The Zoom IPO (with Santi Subotovsky)

0:00 And how do you get people to be The True cells rather than whiskey. Okay. Where's the whiskey?

0:09 Like mobile tape. In case emergency breaks, to kill a shot or something. Welcome to Season 4, Episode 8 of Acquired, the podcast about technology, acquisitions, and IPOs. I'm Ben Gilbert, I'm David Resenthal, and we are your hosts. To introduce our episode today, I want to play you a little clip from Emily Chang on Bloomberg TV.

0:49 This is from the day of the Zoom IPO, where she interviewed Eric Yuan, the founder and CEO of Zoom. As you can tell from this clip. Eric is incredibly grounded, humble and and quite a different type of Silicon Valley CEO. As we will see when we get into this episode.

1:06 And that's very exciting, but it's also a lot of pressure. We've seen some of the recent IPOs like lift have a lot of volatility. Do you feel that pressure? I do, I do, because the price is too high. So So you think the price is too high.

1:24 Yeah, I think so. And uh but anyway so y yesterday we finalized the price of thirty six dollars. You know, today wow there's a bigger pump. So and uh yeah it's it it is all of our control, you know, we just to go back to work. So Ha ha This IPO pop last month. Put Zoom's market cap at sixteen billion dollars. Today, just under two months after he said that, it has risen another sixty percent.

1:49 to twenty six billion dollars. So what's going on here? What is Zoom and what makes it so special? Today on Acquired, we dive in with one of the best people on the planet to help us tell this story. Santi Subatovsky. All right, David. So who is Sante? Uh we're super lucky to have Santee here today. Sante is a partner of Jake Saper on who was on the LP show uh a few months ago and is here at Emergence Capital. Sante has been on the board of Zoom since he led Emergence investment in the company in 2014.

2:22 And Santi is also from Argentina and like Zoom CEO Eric Yuan is an immigrant to the US, which we are going to talk about a lot more on this episode. Before joining Emergence, uh Sante, you founded and ran an online learning platform in Argentina and you also did your H your MBA at HBS. And uh I think the class you're in had some pretty good entrepreneurs in it, right? We had some great people, yeah. Uh and I actually saw them last week. We were all celebrating our tenth year reunion. Oh wow. That's uh that's awesome. Um the uh Was it Rent the Runway came out of your class? Cloudflare. Cloudflare, yep. A few other great companies. So we had a bunch of great companies. Yeah, that was a that was a great year. I mean to be honest, it was a horrible year to be looking for a job. It was two thousand and nine. So that's why the opportunity cost of starting a business was much lower.

3:13 Yeah. It's kinda funny. It's like your your uh life cost of capital was very low. Exactly. Yeah. Wild. Well, Santi, thanks for for having us in your office today here uh at Beautiful Emergence Capital. We're super excited to dive in.

3:27 Thank you for having me. Well, if you like the show and you want to go deeper on company building topics with David and I, you can become an acquired limited partner and get access to our second LP only bonus show. On our last episode, we gave an update on a lot of our thinking from the Uber and Lyft episodes, regulation, and autonomous vehicles. We also answered a bunch of LP question and answers. If you want to join, you can become an acquired limited partner by clicking the link in the show notes or going to glow.fm slash acquired. All right listeners.

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4:33 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 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.

5:19 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 70% of the time. Lagora now has over a hundred thousand lawyers on the platform from twelve hundred legal teams in fifty countries. And crazily, they went from one million to a hundred million in ARR.

5:52 Eighteen months. Mm. 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.

6:08 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. Well, David I think we're ready to dive in. Let's dive in. Uh

6:25 how to frame this episode on Zoom and um A good lens for for Zoom as a company is is almost like a bridge both between kinda eras here in Silicon Valley. You know, in many ways it is classic old school Silicon Valley. It is an enterprise software startup. It's located in San Jose, down on the peninsula. Uh and the DNA, as we will see, came out of a classic nineties startup, WebEx. But it's also undeniably part of this new wave of IPOs and part of the A plus Z cohort of companies that are coming out here. And it's also on an acquired theme, a bridge between Silicon Valley and the rise of China and the tech ecosystem in China. So

7:05 Really excited to dive in here and dive in with Sati. But before Santi comes in the picture, we actually start In nineteen seventy, speaking of China, in China in the middle of the cultural revolution. In the Shandong province, which is in the east coast of China, uh, and it's located about halfway between Beijing and and Shanghai.

7:24 And uh Shandong is sort of the um religious and cultural uh birthplace of China. Um it contains both Mount Tai, which I believe is where Eric is from. And is the most revered site in Taoism and is where the first emperor of China was crowned. And it also contains the city of Khufu, which is where Confucius was born. No way. Uh and both of those are gonna be very apt, as we will see with uh Eric and Zoom as we go along here. Uh so in nineteen seventy A boy named Eric Huan is is born. It's still the middle of the cultural revolution, but his parents As far as we can tell our

7:59 pretty well off. His family does does okay. Um his parents are educated mining engineers. Eric early on, uh even though the country is converting to communism, he starts showing some entrepreneurial tendencies. He starts collecting his parents are mining engineers, remember, he starts collecting and selling uh mining and construction waste and burning it down to get the raw copper inside so that you can sell the copper to recycling. uh play. Exactly, exactly. Apparently he almost burned down his neighbor's house doing this. So uh that was uh maybe that is when he saw the light that technology enabled businesses were were better than Sante, did you know this when you were making the investment that he was so irresponsible and reckless. Uh we didn't. We would have still backed him. I think he learned a good lesson there because uh he does not burn capital, as we will learn. And uh so he goes off to university at the Shandong University of Science and Technology, but his girlfriend at the time, who would soon become his wife,

8:59 goes to another school that is about a ten hour bus ride away. And it's on these bus rides between their universities that as legend has it, Eric starts daydreaming about how technology could one day Bridge this physical gap, uh between uh him and his girlfriend soon to be wife, but many people around the world. And uh would lead to Many things eventually zoom.

9:24 He graduates, he ends up getting his master's degree after undergrad. He graduates, he marries his girlfriend, he goes to work, and in nineteen ninety four, the company he's working for in China sends him to Japan for four months. And uh while he's in Japan, he sees Bill Gates give a speech there. This these are the days of the information super highway, and he hears Bill talk about the information superhighway and he thinks. This is the future. David, I was looking at this in in in your research in uh It's kind of ironic given uh how Microsoft missed the web.

9:54 And how then Bill Gates had to sort of uh about face the company writing that classic internet memo that he wrote. It's amazing that Bill Gates is actually the one who ended up inspiring Eric and so many others, you know, when Microsoft almost had a a a very uh uh existential moment about the internet. Yeah, and crazy that like A speech Bill Gates gives in Japan. You know, in nineteen ninety four. That is heard by A you know, young man from China. ends up leading to

10:23 the most successful IPO in the US of twenty nineteen. Like the world is just crazy. So Eric goes back to China and he realizes though that Um he's inspired by the internet, but The internet in China is still a long way away. It's not gonna be mature for a long time. And if he really wants to be part of this what is gonna change the world, he needs to come to the US and he needs to come to Silicon Valley. So he knew An entrepreneur from China, uh, who had gone over to Silicon Valley. Uh, I believe it was Min Zhu, who was the co-founder and CTO of WebEx. Min had come over, I believe, to teach at Stanford. Um, and that was how he got to Silicon Valley. Min ends up hiring Eric into this fledgling startup of WebEx, which is also uh

11:06 Communication. Not video communication to start, but communication across the internet. The first step in bridging the gap between him and his wife. And and the main focus of WebEx at this time was was not video conferencing, but screen sharing? Correct. Yep. That's how they started. Yeah, screen sharing and presentations. And so Eric says great. I'm gonna join you. I'm gonna come over to the US. I just need to apply

11:28 For a visa, a work visa to come over, and me and my family will will come on over. Well, he applies. This is nineteen ninety five. And His application is rejected. But Eric is is undaunted. Continues, he applies again.

