity created by us creating a bunch more shares in the company. So there's no dilution to the company. There's no DPO. Yep, no dilution. Of course, because of that, they don't actually raise any cash. It's just investors and money and employees taking money off the table. But there's you have to imagine there's Well there's and there's one other big benefit for the ecosystem as a whole and for employees of the company is there's no lock up. Yes. When you do the Yes. So I was gonna say the the sort of but to this whole thing is gosh, it seems like there might be a lot of volatility involved in this. So There's no lockup period. Employees can sell right away. Great benefit to employees, maybe a little bit dangerous to the signaling for a company. So How do you manage this? Well one thing is

1:13:59 And 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. Uh it's it's uh The investment bankers are never out of the process. Yes, they they move pure law of thermodynamics. Yes, they move from a role that is underwriting, which is saying, I commit to buy fifty thousand shares in this range that you have quoted me at, you know, approximately this price uh the night before the IPO before it starts trading. Maybe I'll get a pop. You know, the it it's 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, well 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 and who's not and sort of at what price and we're going to cats. Yes, we're gonna come back to you one with a guidance of what we think your suggested initial trading price should be.

1:14:57 But again, trades just start happening instantly and there's a sort of market making function that happens there where they're gonna trade where supply and demand intersect. And this is the real crucial part of of sort of what they help you do there is say, look We talked to these set of investors. each one of them have committed to us, your advisory firm, to selling uh this number of their shares. So we can guarantee when you start trading that

1:15:23 you know, I don't know if this is true or not, but Excel will be selling twenty five percent of their shares. So that will be available. There's nice liquidity in the market for your new shareholders to have something to buy. It's organized. It's not just chaos. Yes. But it is, you know, much more sort of uh you can think of it as like algorithmic rather than this previous process of Uh, you know, lick your finger, put it in the air, see which way the wind is blowing and say twenty four shall be the amount for this chip. That the the IPO prices are set based on order books that are built during the road show process. And but but another important benefit for Another important benefit for the DPOs versus the IPO process is if you are a company that has already raised capital

1:16:10 Privately from many of the traditional public market mutual fund hedge fund type 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. They already had the exposure they wanted. Their incremental appetite for new shares was relatively low. They wanted to be selling, not buying. Yeah. Um and so 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. Yeah, that's the other thing. So to do a DPO, one, you have to not need the cash like companies like like Uber and Lyft do. Two, you need to already be a brand that doesn't need

1:16:56 a road show 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. So Slack, you know Spotify it made sense because they were a consumer company. One of the magical things about Slack is they've managed to turn this I mean it's enterprise software and it it has a consumer like brand to it. And it has an awareness where you don't have to go and do a whole bunch of marketing around, you know, here's why you would want to buy this stock. It already had enough excitement around it. I mean The story has, I believe, multiple times been on the cover of Newsweek. Why is Newsweek relevant?

1:17:39 Like Well it used to be relevant. It used to definitely be relevant. But it's a good sign that you know people know about this. So well in April of twenty nineteen of this year. Slack announces they are gonna do a DPO on April twenty sixth, they file the S one. And then last week, Wednesday, June nineteenth, They set the reference price in the evening. Uh the bankers do have twenty six dollars a share. On Thursday, June twentieth, the company begins trading, closes up nearly fifty percent.

1:18:04 to thirty eight sixty two at the end of the first day of trading. And again, this is not the banks aren't supporting trading. This is just free market trading. One of the ways in which we should be grading this later on in this episode is how volatile was it? Like did they manage to keep a relatively stable share price or You know, was it just flying all over the place because the the um there was no underwriting? If by stable you mean it went. Up very quickly. Yes. So they close the day at uh thirty eight sixty two, which is a nineteen and a half billion dollar Market cap.

