Slack set out to kill E-mail

  • Started as a side project for internal use in a gaming company
  • High revenue growth with recurring revenues
  • Went Public by offering shares through the Direct Public Offering


Founded by Stewart Butterfield (previously co-founded Flickr, sold to Yahoo @ $20 million), Slack started as a side project for internal use in a gaming firm called Tiny Speck in 2009. However, the potential of the messaging app was realized and soon it became the fastest growing Software as a Service (SaaS) startup in history, offering cloud-based workplace messaging platform, that brings together people, data and application at a single place, facilitating nearly all communication/collaboration needs in an organization. It provides group conversation, file sharing, data aggregation, access to critical applications, presentation etc. with the aim to replace E-mail. The conversations within slack allows for multiple participants and are public within a company, thereby creating a permanent record and easy accessibility of projects, processes or meetings which otherwise are lost in individual mailboxes of the participants (in case of E-mail). Further it offers integration with over 1,500 popular third-party applications (GitHub, Salesforce etc.) as well as custom built software.

With the mixed bag of Tech-IPO’s this year with Pinterest and Zoom doing exceptionally well while Uber and Lyft facing the investor brunt, Slack became the next litmus test for high-growth/high-loss startups (although Slack is quite different from Uber, it bears similarity in respect of high growth and high losses, with no visibility of profit in the near term). Broadly, the IPOs in the cloud software category have been particularly rewarding in the past two years with Zoom, Okta, Twilio, PagerDuty etc. trading at three-digit percentages from their IPO price. Notably, Slack also witnessed a healthy bump in the stock price as it went public on 20th June 2019 on the New York Stock Exchange soaring 50% higher to $38.62 vis-à-vis reference price of $26, valuing the company at $24 billion as compared to the last private funding valuation of $7 billion in August 2018. The Slack issue was structured as a DPO (Direct Public Offering) in which it offered its existing shares directly to the public, eliminating the middlemen – Investment banks, broker/dealers and underwriters and saved on listing costs. In this case no new issue of shares took place, rather shares were sold by existing investors.

Looking at the overall structure of how Slack operates, it provides a niche product in a high-growth segment (with exponentially increasing daily active users) and a loyal user base and brand following (with high net dollar retention rate, outperforming most cloud software IPOs in the past).

Further, Slack has witnessed exponential revenue growth with almost doubling in revenue in each of the past 2 years, owing to doubling of paid customers (>$100,000) during the same period. However, the Company has never been profitable since its inception, although the magnitude of loss decreased in the past 2 years.

The losses are majorly attributable to higher operating costs (which Slack has been unable to control), with user acquisition cost (selling & marketing costs) hovering above 50-60% as percentage of revenue. Although it managed to reduce the net losses over the years as % of revenue, but that was mostly attributed to a huge reduction in R&D cost as % of revenue. Whereas, the focus should have been more towards reducing acquisition costs (considering it is still very high vis-à-vis other players in the cloud collaboration space) rather than focusing on reducing R&D costs which is required to innovate and remain competitive in the cloud collaboration space that has low barriers to entry.

Globally Enterprise collaboration market is estimated at $31.74 billion in 2018 and expected to reach $53.83 billion by 2023 (source: ResearchandMarkets). Although, the growth of Slack has been exponential, however there is still a huge untapped addressable market globally for Slack (which has set out to replace E-mail). Further, looking into the potential of this market, Slack is currently pitted against the tech giants like Microsoft (started Microsoft Team last year, which it can offer to its over 180 million Office 365 users at almost no cost), Facebook (Workspace snagged large clients like, Nestle etc.), Cisco, Oracle, Amazon, Google etc. which are all testing the waters of the enterprise communications market and can eat into the market of Slack. Currently Slack has the first mover advantage and should focus on differentiating itself with investment in R&D to remain competitive in the near future. One area where it has differentiated itself is the integrations with over 1,500 popular applications. It has to focus on winning more enterprise wide contracts and converting free users into paid users, while focusing on reducing customer acquisition costs.

The road ahead for slack is a difficult one and only time will tell how the company fares against the tech giants with huge resources and customer base. Founder Stewart has currently carved a niche for himself and has the option to either go head-on with the competition or look to be a potential acquisition target (like his previous venture). For now, the existing investors of the company made a windfall in the successful DPO.

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