11:43 And again and again and again and again and again. And he ends up applying a total of nine times before his music is accepted. I mean, it's just crazy. That tenacity and that desire to come to Silicon Valley, come to the US, be part of this. Put up with all of these rejections and keep coming.

12:00 Amazing. Yeah, that's something else that Eric and I connected really well on. I had to go through a similar experience coming from Argentina. And until like a Month ago.

12:12 I was still going through the process of like back and forth and visa and green card and another visa and an extension and a rejection and those letters that said you have thirty days to leave the country and showing up at one of those In for pass. Offices. standing in line trying to explain a case. So yeah. And we bonded over that as well. You you just recently became an American citizen, yeah.

12:38 Congratulations. That's I mean This is not a political show, but this is the one topic that just comes up again and again, like This is so crazy. This is again the most successful IPO in the world of twenty nineteen. And all these great people involved in it and they just wanna be here and work and like the US makes it so hard. So Anyway. Sidebar over to Santi for a second. Like while being a general partner of emergence and doing the the work and economic development and creation that you do, did you you had to like mandatorily leave the country for periods of time to

13:11 Yes. I I got notified that My status had changed. And I had to figure out some other ways if I wanted to stay here. Wow. Yeah. That's just so incredible.

13:24 Yeah. Well congratulations on feeling being a citizen and um Okay. I hope that inspires a lot of people listening to this show, uh, on uh both citizens and and not as citizens here. So

13:36 When Eric finally does make it to California in nineteen ninety seven, um, he shows up, he he and his wife come to California and he comes starts working physic at at Webex, there's just one one problem. Um He doesn't speak English. He doesn't speak English like at all. He can write code really well, but he's really hungry to learn and grow. And he but he's so focused on writing code as a you know founding engineer of of Webex and and developing WebEx that he doesn't actually take

14:04 English language classes. He just learns and picks up English from working here and working with his teammates, which again is incredible. And and Even though that's how he starts. he is really interested in management and hiring and developing people. He rises up, he becomes an engineering manager, he ends up getting promoted to becoming VP of engineering at WebEx, and then in July of 2000, WebEx goes public And ends up getting acquired a number of years later by Cisco for three point two billion dollars in two thousand seven. Eric is then promoted within Cisco to become VP of engineering for all of their communications platforms, by the time he leaves Cisco to start Zoom, after 14 years in total at WebEx and Cisco, talk about loyalty, um he's managing eight hundred people across the globe.

14:51 I may have actually reported to Eric and I I don't think I ever knew it, but um I interned with Cisco in the summer of two thousand eight and two thousand nine. and worked in the telepresence unit. And so I'm sure somewhere in the management chain, either sort of in I I guess because I was a uh test engineer and then an engineer, I probably did end up actually referring to to Or one of the eight hundred. I don't know if they count interns. So By the end though of Eric's time at at Cisco, uh after the acquisition He was going around and and spending a lot of time, a lot more time with Cisco customers and former Webex customers that are now Cisco customers. And

15:31 This is gonna sound simplistic, but but bear with us here because it's really important. He starts noticing that they're really unhappy with the product. Uh this is now, you know, twenty, two thousand nine, two thousand ten, uh, twenty eleven. And that makes Eric really unhappy. And again, this sounds simplistic, but but I this is really important for Eric and for Zoom. Happiness is kind of like his philosophy. I want to say a quote that that he he has here. He says, You know, along the way, he talks about his career. I really came to understand that the purpose of life is to pursue happiness. Like here in the US. That's really the most important thing. I also learned how to pursue happiness, especially how to pursue sustainable happiness. You've got to make others happy. If you make others happy, your happiness will be sustainable. So for me to apply that philosophy to the company world, to the business world, if we can make a customer happy, our company will be happy. That happiness is also sustainable. And so if you looked at his LinkedIn profile today. That's wildly enlightened. It's it's like something I mean I told you confusion was going to be important. If you look at Eric's LinkedIn profile today, it doesn't say CEO of Zoom. It says delivering happiness to our users

16:40 Your happiness is my happiness. And uh so I'm just curious for Santi to bring you in here. This philosophy of Eric's, you know, obviously it permeates the company, which we're gonna get much deeper into, but like what did you make of this when you first met him? I mean we heard it directly from the early customers. I mean when we came across Zoom, this was back in twenty thirteen. That's the first time that we came across The product zoom.

17:06 And we came across The company Because of a personal need that I had. being from Argentina. I tried every technology to

17:16 Stay in touch with friends and family. And there's a big difference when you're trying to transact. And when you're trying to build a relationship with technology. When you're transacting, then you can deal with Issues even though it is frustrating. You just deal with them because you wanna get to the end of the transaction.

17:34 But when you're trying to build a relationship, if the technology doesn't work then that's detrimental to that relationship. So that's why I felt I was not staying in touch with my friends and family because I dreaded those communications. And that's when I started trying every technology and in twenty thirteen I tried Zoom. And it worked. And this was very early in the life of Zoom. It was about two years after the company was founded, but during the first year of its operations. Yeah, a few months after they released the product.

18:05 And We not only experienced that the product worked, but then after having those first initial calls with my friends in Argentina. I started getting random invites from other people in Argentina. For Zoom calls. So it not only worked, but people loved it and they started sharing that

18:24 With their friends. And that was the light bulb moment where we said There's something here. And then another interesting piece of information is when we were doing diligence on the company, we talked to early customers and what we heard

18:39 Yes. lines up a along the If you turn off Zoom I'm gonna quit my job and I'm gonna join another company that has so it wasn't just Customer happiness. Yeah. It was like

18:54 Customer obsession. Customers were Incredibly thankful. Because Zoom was enabling them to do their jobs. I'd be happy while they were doing their jobs.

19:06 I think this is something that's really easy to forget. Like a lot of things we cover on this show, technology moves so quickly that we sort of acclimatize to what it is today. And I I'm remembering back a friend of mine started a company and it was uh three of them uh that grew to twelve of them and a live workspace. And I remember him telling me, My morning is five or six uh Zoom calls with uh some of our most loyal customers just to like understand what's going on uh with them. And I was like, You can't do that from video call. Today it seems quite reasonable because you're like, oh yeah, it's probably Zoom's very reliable. Like that makes sense to me. But I remember being in shock at the time. I'm like, you can actually get the consistency and quality of understanding how you're y the customers of your startup are going from doing Zoom calls every morning from your apartment. Yeah. And I th that like that memory is really grounding for me for how bad that technology used to be. Yeah.

20:00 So Speaking of you know, uh this was the Cisco technology and WebEx. But for then, of course, there were competitors, you know, there were expensive. I mean the other thing is in my head I remember thinking Well, I've never heard of Zoom, but what are you using for that? Because like I know There's like

20:16 Enterprisey things, but you can't afford that and they probably won't even send a sales guy to talk to you. But also like I you know, I use hangouts and I use Skype, like That's That's a very different class of thing. That can't be working for you. And and this middle didn't didn't exist. And and those technologies were built for a different era.