1:18:35 Good. Yep. Well. All right. Should we talk about narratives. That's awesome. We should definitely do that. We should also talk about um sort of who owned the company at that point, just because I think it's kind of an interesting Uh it's interesting to dive into this a little bit. Obviously you've talked about Excel. Excel owned close to a quarter of the company. Incredible. Which is uh

1:18:54 highly atypical. I mean usually venture firms will own maybe ten percent at IPO if you let a round and did north of twenty percent at that round. And so you know it's what's very clear here is Excel kept participating in a big, big way in all future rounds. I believe they were in in all the fundraising rounds that were happening along the way. I believe they were actually not just P not just doing Paretta, but but buying incremental. ownership, I think in a lot of those rounds. That's a conviction bet right there that's paying off in a huge way for them. Yeah. Andrees and Horowitz owned thirteen percent, social capital ten, soft bank with seven. uh which is around the same percentage that Stuart Butterfield himself owned.

1:19:31 Uh so Stuart is now, at least on paper, a billionaire. Better than the outcome from Flickr, I would say. Yes. Yes. But it's also interesting to see all the other Silicon Valley CEOs who have been angels. And I think this was reported by Forbes in a in a great piece recently, but Jeff Wiener, Patrick and John Collison, uh CEO of Squarespace, Biz Stone, uh former CEO of Yammer, David Sachs, Jeremy Stoppelman of Yelp. Dave Morin from Path. So this had a a kind of an amazing cadre of Yeah, I think it's from that angel round, the one and a half million dollars. Oh, is that what it was? I believe so. Wow. And there's a a lot of these guys I know also came in later on in sort of the low hundred millions and low billion dollar valuation rounds as well.

1:20:14 Just interesting to sort of know who who is a big part of this, I guess, big liquidity event. Yeah. Well, it also speaks to, you know we've made this point so many times on the show, especially 'Stuart and and company and the co founders and and the history here. Goes back to the early Internet or the at least the

1:20:34 Well back to the web one point oh but but really back to the web two dot oh days. The world was just a smaller place back then. Like All these same people. Like they all that's like a little club, you know, they're all like the world was just not that big. Silicon Valley was not that big. A lot of them worked at Yahoo together. Um The Yahoo Mafia is strong. All right, so before narratives, just some facts to know about the company from their financial position when they went public. So I mentioned they had 800 million in cash on the balance sheet. They're still growing at eighty-two percent a year.

1:21:06 So it that they're close to doubling year over year now as a public company. They're generating in the fiscal ending uh in January of this year, they generated four hundred million in revenue. So Previous year two twenty in revenue, previous year before that just over a hundred million in revenue. So companies still doubling. Um that's close to in line. It's a little below, double, double. Yep, a little in line with with Zoom. So Zoom's growing a little faster at close to 120%, whereas uh um you've got Slack here around eighty percent. But It's fun to kinda keep comparing to Zoom. Zoom has a little less revenue, so three hundred and thirty a million in revenue versus Slack's uh Slack's four hundred, but they are cousin companies in a lot of ways. Absolutely. All right listeners.

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1:23:36 So Moving into narratives. Yeah. Should we talk bulls first? Yeah. What um uh why do people love this company going into the IPO? Well, I mean there's a lot to love. There's a whole lot to love. You know, the dynamics Similar to what you you said in the comparison to Zoom.

1:23:54 Uh this is a Product that really. Zoom and Slack represent the new wave of go to market. in the enterprise of

1:24:06 Products that are so good that they Sell themselves. Yeah. a freemium business model that is perfectly tailored. to maximizing Reach.

1:24:16 Uh and acquisition. And has the conversion markers set at just the right places uh to optimize. There's Extremely well.

1:24:27 Managed. The growth is incredible. I mean There there's like I said, a lot to like. Yep.

1:24:34 And to get into uh some of the numbers a little bit there, one of the biggest things is crazy strong retention. Yes. So if you sort of model this out, it looks like Only about ten percent of uh newly acquired paying customers churn in their first year. So sort of or over ninety percent retention on paid customers. And that If you look at a five year window, about eighty percent of customers that you paid to acquire are still around and are likely paying more. So that is just crazy stickiness, great upselling. That is truly world class. It's amazing. The other thing on top of that, which is a a secondary metric that falls out of that, is there their CAC to LTV ratio or the cost to acquire a customer uh versus the lifetime value of that customer. And again, these are paying companies as the customer is about 13 times.

1:25:25 So while it costs them a lot to acquire a customer, and I'll talk about this in in bears. It costs about eight thousand dollars to get a paying customer that more than pays for itself sort of uh in the long run of how long that that customer will be with you. Another thing that we have to bring up here is Microsoft launched Teams.