20:36 Uh if you think about a lot of the incumbents, they were built For a time where people were sitting at a desk With fixed internet. So Everything was monitored and controlled. Now people are on the go and you're using your laptop, your

20:52 desktop, your phone on Wi Fi 3G, switching from cell towers. So you had to rebuild the infrastructure from the ground up. Yeah. And that's what a lot of the incumbents couldn't do. Because they Build. This monolithic

21:09 architecture and then they were just trying to patch it and adapt to the new world. And that's where Eric had this great vision that He had to rebuild the entire software stack. Yeah. And that's what he did. He worked really hard, even before releasing the first product to make sure that everything worked. Yeah. So Sante, did you uh going through all the hardships that you did to try and communicate with people in Argentina? Did you have an investment thesis around someone's gonna make this better and I'm on the lookout for it, or was it more just I'm trying to solve my own problem and oh my gosh, this company happens to be a great investment?

21:44 So we're incredibly thematic here at Emergence. We we're not just running around seeing what's hot and trying to follow what everyone else is doing. The way the firm was started was with a big thesis that software was gonna move from on premise to the cloud before it was obvious. And that's why we invested in Salesforce early on when again it wasn't obvious. In this specific case, we had a thesis. We knew that things were gonna change. And it took us three years to find the right company. We talked to a number of companies in the collaboration space.

22:17 And we could never find the right company. And the right company is not just the right technology. It's a combination of The right technology. Perfect timing. And the right leadership.

22:30 And that's why when we came across Zoom, we like the technology. And then we met Eric. We fell in love with Eric. And the timing was right. So even though the company wasn't raising capital when we met.

22:43 We kept on building that relationship, forging a partnership that eventually ended up in an investment. Yeah, we've already talked a little bit about Eric's background and what makes him special, but this is he saw all the things that were broken within Cisco and he went to Cisco senior leadership and said I wanna re-architect how we do our communication and collaboration platform as VP of engineering here within Cisco and and build this product right.

23:11 They didn't let him because they were obsessed with these were the days of, you know, Yammer and uh Jive and and Cisco thought the future of enterprise collaboration was Facebook for work. And um I like Zoom is a bit better. But anyway, uh so in June of twenty eleven, Eric finally leaves the company. He's forty one years old at this point. Right after he leaves, a whole cadre of basically anyone who had ever worked with Eric immediately gives him money. Just blank check to back him. To work on whatever he's gonna do. And uh he knows he wants to start a company. And I believe the first idea, Santi, correct us if we're wrong, is um he actually thought he wanted to build an application on top of video chat. Uh the company was initially called SASB. It was more of a consumer play, not an enterprise play. Yeah.

23:58 But then pretty quickly he figured out that actually the the real big opportunity is just do what we should have done within Cisco outside of Cisco. That's when the company became Zoom. Episode that you just shared. About Eric's life. It's very unique for him. Because people

24:14 wrote him a check. Not because they loved the idea. I mean some people even hated the idea. It's like what are you gonna do this? But they believed in Eric. They

24:24 They had full confidence in Eric. And That was a great lesson for him and that's what he used every time he raised capital. When he raised capital, he didn't share. All the information.

24:38 dance that most entrepreneurs do. It's like oh this is my dance. It was more about I want people who are investing in me who are convinced that I'm gonna do something And then if I get to that point, then I'm gonna open up And share everything else. But if I don't get there

24:57 Then it makes no sense because businesses change and he saw it with Sasby. Sasby became Zoom. The business changed. It went from A consumer product to an enterprise product. And if someone had invested in the consumer product, they might have pulled their money

25:13 When Eric said we're gonna do enterprise. But given that people invested in him People were supportive of whatever Eric wanted to do. for folks listening out there who are sort of first time founders or more junior in their career. that's a move you can you can sort of execute when you're forty one, have led a gigantic organization and have the track record that Eric has, in addition, of course, to the personality that he has. Yeah. I think that

25:38 You should always do that. You should always find the right partner, someone who believes in you. Before They believe in the business. Because if they believe in you, they're gonna be with you in good times and bad times. And believe me, a lot of these companies that we're now talking about, oh, great outcomes, they went public, they got acquired.

25:59 It wasn't a straight line. And they had the moment. Yeah. I mean it's I mean you know it. It's not a straight line. And you want people who believe in you who are gonna help you when things are tough. Especially when things are tough. Because that's when you need a true partner. When things are going well

26:17 Then everyone's gonna be a cheerleader. And they're all gonna be Your best friends. But you wanna make sure that you not only get the right partner, but you also get the right group of people.

26:28 Because Partners are just one piece. Of a firm. You want to make sure that everyone is invested in your success. Yeah. We just talked about this, but I want to highlight again of the A plus companies who've gone public this year that we've covered. Uh I think now three of four have been pivots. I mean Zoom was a pivot was a pivot. Pinterest was a pivot. Lift was a pivot.

26:51 I mean uh their real line of business is not where they started. True. Yes. Well it was a pivot to peer to peer, right? I we can debate whether we can classify that, but it's such a good point. Like And and absolutely. And you know we take this to heart. I think, you know, any any great investor and partner does that the most important thing is the DNA of the team you're backing. And if you believe in them, you know, it's uh uh we like to say the the early stage is turbulent. Uh you have to believe in the pilot's ability to navigate the turbulence.

27:21 So I wanna spend a minute before we move into building Zoom. So what was it that was making Making WebEx customers so unhappy. Satsky, I'm curious from from your perspective, especially having a thesis coming into the space. Like lots of people and and we'll get into other other companies that competed with Zoom over time, but This was not a unique insight to Eric. Like there was something that had changed. Wha w what was it about the collaboration space? I think a big change that a lot of this big incumbents missed.

27:52 Was The purchasing A process for these products. when WebEx got started and you talked about it earlier They were selling to IT.

28:02 Because they had Very high price points. And they just needed IT to be Okay, they didn't need IT to be happy. They just wanted IT to be

28:13 Okay with whatever product they were selling. And it was more about Yeah, we're compliant, we're secure, we check all these boxes. If your users hate it. Who cares? We're

28:26 Just gonna make sure that We cover your back. And that we check all the boxes. Classic enterprise software is the user is not the buyer. Correct. That changed over time. With SAS and these freemium models

28:39 The end user became the buyer. And then the purchasing decisions got decentralized from Just pure IT. to the end user and then IT needing to manage I mean the CIO

28:54 Now needs to manage all the applications that people are buying independently. And that's why happiness matters a lot more today than it did Ten or fifteen years ago. Because now every interaction

29:07 can lead you to lose a customer. Early on, if you just On a big trip and fancy dinner. And they were happy with you?

29:16 That was totally fine. even if the end users hated your product. So that's why There's where you're gonna find the next opportunities. Just ask people which Products.

29:27 The use Which progs are they happy about and which progs they hate. If customers are unhappy in the SaaS world, you're gonna lose them. there's also a multiplicative effect on the upside. If they're very happy, they're gonna become evangelists and The buyers now are actually distributed and have buying power. Whereas like if

29:47 with an enterprise product if users love the product before like It didn't matter'cause the CIO was the one making the decision. It was so funny because uh pre-dating this, like two or three years before this, there was this phrase that was floating around in like oh eight, oh nine that was the BYOD, bring your own device, and CIOs hated it. I mean there's this thing that IT suddenly had to deal with iPhones for the first time on their corporate networks and people saying, I need to be able to get my email on my phone and it's not BlackBerry, but like I like this thing so much that you can pry it from my cold dead hands. And it's amazing that it actually went hardware first and then took a few years to trickle into software. And now, you know, you look at Zoom, you look at Slack, so many of these companies, their distribution is bottom up. And and sometimes even their payment is bottom up because it's any employee with a credit card can can sign up for it. So Santi, my question to you is, why did devices come first and now we're in a bring your own software world in in IT? It's kind of we move from bring your own device to buy your own app.

30:46 I feel that The Devices. unlocked that purchasing power. Because when you brought your own device, you had full control on the applications that you installed.

30:57 And a lot of the consumer applications were driving this incredible user experiences Because they needed to make sure that you were paying for those consumer applications. So they knew That you had to hook them and deliver value, and that rewired.

31:15 the way people thought about business applications. So it's like I have this great consumer application that I use uh to communicate with friends and now I'm going into business. And I'm still using my Phone?

31:30 And it doesn't work and I can Can't set up conference calls. So I'm gonna use a consumer application. So then when you were able to Ту кріє а консумер лайк експірієнс.

31:42 With enterprise grade Security and features. That's when you win the enterprise game and that's what what Zoom has accomplished. 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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33:36 And just tell them. That Ben and David sent you. So Once Eric landed on Zoom and got going this after leaving and raising his seed round from all the folks that he'd worked with in the past.

33:48 This episode is full of incredible stats about Eric. Forty engineers of the eight hundred that he had worked with at Cisco come over and join him to build this new technology from the ground up, uh, that's gonna, you know Pursue customer happiness. Maybe that says a little bit about Cisco during that era, not to bash on them too much, but it says a lot about Eric, like 40 engineers right off the bat. And they just crank for basically two years building this product. Um And then finally at the end of twenty twelve, they get their first paid customer, which is actually the Stanford continuing education department. And this was was super cool. Uh also right before then. they got a review from Walt Mossberg in all things D. Like before they had a single paid customer. What a great write up. And Walt is just glowing. We'll we'll link to this review in the show notes. You know, in his in his typical Walt way, uh you know, just glowing about how great the product is and how well it works.

34:43 And it's funny he talks about it as a consumer application. Uh, even though at that point they were a business application, but that's how good it was. But anyway, so Stanford is is the first Customer and I think that uh Sati let's talk about this. becoming a great beachhead customer for them because education, this was the time of the rise of MOOCs and uh Coursera had just launched and Udacity and and To U, um, or Tutor which became two U, and all these universities around the country were thinking about like what is our online education strategy and component and Zoom becomes the way that they deliver that.

35:19 Education's still a huge vertical for Zoom, right? I mean something like ninety plus percent of universities use it. It is a huge vertical. And I think it makes perfect sense for this disruptive technologies because if you think ev even about Apple, the way they did it. They went. into the education vertical because that's where you capture the next generation. The older generation is probably

35:43 Okay with what they have. Things are not gonna change. But the younger generations are expecting a different type of experience. And then those younger generations get into the workforce And they demand

35:56 the same type of experiences. So this was not only a great decision by Eric to focus on education early on. But I feel that They also created a lot of value.

36:10 Because if you're trying to communicate to someone and deliver a message and people are remote, they can show up to class. And you have a seamless way to communicate, that's gonna have a huge impact. So I believe that if we could measure the impact on happiness within students and graduation rates of those people using Zoom, we we should probably see an increase there. Yeah. I was thinking about it as Education was a great beachhead customer'cause they were ready to adopt. But that's such a good point too. Like I again

36:42 What a perfect strategy to go in. These these people these kids are all gonna go join the workforce. They're gonna show up and they're gonna be like Ew. I'm using a polycom? That's icing on the cake, right? Uh w timing is is all about Are you solving a customer's pain point in a way where they didn't have this sort of pain before, where there's sort of an opportunity for you to slide in there? And you know, all these companies had already bought

37:06 You know, the IT departments had all bought video conferencing quote unquote systems before. And so there was not really an opportunity there, but this sort of slipstream that happened with MOOCs, that happened with uh students expecting to be able to watch things remotely, it sort of enabled you to go, Oh, yeah, that's exactly what we're for. And then you get this massive upside later of a a twenty year benefit of them sort of joining the workforce and selling within their own companies. So the other really, really smart thing that Zoom did in their freemium model with with GoTar Was

37:37 Zoom wasn't and still is. Free for anyone to use the full product for up to forty minute meetings. How did do you know Sati how they landed on the the forty minute? Yeah, I mean Eric Spent a lot of time in this space, so he knew the stats.

37:56 Анхінів business meetings. were forty five minutes long. So that's why forty minutes was a magic number. And we still have a lot of people using Zoom for business and using the free version.

38:10 And as you said, they get access to the full product, they get to experience the full experience. And then We see them they use it for forty minutes. They drop. And they start a new meeting.

38:21 And we're totally fine with that. We just want people to use it. And if they can't pay they can use it for free. And if they Wanna pay, they can Remove that.

38:32 Uh I mean that restriction. Yeah. It's so Such a smart like I think just demonstrate such a Great. understanding of like The customer and customer needs. Yeah, and the and the business model. Like when you have a business that requires a network effect.

38:48 to work like video conferencing it is It provides a ton of value to do it with at least one other person. It provides literally zero value to do it alone. And so providing another. If you're using Zoom by yourself, you have bigger problems. There's gotta be some use case out there. I mean people are recording messages with Zoom. So there are some use cases, but it's not the main. Um f to take advantage of the inherent network effect that's both necessary to make the product work and enables this incredible business that we're now seeing really as a public company today to

39:30 You have to be able to if you're paying, communicate with someone who's not paying and make that incredibly seamless for them. Or even if you're trying to use it for the very first time and and you know you're not paying yet. being able to to jump right in on that in a network effect business is crucial to success. It is. And and on top of that if you think about Zoom.

39:52 And we talked a lot about happiness. People are not only buying video conferencing from Zoom They're buying an experience. And that's what enables the company to do more than just video conferencing. If you

40:06 If you've been following the recent announcements, I mean they released phone and zoom rooms and the marketplace. And that's because our customers Want us to do more. They don't want A phone solution. They want the Zoom experience with their phones.

40:23 They don't want Uh room solution. They want the Zoom experience in the conference room. And that's magical when you get to that point. And it sounds like the vision is really to to become

40:35 sort of a full scale collaboration productivity company. Is that is that is that sort of how you think about it? We're listening to what our customers want. And we're Building based on what what our customers need. So so that's why we released these products because that's what our customers wanted us to do.

40:54 I wanna get to you know kinda now's the point. So Eric and Team Yeah, they build Zoom, they've got the education beachhead beachhead vertical, the companies and the product is starting starting to spread virally. You started using it as a consumer to start. Walk us through how your relationship grew with Eric and the investment process and

41:13 In particular, I'm interested in, you know, you mentioned you've been looking at the space for three years. You met with there there we're NR. Lots of competitors out there run by smart people who also get all the problems in the space. What what was it about Zoom that like You you were like this this is the one. First of all, it started with the product worked. Even before meaning Eric. I knew there was something special in the product.