1:25:43 Slack took out a full page ad in the New York Times when Microsoft launched Teams and said something along the lines of Welcome to the party, you know, the water's warm, come join us, we've played this thing. Apple uh doing the same thing many years ago. Yes, which was both lauded and widely criticized, but um a baller move in uh in in in in some form. Microsoft is very seriously competing here. They've basically shifted their enterf enterprise product strategy to say, hey If you're using Office three sixty five and you're using OneDrive, you know, Microsoft Teams is the hub. where it looks just like Slack, like you communicate with your people in here, and then everything is sort of shared and mapped through here. And this is the way that you experience you know, the the rest of the Microsoft Enterprise productivity suite. So

1:26:29 pretty serious head on competition. The thing to like if you're a sort of a bull on on Slack is that, yeah, 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 aren't currently Microsoft customers and will be looking for a solution like this. Slack. very likely wins those customers. Yeah. Well and um Store actually had a quote about this in a very beginning days of of Slack, uh the product after the public launch. He called it a I think something like the the fifteen year slow motion unbundling of Microsoft as the productivity suite for the enterprise.

1:27:11 And Absolutely, that story is Great. If you buy into using all of Microsoft's services. But which work very well together. Very, very well together. But I think very few organizations, uh and especially new organizations do that today. Now there may be a story w when we get into bears about You know, the world uh the the famous quote that we talk about here all the time of the two ways to make money in business, bundling and unbundling. We've been on a fifteen year unbundling journey in productivity that maybe it has now reached its apex with

1:27:43 With Slack, with Zoom. with our next episode that we're gonna cover here at Acquired. Um and maybe the time is right to begin the rebundling. But For the moment, you know, uh A lot of people like the unbundled. Don't you bring a bear into here this bull section.

1:28:00 That's actually a very interesting quote for another time is uh 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 in ball before we move to Bears is like Salesforce, their ecosystem, Slack's ecosystem and app platform makes them very sticky. So once you really start to, you know, loop in a lot of these these integrations, which Slack has done a very nice job of building from the very early days, you know, you really start to feel like Yeah, we could move off this thing, but gosh, it kind of all works really well together. And I think that's gonna continue to be a story for them. There's integrates, but I think there's also even more important than that is just Tip. All the persistent archive of

1:28:41 all of your team's work over the last like we would never leave Slack at Wave. Like we well, we couldn't, even though we're just a three person organization. Yeah. Yeah, that's a great point. All right. So bears.

1:28:54 The company is doing well, but Not that well. I think the we thought before seeing the financials, or at least I thought I was like, this could be the first profitable IPO of of well the DPO public offering of the year of this sort. It turns out actually they're losing quite a lot of money. They are losing quite a lot of money. And the phrase that I can't remember where I saw it, but I I think this sums it up very nicely. Zoom was actually the slack we thought we had all along.

1:29:21 Now this may be a little extreme. I I fully do believe that Slack is making the choice to invest heavily here. Yes. Here's why they're not profitable. So Slack actually has a two to three year payback period since it's such a low price point. And the thing that that you'd kinda don't like about this is that

1:29:40 It's backloaded. So you know, people are paying more in the later years of their customer lifetime. So it will continue to incur losses building out its customer base here. Um You land on a in a kind of an organization or a team. A few people join. Uh, maybe they don't pay for a while, then they start paying, but then the team grows, more people join, more people join the company. Yep. Then you start paying more per user. Yep, absolutely. Another thing to be bearish on here is that

1:30:07 Slack's net dollar retention. So this is the sort of beginning of period revenue. plus your upgrades, minus your downgrades, and your turn, all sort of divided by the beginning of period revenue. So you're basically saying How much does the next

1:30:26 this set of customers. Like what percentage of next quarter's revenue comes from the revenue that you currently have. Yep. It's still world class. It's still one twenty, thirty, forty percent, something like that, but it has been declining. And so there is some amount of okay churn there's pay there's pay churn that's actually happening. Yeah. And it's either is it people ditching it for Microsoft Teams, is it people saying, uh it's actually maybe disruptive to my workflow and email might be better. So You know, I don't want to be too bearish here, still world class.