41:37 And then when I met Eric for the first time I realized that it was more than just the product working. It was strong leadership. And someone who was committed

41:48 to doing things right, not taking shortcuts, not building it on top of Open source stuff just to patch things together, change the UI. And deliver quick value. He was focused on doing the right thing. So then I became obsessed with

42:05 Eric. And the product I remember stalking him they had this small office uh in santa clara Ironside Road, I think. Uh the elevator never worked and they had

42:18 uh boxes piled on and cameras stacked on top of refrigerator and boxes and that was The state of the art setting. And and I would drive down to Santa Clara to meet with Eric and the team on a regular basis. To build a relationship. and try to convince him to partner with us.

42:38 My goal was to invite him to present to my team. And he said, I don't have a pitch deck. I'm I'm not raising, so I'm not gonna do that. And the hook that we found was

42:51 Look, we're using Skype. in the office. I had bought a Skype camera that I would use to talk to entrepreneurs. And I hated that. Can you come in and talk to us about how Zoom is gonna replace that? Do a sales pitch. Exactly.

43:06 And he basically pitched us. On Zoom. And the pitch was very risky because he didn't present the metrics and NPS and all that stuff.

43:18 What he said is Everyone in the room Download Zoom now. We're gonna do a live demo. And if you've been in this industry doing a live demo it's incredibly risky.

43:30 And we all downloaded the product. And we were in the office, go somewhere else and present on the No, we were all in the same room and We joined the Zoom call And it worked incredibly well. And people were kind of okay. There's something here.

43:45 That's amazing. So so what happened from there? We were talking with Jake a little bit ahead of time. As you said, Eric wasn't he wasn't raising. He didn't have his, you know, numbers prepared. You started digging in on diligence. And and then you found A big surprise, right?

44:02 Yeah, I mean the metrics were a lot stronger than what we even Anticipated. And we've seen great businesses. I mean we we we work with companies like box and yam or

44:16 And Salesforce early on But these metrics were off the charts and To be completely honest, I don't think the team knew exactly What they were doing because they sent us like the data dump a lot of information

44:31 And for weeks we try to piece things together. And a lot of people couldn't even see what was going on. So w w we saw some trends like People were paying for Zoom and then they were churning. And in this standard industry, if someone turns, that's bad.

44:47 But then A few months later those people came back. So we saw those return rates. People were addicted to Zoom. Some people just needed to use Zoom. Once a month, once every two months, some people were using it on a daily basis. So when we pieced everything together

45:03 We were completely blown away. by the fundamentals of this company. So Having sine the product work. Having

45:13 being obsessed with Eric for a long time and then seeing all this underlying metrics That's what drove us to yeah, we we should partner with this team and help them build a big company. And it And we also felt that we could Add some value Beyond just a capital.

45:28 Because we've seen a few of these movies play out in the past. I mean this is what emergence does. Exactly. Scaling go to market. And when we first started working with Zoom It was mostly focused on the SMB sector. And we knew that over time we had to go up into mid market and enterprise. And that's what we focus on. I remember having conversation with Eric even before we invested where we started introducing him

46:00 Two great heads off. uh marketing, great heads of sales. So that their team could learn from other people And

46:10 So I feel that that combined with our approach to partnership is what convinced Eric and the rest of the team to go ahead and partner with us.

46:22 And even though we wrote a very big check when we invested in the company the largest Czech uh emergence has ever written. The company never used our capital. So they were not looking for capital. They were looking for

46:35 A true partnership. To help them scale the business. This is amazing, uh, hearing it from the the sort of Zoom side. Can you talk about a little bit what it's like as a venture investor to write the largest check ever from your firm in this really high conviction bet in this quite unusual scenario of the way that you're sort of chasing the company and it's not as formal of a presentation like What what is your life like in that moment? My life

47:00 Was kind of hell. Because I didn't have A lot of experience. I'm s I mean I I still don't have a lot of experience in venture. I'm learning a lot. And this was gonna be A big investment.

47:13 And it was gonna be my investment. I remember one of my partners telling me, Santi, you're betting Your career in venture. Because if this doesn't work out

47:24 Then I mean it's gonna be hard. To get out of this. Mm. But I had no pressure though. No but that made me think about the conviction. And then after doing all the diligence and after everyone met Eric, we came together as a team. We make decisions as a team here, and everyone was not just supportive, but

47:43 Of doing the deal, but we have this bar that we call unanimous enthusiasm. Everyone needs to be excited. About the partnership. And we were all there. Even though we didn't all start there. As we did more work.

47:56 And everyone met Eric, they tried the product. We got to this point where we said, Yeah. This is something that we need to do, even if it doesn't work out. But it yeah, it would be a It didn't feel great. That was leading up to writ writing the tech and making the investment.

48:14 How did your emotions like evolve uh after that? Like you know, obviously it worked out. Uh, but but how long did did it take before you felt pretty good about it? I thought. Pretty good about it. All the time. Because

48:30 What I Invested in the relationship with Eric and Tim that has never changed. So I didn't get any surprises. I mean all the surprises were positive surprises. It was one of those board meetings where

48:44 Uh We would show up and Eric would say We didn't do what we said we're gonna do, we did better. Uh that's such a hard job as a mentor. It was it it was a good feeling all along And

48:59 The more time I spend with Eric and the team The more excited I got. Because initially It was just v video conferencing. Then it's okay, our customers want want us to do more.

49:12 We can do more. And that's how we kept on expanding the the Tam And that's where we are now. And we still hear our customers

49:22 One in A lot more from Zoom than what we're offering. So it's been a great journey. And for me personal. It's been great because when I wanted to join Venture

49:33 I got a lot of rejections. I was Talking to over seventy firms. It's like being an entrepreneur. Yeah. I was I mean, it was my sales pipeline, and I had a sales pipeline, different uh I mean different conversion metrics and

49:49 And A lot of the notes I got We're not specific about my track record. They were more about me as an immigrant, as a Latino.

50:00 Inventor. And that was before people got a lot more politically correct. This was back in two thousand and ten. And a lot of people said, yeah, but Latinos are not in venture. So you should try to find a different job.

50:14 Here in the valley. So I always had that chip on my shoulder where it's like I'm gonna prove you wrong. It's like I got a lot more energy from those conversations.

50:24 Unfortunately the emergence team gave me a chance And and I couldn't be more thankful for What they did for me. A few people inventure Alex Mendes who's a founder of Storm Ventures.

50:37 He believed in me and hi held me. a lot would have very long conversations and he had no vested interests. So there were a few people that helped me out. And and I'm incredibly appreciative of that. And also Eric and the team who trusted that we could help them out as well. Yeah. That's such an amazing story. And um

50:57 Thank you for sharing it. I can only, you know, imagine You go into that on the Venture side. I mean, I think I would imagine Eric probably went through a lot of that.

51:06 On the founder side too. Um Yeah, he got a lot of rejection early on when he tried to raise capital. That's why he decided that he was not gonna raise capital. And even when we invested in the company. And we could tell the company was doing really well. People wouldn't even take meetings with Eric. So when w when I would talk to my friends in venture about

51:29 Zoom. It's like no, we're not doing anything in video conferencing. It's a race to the bottom. Or different comments about it, people wouldn't even take the meetings. Wow. That's so incredible. So that's why I feel that when people are looking just for

51:43 A category They might miss out on great people. Yeah. Yeah Totally. Especially because you know If you believe which has shown to not be true that

51:56 the raw video conferencing technology is commoditized. Like it's not. Zoom Zoom is still excellent and it is widely true that most others are not as good. As you were talking about TAM expansion. Buy leveraging that customer base and that happiness and that love for the the company

52:12 into all these other things that you're completely blind to that, Tam. And good market innovation too. I mean the forty minute premium model. Illustrated no better than WebEx being bought for three point two billion dollars in two thousand six or seven or whenever that was. Today, Zoom's market cap, you know, they were sixteen after their IPO twenty six billion we're we're recording today. Like the enterprise value of this company is

52:39 Number one, not just about video conferencing and number two Turns out that wasn't a commodity in the first place. Yeah. I also feel that there's a lot of bias when it comes to venture investments. And people are looking for the next

52:52 artificial intelligence, blockchain powered Whatever. And there are some basic building blocks. that go through this renewal phases. CRM and what Salesforce did Was not a new technology.

53:08 It was a new way to deliver an existing technology. Same Thing for Zoom. So there are a lot of existing markets that go through replacement cycles, especially when the incumbents Miss out.

53:23 on the big changes in the market. When was the last time that you heard someone say I love email and the way things are being handled. Or I love it. Or I love it. CRM.

53:37 Uh there are a lot of those core building blocks. that are gonna go through big transformations. And if the incumbents don't see it Other people are gonna take advantage of that. Yeah. All right listeners. Now is a great time to thank our longtime friend of the show, ServiceNow.

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55:37 Well, before we wrap up with The Zoom IPO I I wanna build on what we were just talking about a minute ago and kind of the underdog status of of you of of Eric, can you talk a little bit about the both the the senior management itself at Zoom and the philosophy. I mean, unlike

55:55 I would imagine a lot of c well, a lot of companies in the valley and a lot of companies Emergence works with. Eric talks a lot about, you know, they don't really recruit superstar outside execs to come into Zoom. They build from within and people who are uh who are hungry, uh who have the capacity to learn What have you seen being on the board and being part of this process of building the management team? I need to disagree that they don't recruit superstars.

56:20 They don't recruit known superstars. Yeah. But publicly known. Yeah. But the people they recruit to lead the different functions. Are superstars. And people who've work with them

56:34 recognize their superpowers. But they're not the ones that are being listed in every list of oh, who are the Top ten CMOs. Let's hire one of those. Yeah. You won't see a uh you know former president of Oracle coming to work for Zoom anytime soon. You're gonna look for the people who are actually doing the job. and are we gonna work incredibly hard and are gonna connect

56:59 with the mission of the company. And that's another Area where emergents connected really well with Eric. So if you think about me, I'm a general partner now. I joined as a senior associate. And when I joined, I was doing everything from like Copies to coffee to setting up technology. I still do that. I'm tech support and I don't care. And I still I mean we still do that and we recruit people as senior associates and we invest in them to make sure that they become

57:36 the next generation leadership. But Kevin Spain, who's also a general partner. Join the firm as an associate. Jake, who you guys know.

57:45 also join us an associate and now as a partner. So we invest in rock stars. before everyone recognizes them. And we do. what it takes to make sure that we create the right conditions for them to succeed. And that's what What Zoom does.

58:00 And the team there is one of the strongest teams that I've ever worked with. And it's probably the most humble team. that I've ever worked with. And one other thing that

58:10 Point out here, you know. Again, we're being super laudatory of Zoom because it deserves it. Like Of the named senior executives on the S one for the IPO. Other than Eric, all of the other named senior executives are women. You know, try and find another company in in Silicon Valley that looks like that. And that is not a story that they're sort of pounding the pavement with. You'll notice that this is true. And it's not the coverage.

58:37 Yeah, I was talking to one of the executives at Zoom. She described Eric as Eric doesn't see colour. Doesn't see shape. Doesn't see anything. He just sees

58:48 Raw talent. Um so that's why he's not saying, Oh, we are an incredibly diverse team Because he's not gonna use that for marketing. He's just gonna do the right thing. And that's been a strong core value of the firm, just doing the right thing.

59:04 Even if people don't even notice. Yeah. I was shocked that I hadn't heard Zoom or anybody else talk about that before and going through the S one I'm like, Wait a minute. Yeah. This is this is Different. Yes, absolutely different. All right, so I want to catch us up

59:17 Before so Santi, I want to ask you to sort of lead us through after the investment through today and other funding rounds and other milestones. One thing that we did skip over in sort of the growth of the company is so we said founded in in 2011, they launched in January of 2014. let's just take it a moment to acknowledge how ridiculous it is that five months after launch they had a million total participants. in their video conferencing, and then eighteen months after launch continued to accelerate to ten million participants by June of twenty fourteen. I mean this company was growing like a weed from day one. True.

59:54 But they were completely under the radar. People wouldn't even know. What Zoom did. And that's because they were not selling. Two IT, they didn't have the billboards.

1:00:07 It was more of a grounds up adoption. People were using Zoom. Even when Their companies were standardized. on different technologies.

1:00:16 And that's just because they wanted a better experience. We saw a lot of that. uh where people were She's using Zoom, it's like yeah, don't tell anyone. But I'm not gonna schedule uh That was Google for Search when I worked at Microsoft, and then it was Google for Docs when I worked at Microsoft.

1:00:43 Uh so Santi, uh catch us up. So Emergents leads a thirty million dollar round in the company. They continue to to grow very well. What did growth and then what did uh future funding look like between then and the IPO? We when we invested this was back in twenty fourteen. The company was mostly S B. So the Next big challenge we had was

1:01:04 going up from S and B to mid market. An an enterprise. And we did that. Probably like twenty fifteen. Uh we started getting some mid market

1:01:15 and a few enterprise customers. And that's when we saw that this was not just an S B product. But be companies. were willing to standardize on Zoom. And again, we were not raising capital. The company

1:01:30 has been profitable for for a while as you can see. I in the S one But then we got approached preemptively. by Secoya and Eric Her Always

1:01:41 And had an admiration for that firm. And they were good partners, they did a good process. And we ended up partnering with them. And after that we we never raised more capital. It's amazing. Yeah. And I think we never touched the Sequoyamani either.

1:02:02 Other companies that are IPOing uh this year. Absolutely. We we've had another company back in the days, a company called Viva Systems. Yeah that went through a very similar they only raised seven million dollars and they only raised it from emergence. Yeah, and they only used Mm less than half of that. And and then they're now a twenty plus billion dollar company. It's crazy. And actually what's also interesting is that The founder and CEO of Viva Systems.

1:02:30 is now on the board of Zoom. Uh When we invested in the company, we knew that we needed some of that enterprise DNA. So Peter Gasner joined the company. And that's why you see a lot of similarities.

1:02:44 In the way Zoom Uh scaled. compared to Viva. How does that work? Is he when the company was private, is he like the outside independent. And he's an independent with a lot of enterprise uh knowledge. Yeah. And a lot of

1:03:00 company building knowledge. You don't just want to have a lot of investors right on the board. You want people who who build real companies. Yeah. So before we switch to the IPO, there's probably a lot of people out there, and I know I'm thinking it too, sort of pattern matching off of that comment you made. We started SMB. Um in fact I remember when we had Scott Dorsey on and he was talking about exact target, they started with uh his email marketing software. that sold the sales force and their initial customer was a dry cleaner that was right there in Indianapolis on around the corner. Started the small business and and ended up scaling up to be, you know, everything from small business, SMB, enterprise, mid market. They became a tremendous enterprise company. And I was always shocked that oh my gosh, this software that you're originally selling to dry cleaners, at some point like you can sell to Nike and Microsoft.