1:31:00 But also declining. And so you d you sort of want to see that bottom out soon. Yep. And then I think the last piece is is competition. Um which You could have different views on. I mean

1:31:12 I lean towards the I don't think rebundling is happening anytime soon, uh, or at least not in a big way towards Microsoft. Um but Teams is a is a viable competitor. Very much so. Very much viable competitor. Uh Ben Thompson's written a lot about this. There are Other competitors that are popping up. Um interestingly, as I was doing research, I It seems a lot of people are starting to use Discord. For for work. Whoa. Yeah. By the way, uh did you know also Facebook Facebook work has like a ton of organizations. I don't know how many are active, but like it's a very, very widely like activated product.

1:31:51 Wow. Yeah. That is shocking. That is truly shocking. I completely agree. Please, if you are using Facebook for work, stop All right. So the the net here is it's gonna 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. And I thought one good quote to put a pin on this balls and bear section is uh from my colleague Ben Rush at at Pioneer Square Labs. We were slacking about this last night and he told me, well Basically right now the way I look at it is it's a machine where a dollar in gets you close to ten dollars out over eight years. So you'd be a fool to to not keep putting money in unless you believe that something fundamental is about to change to make them much, much less sticky.

1:32:46 And you're basically saying, look, I know it's gonna take a long time to pay back, but boy is it gonna 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 sort of their unit economics, their their their stickiness. Um and yet it's still not a profitable company. It's just gonna take some time. Yeah. Yeah.

1:33:06 Well, Should we talk about what would have happened otherwise? Could have had like the coolest game ever. It actually was among among the corset like a uh I used to work with um a a group that was like very, very hardcore gamers from would basically try every single game a new a rich history and it there was a lot of buzz in the gaming community about what glitch was gonna be and about the the promise that it held. It's so interesting there.

1:33:33 Can a game be built? I mean I guess Minecraft is the perfect example, but um Robux. Yeah, yeah, robots like games where people don't kill each other. Yes. But it's like you know you look at Fortnite and like I kinda like if you take a Step back from like killing each other. Fortnite is a great example of this. It's just a great gameplay mechanic. Like and if you take the violence aspect out of it. Like it's just hard to top that competition based, you know, if you think about it more like a sport than you do as like violence. It's really hard to find any other mechanic that that can top that.

1:34:05 Yeah. Yeah. I I think the more interesting what would have happened otherwise is what if this team hadn't brought this approach to this market? Um Would somebody out how to do this?

1:34:18 I mean Yes. because you look at what Zoom figured out in the first forty minutes of your meeting are free. Yes, I I absolutely think that someone else would have figured it out, but it may not have been done in such a it may have been done later, it may not have been done in this exact way. They may not have gated it on sort of message. Also they had a product in market that it would have been too disruptive to their existing product. It would have been some maybe we would all be using Discord. For work.

1:34:45 Yeah. Oh that's actually There's a chance that that's the most reasonable conclusion to draw here. Yeah. Wow, that's like a super hedged comment. I should say, uh I'm in on that. David, I'm in on your prediction there. Well you know the gaming DNA? Yep. Yeah. So playbook. Playbook. So one thing I wanted to talk about here that we didn't really cover in the history and facts

1:35:05 Is One other uh discipline that the team brought from the gaming and consumer world to Slack. Is really Deep

1:35:16 understanding and and kinda analytics around the funnel of of a user acquisition to conversion to activation to retention. It is no

1:35:29 accident that Slack has world class metrics around this. And it's because this this discipline is so important for gaming and online gaming. Um famously the PMs at at Zinga, um, who sort of pioneer this approach were not uh the the creative types. They were the spreadsheet. They were the former bankers, the analytic type, the analytical types. One thing that they realized really early on that again, you know, PMs at at gaming companies look for these moments, which are what is what is the signal when a user hits some threshold that they are then gonna retain for a long period of time. Or monetizable. What's that magic, or they're gonna monetize or whatever. What's that magic thing and then then they optimize the game to funnel users to that magic moment. Slack realized pretty early on that that that magic moment is a team that has sent two thousand messages back and forth. Which sounds like a lot, but if you've used Slack, you know that like that happens. So if you're a relatively smaller team, it takes X amount of time. If you're a relatively larger team, it takes like less than a day for that to happen. They found that ninety three percent of teams that hit that two thousand

1:36:40 Message threshold. Didn't turn, retained indefinitely. And so they started architecting the product around doing everything to get new teams that were onboarded to that threshold as quickly as possible. Super, super interesting. And again, this is like think back to, you know, our Zoom episode and the world of enterprise software before this. Nobody was thinking this way. Yeah.