1:03:46 As an enterprise SaaS investor, is is that typical? Like this thing that Zoom went through and being able to flip the switch and move from SMB to enterprise, would you suggest people go about that strategy and building their businesses? What's nice about that strategy is that you focus on the end user. Because when you're selling to an S M B or a VSB Everyone cares about the money that they're paying you and uh about the experience.

1:04:13 So if you can convince an S B to buy your product and use it. Then It's gonna be hard. to create that customer love when you move into mid market and enterprise.

1:04:25 So I believe it's a great strategy. to get that customer love early on. But it's not easy. Yeah. That's gotta be a try moment for the company doing those first few enterprise customers and really understanding those pain points. Yeah, and and then making sure that you're not only serving

1:04:43 The end user. But the CIO will have his or her opinions about how to integrate Into the platforms they are using. And they'll ask about security and they'll ask about compliance. So you need to have that figure out.

1:04:57 And that's why early on I remember conversations with Eric where he said oh we have this big customer that wants to standardize on Zoom But I told them that we're not ready. And uh

1:05:10 contract value was much bigger than what we were getting from other S and Bs. But he was right. And that's sometimes what And you were like we're not ready, like we ready tomorrow. Aside great COs from OK CEOs, that they know when to say no. And that's probably harder than saying yes. But if you're building a big company those initial experiences that you're gonna get with mid market or enterprise

1:05:39 Could end up killing you. Because if you're not ready, you might become an outsource development shop. For that enterprise. And that might kill the rest of the business. Well what's what's cool with this strategy, um uh my favorite customer stat from uh from the S one was Uber. I forget where

1:05:55 Uber started with with Zoom. But it grew and grew and grew over the years to the point where Uber now does, according to the Zoom's S one, fourteen million meeting minutes a month. On Zoom. Across the organization. Like think about that. That's that's crazy. But that's like growing with the company and you and starting with you know just small teams with an Uber and using it to communicate and then like next step is like Get some bigger paid plans, next step is talk to the CIO. And next thing you know, the c whole company is standardized on Zoom as the way they collaborate. And it not only grows with the companies, but it also changes the way companies run.

1:06:32 I believe that Zoom is changing the way we work. And I can see it in Some of our biggest customers. And I also see it here at Emergence. When when I first started here at Emergence, most of our investments were here in the Bay Area. Last year. Sixty percent of our new investments are outside of the Bay Area.

1:06:51 So bringing us back Two This pursuit of happiness, I believe that Zoom. is democratizing and globalizing The pursuit of happiness.

1:07:02 Because it's enabling people to realize their dreams regardless of where they are. Yeah. Alright, I'm gonna take us quickly. The IPO. So Post

1:07:13 Emergence investment. in uh essentially calendar year twenty sixteen, the company does sixty million in revenue. is cash flow positive. Doesn't use the emergence investment. The next year in twenty seventeen does a hundred and fifty million in revenue. Twenty eighteen does three hundred and thirty million in revenue with fifty one million in operating cash flow. And files to go public in March of twenty nineteen of this year. That's net income positive, folks. Not a loss. Which is the first time you're hearing us talk about that this season. That plays well with public market investors, it turns out. Sure does. The IPO prices the evening of April eighteenth, uh at thirty six dollars a share. above the range, which had already been raised during the road show. That equates to a nine point two billion dollar

1:07:55 market cap. And then it closes the first day of trading, as we heard at the very, very top of the show, uh on Thursday, April nineteenth, up seventy two percent to sixty two dollars a share or a sixteen billion dollar market cap. What was that day like? Uh it was an exciting day. And the question that I got asked a lot

1:08:15 With Did you guys feel that you were leaving money on the table by pricing at thirty six? But This is very in line with how Eric Runs Zoom.

1:08:27 He was inviting new people to join our journey. Those new investors were gonna be our new partners and he wanted everyone to be happy. So not just existing investors or people selling

1:08:39 So It was pretty much in line with the type of company that we want to build. Make sure that we attract the right investors and that the right investors believe in what we're building long term. I came back home and I described this to my wife and it felt like a

1:08:55 Like w when you get married. Just Date for a long time, you start building and making sure that you're ready for that big day. Then you have that big day. You celebrate with your friends and family. Then you go back home.

1:09:10 And you need to start dealing with the rest of your life. You have a marriage to build, yeah. You have together kids and this and that. So that's a phase that we're in. We're still building and we're still focusing on making sure that our customers Are happy. All right, David, so let's dive into the playbook. Well, one I'll just highlight again real quick, you know, as we started at the top of the show, just The power of

1:09:33 immigration and like grit and people wanting to Build things and come here and do it here in Silicon Valley and in America. Um What a shining example Zoom is of that. And and you are too, Santi. I mean, amazing. Um But I also want to say Santi, you mentioned this, I want to highlight it again.

1:09:50 Every big market, or most big markets, I think. They go through cycles of disruption and cycles of innovation. And I think it's so easy to forget that. You look at the video conferencing market and you're like, Well, that's done. You know, it's big, but it's done and and These big markets, they're always going through these cycles and and you need to know where you are in in the cycle. Yeah.

1:10:11 That's a great point. I've got a couple one is on the product side. So I opened this episode with so what's going on with this company what makes it so special. I want to talk about the product side and then I want to talk about what's going on with the business. So on the product side, Uh, we danced around this, but basically what you have is something that people thought was a solved problem, which David you alluded to, it's not. People thought it was a commodity and uh uh Santi, as you alluded to, it wasn't. So it was an actually good experience for an essential piece of doing business that had a mandatory network effect built in. And I think when you mix those things together, like

1:10:47 that product's gonna grow. Like that's gonna do very well. And so when you look at the business impact on that, what's going on with the company now when Jake, Santi's partner here at uh emergence joined us on the limited partners show, he made the comment that what we like to look for is triple, triple, double, double in uh in SaaS companies, that, you know, the first few years we first two years we it's great to see it triple, second two years it's great to see it double, and it sort of gets smaller after that. Zoom. is still a massive growth story. They grew uh over a hundred percent, so more than doubling year over year last quarter. And that's eight years after the founding of the company. So

1:11:23 This is still a a a superstar growth story. The payback period when Zoom pays to acquire a customer, right now is is averaging around nine months, and that's an implied payback period from reading the S1. For reference. Dropbox is about sixteen months and uh DocuSign's about thirty, so when you look at the efficiency of spending marketing dollars and getting that back from revenue, wildly, wildly efficient. And so that leads to a business that is cash flow positive, that is now debt income positive. Um and and you can just sort of see in the the stock price why everyone just believes that this is such an an amazing business. That's an advantage that we have. We've been doing enterprise investments for the last

1:12:02 Fifteen years. So we've seen a lot of this companies. So when we see those underlying metrics and when we do those cohort analysis, we can see which companies are doing incredibly well. And we can also help shape that. Because Now with a lot of capital available

1:12:21 Some companies are not even focusing. on doing the right thing. They're just spending a lot of money. and focusing on growth at any cost. But ultimately, and Zoom has shown us this

1:12:33 Markets care about profitability. They do care about growth. But profitability is also important. So that's why having seen this movie play out in the past we can also help a lot of entrepreneurs focus on the right metrics. And a lot of entrepreneurs have no idea

1:12:50 how those metrics stack up against other companies. And there are a lot of things that they could do. And even if they don't do it early on because they just want to focus on growth, you need to understand At scale, what are you gonna change to make sure that you continue growing? And you continue delivering and building value. Yep.