1:37:03 At Cisco, at Microsoft, at Salesforce. Um, how can I take the CIO to a new dinner he's never experienced? Exactly, exactly. And this is also a perfect example of uh a friend of the show, Alfred Lynn at at Sequoia. He um He had a great thing that he he said to us uh at Wave a while back, which is that What he really looks for in companies is Do they understand he called it input metrics as opposed to output metrics. Like the output metrics are what is your retention. Um the input metrics is what is going to

1:37:35 get you. What do you understand about your product and your business that's going to get people to retain. Um and this is like a perfect example of that. Great point. Another thing that they did.

1:37:48 is oh my God, they were their own first customer. Like they they a lot of times I think startups Presume to know their customer. And they because it's frankly difficult to go out in the real world and have these sort of conversations, you often project the needs of the customer into a map that you already have in your head and just start building. I mean Slack was something where they already with Line Feed had a good amount of development under their belt of w what makes it easy to onboard new team members, what are the sort of bells and whistles that we would add onto IRC. Um so they knew better than anyone what this thing could be.

1:38:22 and and and what would make it useful. And so you don't often have the luxury of being your own first customer because you're not building a a gaming company that has zero enterprise value, shutting that down and then pivoting. But to the extent that you can get you know a hundred percent fidelity on what are the needs of your customer, that's pretty cool. Yeah. Holy. A few more here. So Like Zoom, David, you're talking about they pursued this bottom up distribution strategy, you know, low price, freemium, the go to market is similar, uh, the network effects that they have. So you basically have this equation, which is Low price in the enterprise.

1:38:56 Plus network effects equals unprecedented growth rates. And It's interesting to to see sort of how long Zoom and Slack have continued at these really high growth rates. Obviously, like their products, you know, aren't incredibly expensive. So the the trade off you're making there is that your average customer value If you're weighing in all your free accounts is actually quite low. Um, but you your growth continues to stay high for a very, very long time. It's just sort of interesting to

1:39:25 sort of understand that that equation a little bit. Which gets me to Their top of funnel is operating a free product. And so I want to do a little analysis on on this. If you divide

1:39:37 their total marketing spend last year by the number of new pay customers that they brought on last year. you end up finding a cost of of customer acquisition around eight thousand dollars per company. So Okay.

1:39:53 You know, for a consumer company that'd be crazy expensive. For an enterprise it's not that bad. But It's significant. Eight thousand dollars to bring on a paying customer. However, when they break out their cost of sales, it's only about six hundred dollars per company. And so what you see there, I mean there's slack community. Yeah. There's some marketing dollars in there from billboards and stuff like that, but basically what you're seeing is that there's a massive expense hosting these free organizations. That If you think about the different things that whatever convert to paid. Why is their cost of sales only six hundred dollars, but and yet they're somehow spending an average of eight thousand dollars. Yeah, it's the massive amount of free usage of Slack that's going on out there. So while it's a

1:40:33 brilliant and disruptive strategy. It's it's an expensive one to run a a huge free product like that. Yep. Great point. Great button. The other thing that I wanted to talk about a little bit here is a couple of zoom comparisons. So we mentioned that while Zoom is externally viral while Slack is internally viral. That ends up showing up in the sales efficiency. And so when you look at Slack's return on sales and marketing costs, 111%, great. But Zoom's is 180%.

1:41:01 And it's it's sort of uh I was expecting a thousand and eighty percent. Yeah. But yeah, it just screams to you like, Whoa, when you have the capability to promote your thing organically to people at other companies, you know, it just sort of has that natural so Slack is I would say Great not a plus on sort of that metric. The last thing that I'll sort of say on on Zoom and Slack, um, and this is not an original thought, this is a collection of some other things that 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 uh I intrinsically understood how to use Zoom at first. Great. Yeah, I've used a lot of these. They were mostly bad. Oh, this one's good. Slack was like, What is this thing? And there's an education before.

1:41:49 Uh I had but Somehow Slack was less obvious to me when I came in, what it was. Well, I guess even if you have used hip chat, I mean hip chat if if you were on a technical team using hip chat. Slack, once it's the whole organization, just the use case is different, right? Like you have all these people who've never used it before. So even if you use you have used something like this before, your experience changes because now The organization's experience has changed. Yep.

1:42:15 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. So Value creation here. Tons. Oh my gosh, all these these companies are paying all this money to have this new way of working that's frictionless and real time and live and uh highly interactive. But boy, at what cost.

1:42:38 And I think you see this complaint a lot flying around Twitter. I certainly feel it a lot from 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 into flow on something and then pop my head up and I decide when I wanna check email. It's like the opposite of the four hour work week. It is the always on, always sort of stimulated, always interrupting you

1:43:04 I think we are early innings in 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, very much recognize the downsides of it. This is this is open office space in technology and it's someone that can always tap you on the shoulder. And of course there's settings to change and stuff, but there's a cultural understanding that you are reachable by Slack, you know, when your 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. Yep. Yeah. Now all that said.

1:43:41 There's way less to criticize here, uh, about this company than like sharing economy companies like Uber and Lyft that that you know, we've talked about the the potentially very destructive things in the world, like the underpayment of wages and things like that. This company has none of those projects. I think on the flip though of absolutely I agree and I think it's a broader cultural issue we're just grappling with at this point in time, uh moment in time of of being addicted to our our technology. I think a big benefit I've definitely seen from Slack is, you know, as somebody who

1:44:13 I just struggle with email. Like I'm such a like when writing email answer my email. I really like I'm terrible at email. And it's and and I used to be much better at email because I like had to devote time to it and like I wanna like make sure I've written everything correctly and whatnot. Um Slack has been just the most liberating thing for me. Like we have shared Slack channels with all of our portfolio companies at Wave. And so all of the most important people in my work life, internally and externally to me, are are on Slack. And it's just like it's like a weight has been lifted, you know. I can communicate instantly, easily. I don't need to worry about, you know, structuring the perfect sentence or or whatnot, or crafting the right narrative. Like I can just like

1:44:56 Communicate much more simply. It's been great. My my email has suffered as a result of it, as Ben knows. Um but like, you know, we text each channel's lack like it's better. So listeners if you want to get in touch with me, hit me up in the acquired Slack. I'll also say a thing that David, you do extremely well, and just like m 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, gotta answer it out. You've been very disciplined for years about saying 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? And I think Slack is kind of in some ways the antithesis of that very intentional thinking, but uh you've impl 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. Well, what's cool is that the

1:45:50 Just the cost of that is much lower on Sla so it's much easier on Slack to be like, Yep, I'll respond to almost anything. Yeah. Um, whereas on email, like that cost is so high. Yeah. Anyway, so there's there's uh It's it's just super interesting. Like Slack is we talked about the cultural moment that was ready for it. Like It is was so perfectly positioned for Because I think this trend is much broader than Slack, but uh uh capitalize on it. Yeah, so Slack allows for frictionless always on seamless communication inside of an organization, but

1:46:21 everybody still has email for outside their organization. And I'm sure that that Slack has spent a lot of time thinking about this, but you know, what does this type of workflow look like? Can we kill email f fore you know of them. Shared channels in their current form. You couldn't our specific use case as a venture capital firm is like great for it. But it is amazing. It is But if you're like a B D person, like how are you gonna communicate over Slack with your if if your workflow and your external partners fit such that you could have shared channels It's truly wonderful. I wonder if uh I wonder if Slack will ever launch like an inbox feature where it's like if somebody knows my Slack

1:46:58 handle they can just send a Slack message to my inbox that's universally accessible anywhere in the world. Or maybe not, and listeners will have to stay tuned for our next episode of season finale. Dropping soon. Um All right, so grading. Ooh, greeting. Yeah. So uh listeners, as you know, with these uh uh recent IPOs or DPOs, we

1:47:22 Ask the question five years from now, what will an A plus look like and what will an F look like? And the big thing in my mind is Slack currently has a revenue multiple of forty six X with their current trading market cap. Something tells me that's high. If I mean. It's they're a company with no earnings, so you can only go on a revenue multiple.