1:13:10 All right, moving to grading. So the way that we do this uh for IPO episodes that just happened is rather than uh sort of issuing your grade, we say what makes it an A and what makes it an F and what makes it somewhere in the middle. Over the next five years. Right. Right. And so uh as history plays out, you know, I think execution wise Totally an A plus. You can I'm sure people will quibble and have quibbled over should they have priced higher and the company been able to raise more money versus you know sharing the profits with the new investors. Love the company philosophy there on on sharing with the new investors and the upside.

1:13:42 the thing that will make this an A plus five years from now is In doing this financing event, in doing an IPO, and of course great to get liquidity for for all existing shareholders. Are they able to use that that new cash generated or do something with either the IPO proceeds or what it means now to be a public company to really grow into this really important collaboration company in the world, you know, that that the stock that all investors believe that it can be this$26 billion company. And so I'm super optimistic about that. I think the thing that that uh would paint this as a negative picture would be if

1:14:20 um if you know that that it turned out that the real business was just the video conferencing and there wasn't this this additional value to be gained by being a a a Zoom customer, or if they hit some ceiling on growth and they didn't continue growing in the in the way that they could and the TAM actually ended up being smaller. Personally, I don't think that's gonna be the case, but I think as you're looking at at Zoom over the next five years, those would be the things to look at. And on top of that, what I would add Is That the key driver

1:14:50 That's gonna help us. Deliver results. is making sure that our customers are still happy. That's why the NPS score is critical for us and we keep tracking that score because that means that we're doing the right job. And if we keep our customers happy, then our employees are gonna be happy, our investors are gonna be happy, our partners are gonna be happy. And the second thing

1:15:15 that we need to make sure that we continue to focus on is making sure that we attract the right people. We talked a little bit about the people who succeed at Zoom. And those people are not just rock stars, but they're people committed to the mission and vision of the company. And we need to make sure as we scale.

1:15:34 as we hire more people, as we expand internationally. that we keep on attracting the right people into Zoom. Well put. Well. All right, David.

1:15:45 Carbouts. Yeah, we haven't done carvats in a while. We get back at it. So I went and saw an excellent movie this weekend. with uh myself and and four other uh uh folks from the PSL team, largely engineers, it had a deep appreciation for the history

1:16:01 Uh saw the documentary General Magic. Oh man. I tried to convince Jenny to go with me a couple of weeks ago and uh She was up for it, but I could tell she wasn't like really up for it. So I mean it was incredible. I have some issues with the immense amount of drone shots and sort of random pictures of of California uh water, but it was so well done. And for listeners who are wondering what is he going on and on about, general magic was a company that David and I have mentioned on a couple episodes that in the early nineties was formed to basically invent the smartphone. And they went public.

1:16:37 They were uh spin out from Apple. It was technically a spin out from Apple. I mean we're gonna have to do an episode on that. It was led by Mark Perat. It uh the the founding engineers were uh Andy Hertzfeld and Bill Atkinson. So the original Macintosh team, Susan Kerr was there. And then you really start to dig into all the people, it's Tony Fidel. He was like this like crazy long haired intern, Andy Rubin. So when you look between Tony Fidel and Andy Rubin, like uh there's what are they it's 98% of the smartphone market ended up being you know co-created by those guys at different companies. It's Kevin Lynch, who was uh I think was he CTO of Adobe and now leads the Apple Watch team. This is Apple senior vice president of something technology. There's Twitter CTO There's the former uh CTO of the US government to Barack Obama. I mean, the immense talent that came out of this plucky company.

1:17:30 That by all accounts wildly failed. Like they they went kaput in a big way, but not only the storytelling, but the ambition and correctness of their vision, but just uh you know, as as Santi alluded to, the timing is really what matters in these things far too early. But One of the things that made it really special too is they had a uh a documentarian shooting a lot of footage while they were building this thing. And so they just had immense, immense old VHS tapes, I guess, that it certainly looked like that to draw on to cr to create the documentary. And so like the early days of Alibaba. Oh, it's it's so wild. I mean it's a bunch of hippies on the floor barefoot building computers together.

1:18:08 Like it's that's all all the company meetings are like sitting on the floor. It's great. We'll link to it in the show notes, listeners, if you have an appreciation of uh of technology history and are a nerd about sort of Apple stuff, smartphone stuff, uh early days of of uh a lot of the roots of Silicon Valley today. Definitely check it out. It's touring right now. It is a uh um an independent documentary. I assume it'll be it'll be available online at some point if you if you miss it on the tour, but uh super, super fun to go see. I can't wait to watch this. Well, so speaking of uh truly truly excellent recommendations that Ben you have made to me on on Car Out's Past.

1:18:46 Dissect season four of the dissect podcast. Oh nice. Uh season four is Tyler Flower Boy by Tyler the Creator. And uh So good. It's been one of my favorite albums of recent years for a long time and um Cole just does such a great job. dissecting it. And uh uh if you are

1:19:05 Into music at all. And even if you're not, uh if you're into acquired type podcasts about anything, you will love this season. the I guess the way that we try and dissect companies call dissects music both lyrically what on earth is going on with this track and this artist, but then also from a music producer perspective and dissects the actual track piece by piece and it's Yeah, not just from a music producer perspective, but I also I really love it's like from a music theory perspective too. Like why do these chords work here? And like what is like what is Tyler doing with like, you know, stepwise motion here? It's it's very cool.

1:19:41 That's awesome. I haven't listened to the season I gotta do it. I listen to the Kanye season and uh excellent. Also truly excellent. All right. Bring it home. Let's bring it home. All right listeners. Now is a great time to talk about one of our favorite companies, Statseg.

1:19:56 Yes, there is a reason why the best product teams rely on StatSig, whether they are iterating on their core product features or shipping AI powered experiences at scale. Yeah. In the crazy speed of today's AI world. Shipping fast is just table stakes now. It's basically trivial to build and deploy your app constantly.

1:20:18 The real advantage is how quickly you learn what changes actually created value for customers and how fast you can use that signal to guide what you ship next. This is where StatsIG comes in. It brings experimentation, feature flags, and product analytics into one unified system so teams can ship safely, test rigorously, and directly link what they changed. to how users actually behaved. So if you want to make learning your competitive advantage, whether you're building new AI experiences or just evolving your existing core product, go to statsig.com slash acquired to get started. All right. With that, listeners. Thank you so much, Santi. It's been a real pleasure.

1:20:56 Can't imagine having done this episode without you and uh um so fun to get to have this conversation together. Thank you very much. This was a lot of fun. Yeah. Well, listeners, if you aren't subscribed and you like what you hear, you should. We'll be continuing to cover all of the big upcoming tech IPOs. And uh of course, if you want to hear uh uh sort of deeper insights on SaaS investing from Sante's partner Jake, uh or dive into any of the other company building topics, you should consider becoming an acquired limited partner. at glow.fm slash acquired or clicking the link in the show notes.

1:21:26 And with that. We will see you next time.

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