1:47:43 So what will they need to do to to justify that and is it continue business as usual with high growth rates and a great CAC to LTV ratio, albeit over a longish time span, and then just continuing to do that and hoping that the TAM. on the number of organizations that are gonna do the thing is really big. Mm-hmm.

1:48:06 Or do they need to be broader than what they currently are and sort of take the Dropbox approach of going, Oh crap, it turns out we were a seven to ten billion dollar 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 on that? Well I think the the A plus cases the answer is it's both. We uh uh I don't know if listeners you remember the great I think it was uh

1:48:33 Pizza Hut or a Domino's commercial back in the day with Deion Sanders and um Jerry Jones. I have no idea where this is going, but these commercials were so great. It was uh Jerry Jones, the owner of the Cowboys, and Deion Sanders when he played for the Cowboys. And Dion signed the largest contract ever, thirty five million dollars a year. And so this commercial it was like they're whatever pizza company they're advertising, you could get both a deal to get both two things. And uh And there was the negotiation between Jerry and Dion and and Jerry's like So Dion, what do you think? Fifteen, twenty million? Dion's like Both. So anyway, long winded way.

1:49:09 I think the the A plus 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 own. Maybe start to rebuild a bundle the productivity suite uh in the enterprise and go from

1:49:29 eighty dollars per year per user to Across a suite of products, you know. Two hundred, three hundred dollars per user per year. Yeah in the enterprise. Yeah, it's interesting. If you look at like

1:49:41 a storage company like Dropbox, you know, the Dropbox's enterprise value effectively comes from people share files on it and and use it for that and pay for that. That's a ten ish billion dollar opportunity. If you look at group messaging, Slack, you know, that's a twenty ish billion dollar opportunity when you look at the aggregate of enterprise email and a full productivity suite with Microsoft Office, like, oh my gosh, we're, you know, in a half trillion dollar opportunity. And so it's interesting to sort of think about what the bundle looks like. What do you need to own?

1:50:14 To be the most valuable piece of that. And I think identity is definitely a piece of that. Well Slack own identity. Um Microsoft sort of has Active Directory. There are others that are sort of taking that for the non Microsoft world. Um Google obviously has taken a chunk of it. It's hard to say sort of what the value of uh G Suite is since it's not a thing that that Google breaks out, but what is the value of their productivity business. I suspect it's a lot larger than than Slack's productivity business. So a big question for me is at what point does Slack

1:50:45 do the thing that Dropbox did with Dropbox Paper and then recently with this kerfuffled thing that I need to understand more or whatever the new Dropbox is. Um but like when when do they decide to not to be too penny on the on the air. But when do they decide to uh go build more of the productivity stack in a way that is the Uh not the periphery pieces of the sort of minnows of communication, but the broader heavy hitting we're going right for the job. The other the other thing that this screams to me, uh, and is one of the most important reasons to become a public company is not just build internally, but acquire. Atlassian has done this extremely well within their niche. Will Slack go by like Notion or

1:51:26 You know. Um As a public company, it is much easier to do that than it is as a private company. Yeah. Great point. So A plus is they do both. F is F is where you we're all using Discord or Microsoft Teams in the future. Yeah. Facebook for work. Yeah. I mean that frankly the I I think the the biggest thing that could could be really scary for them is Microsoft actually succeeds at acquiring a significant amount of of the upstarts.

1:51:55 Um and and non-Microsoft customers to work into the team's organization. I think what's also really interesting like the um W we maybe alluded to this a little bit on the Zoom episode, but I I suspect we are going to be entering an age of relatively large acquisitions in the productivity world by both the traditional players, the Microsoft's, the Salesforces, the Googles.

1:52:15 And Slack and Zoom and these, you know, large public upstart companies. Yep. Do you have any that you wanna God on a limb and say. No, I mean

1:52:30 Consolidation of the space feels like a good idea. Yeah. Yeah. Cool. Uh follow ups. Follow ups, yes. Um so we Uh apologize. We made an error during our Uber episode. So apologies both for the error and and that it's taken so long to correct it. But thank you so much to all the the uh folks who I think we had four or five people talk to us about this. Who reached out about this. We waited so long to correct it because we wanted to do it on an episode without a guest.

1:52:58 On the part of the delete Uber story, uh when at JFK Airport with the Surge story, we actually had it reversed. Um So the the true story is that uh or how it actually went down is that Uber had taken a lot of heat. previously for when they surge would automatically kick in during periods of high demand, and sometimes that high demand was like, you know, there was like, you know, d something a disaster happening or something like that. And so they had a playbook for

1:53:30 turning off surge when in certain cases and when when the protest when the taxi strike at JFK happened around the immigration ban Uber ran that playbook and turned off Surge. And so we had said on the episode that they turned Surge on and that's what people got upset about. It was actually that they turned it off. Because they wanted people to be able to easily get to and from the airport, but you know, without being seen as Well, frankly, w 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. But it turns out I I think partially and and several of the Uber people who wrote us said, you know, it was just the perception of Uber was so bad at this point. Which was Uber's fault. that no matter what they did, they were gonna get pillaried. And in this case people were like, You're trying to break the strike, you know. People are striking to protest this horrible thing that happened. And you Uber, are you in league with Trump, or you're trying to break the strike? Blah blah blah. Yeah so the way I would imagine this, if you want to make a metaphor, is they

1:54:30 sort of like whittled a bunch of wood shavings on a hot day into a pile and then there were a sort of you could throw one of two lit matches at it. And it they chose which one to uh to have thrown. No matter which way it was um Yeah. Anyway, so uh we apologize for the error. And uh wanted to correct it. Yep.

1:54:49 Alright, carve outs. Uh somehow I never did this carve out. I was looking back at ones I had previously done, but I watched all of the expanse. end of last year on uh on Amazon. And boy is that show a masterpiece. I am extremely excited for it to come back. Amazon bought the rights. They did three seasons and then I it sort of pseudo ended and then Jeff Bezos, I think is sort of personally a fan, and Amazon bought the rights and is developing um season four. Um, but if you like really gritty sci fi and you liked like Battlestar Galactica and shows like that, you're gonna love the expanse. It's a it's a great um sort of political drama in the gritty future in space.

1:55:27 Nice. Mike Harvey out, uh Full disclaimer uh bias because we are investors at Wave as as everybody uh everybody knows who our LPs, our portfolio company Alma, uh Dan Hill, uh who was previously the head of growth at Airbnb we had on one of our first LP episodes. They just launched a big uh big product feature previously on Alma. uh you could use Alma to give to nonprofits through funds around causes. So uh the wildfires in California were a big um a big fund that they created that you could just give to the Alma fund for the wildfires and they would distribute that to uh to organizations that were addressing the wildfires. Um they just launched last week the ability to give to any nonprofit in America on AMA, um which is super cool. So now

1:56:14 Finally there's there's one place, Alma, where you can go and easily discover and give to anything rather than having to wrangle with you know the website. Paypal if they even have it or whatnot. Um of itself, but also your it all you manage it all through Alma. So you get your tax receipts at the end of the year, all in one place, all through Alma. Uh you can control the level of communication back and forth. Um Very cool. So uh encourage everybody, A to give to great causes and uh B if you want a more modern way to do it. Um

1:56:50 Us on it. That's awesome. Well, David, I have to thank you for bringing uh Dan Hill into my life. Like Dan is awesome. He's such a wonderful person. We had he's obviously on the LP show and we did a great episode on on sort of dissecting Airbnb's growth and the tactics they used and Um, we ended up actually doing a deeper dive with uh a bunch of PSL companies and him, having sort of a round table to talk sort of best best practices for growth and um yeah, he's he's awesome. Yeah, Dan and his co founder, Michelle, um, who's also uh PM from Airbnb. They're in a part of uh many of the uh um big moments and and features that unlock growth for Airbnb. So cool. Super excited to work with them.

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1:58:30 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. And

1:58:47 We will see you next time. We will see you for the season finale. Coming very soon. To uh podcast player near you. After you fill out the survey. Thank you, everyone. Later, David.

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