Slack will go public later today on a $15.7B valuation, the biggest SaaS IPO in history and the first direct listing of a SaaS company. We are truly living through a golden age of business software.
While the core functionality of Slack is similar to IRC, it’s clearly something beyond the core product that has enabled Slack to become so valuable.
The success of the company speaks for itself — Slack is the fastest growing workplace app ever and its shares have been popular in private trading for a while.
So where does this success come from?
I believe it’s rooted in two (connected) factors:
- The Slack team has built a truly great product: one that is connected in existing behavior, improves on it, and is very sticky. In the process, they’ve created a new (huge) category in which they hold a formidable advantage.
- They’ve come up with a business model which supports the product: it allows the company to capture the lion’s share of this new category/market and grow sustainably.
This explains why Slack is so bullish on their public offering — it’s planned as a direct listing (technically not an IPO), meaning the company won’t be issuing new shares, but rather allowing investors to monetize their existing stock. Also, there would be no limitations to selling, which creates a risk about the price of Slack’s shares.
Because of the reasons I explained above, I believe Slack’s public offering will be a success.
In the following sections, I will go into detail on what makes Slack’s product and business model so good and so well-aligned.
But before we get to it, let’s quickly go over Slack’s numbers.
A look at Slack’s numbers
A look at Slack’s S-1 statement reveals some truly fascinating statistics about the company:
Slack’s revenue was $134.8m in Q1 2019
Slack generated $134.8m in revenue in Q1 of 2019. That means sales grew 66.6% in one year.
That level of growth is amazing for a company that generates over $100m in sales on a quarterly basis.
The fact that revenue continues to grow so fast, combined with where this growth is coming from (more on this below), signals that Slack’s (long-term) business strategy is working.
The question is, how much runway do they have…
Slack recorded a net loss of $31.9m in Q1 of 2019
Slack continues to burn through a significant amount of cash per quarter.
However, it’s also important to look at their numbers from the perspective of the $792m in cash Slack have sitting in their bank account.
At their current rate, they would have around 6 years of runway.
That’s plenty of time to figure out how to make money (also, it’s aligned with their overall strategy, which I’ll get to in a bit).
40% of revenue comes from 0.7% of customers
That’s perhaps the biggest threat to Slack, if there’s one.
Out of 95 thousand paying customers, there are 645 organizations that generate >$100,000 in annual recurring revenue.
These large customers contribute about 40% of Slack’s total revenue.
Clearly, relying on such a small number of customers is a risk, but it also shows how successful Slack is at growing through existing customers — they can enter an organization just by getting one team/department to use Slack and then expand internally by getting the whole company to switch.
Net dollar retention rate of 143%
Slack is well into net negative churn territory. In fact, the company has one of the best net dollar retention rates a SaaS company going public has ever reported:
What the 143% is telling us is that Slack’s customers are growing and expanding their use of the product faster than they are churning.
This is a critical piece of Slack’s business model. However, before we get to it, we should look at how Slack created a product that became so sticky.
Find an existing (broken) behavior and fix it
Organizations have relied on email for quick (asynchronous) communication for years, but email is not a good fit for that purpose.
Slack identified this and built a tool, which is much better aligned with the goals that users want to achieve.
The similarity with IRC is not by chance — early in the life of the company when they were working on developing an MMORPG game, they were using IRC as a team.
However, the team quickly realized what were the limitations of IRC and started building and expanding on it. After the game didn’t pan out as expected, CEO Stewart Butterfield decided to pivot and spin out their tool for internal communication as a separate product. Thus, Slack was born.
Slack not only created a new tool that was well aligned with the needs of professional teams, but they also created a whole new category.
Being pioneers and having a great product positioned Slack to capture the lion’s share in their category.
However, that didn’t prompt the team to exploit this position for quick returns. Instead, Slack focussed on building a business model that would allow them to capture a lot more value in the long term.
Focus on integrating then building all the tools
Professional software is a gradually more fragmented field. The average large company in the US uses software from around 1000 different vendors.
Yet, most companies look at expanding their own suite of products as a way to grow.
Slack has chosen a different way. The company admits its product offering is limited, but that’s by design.
Instead of trying to expand by building a tool for every task and behavior as a way to grow, Slack has chosen to focus on integrating as many popular tools as possible to work with their chat tool.
That means their users don’t have to switch their behavior and learn a new tool. That lowers friction for people to start using Slack and makes the product sticky.
Thus, Slack has become a platform — it allows external developers to integrate and build on top of the tool.
This creates a long-term network effect: the more people use Slack, the more other popular tools would want to integrate with it, thus sparking further growth in the number of teams that want to use Slack, and so forth.
(To learn more about what it means for Slack to be a platform and how they’re marketing it, check out this interview with Ceci Stallsmith, Slack’s Director of Platform Marketing)
Build a business model that supports your product strategy
According to the S-1 filing, there are over 600,000 teams worldwide that use Slack, but only around 95,000 (or ~16%) are paying for the product.
That might seem like a precarious position to be in, but you also need to consider the fact that only 8% of their customers start with a paid plan.
For Slack, the freemium model is a great lead generation tool — once a team joins and starts chatting, integrating with other tools they’re using, and adding their information to the platform, it would be very hard to switch to another tool.
That way, Slack can “enter” a team early with their free tier, establish a foothold, and stay for the long haul — the stickiness of the product minimizes the chance customers leave early. The net negative churn numbers we saw above are a testament that the strategy works.
Slack is going to be successful as a public company
Slack sets a great example for all types of subscription companies.
Butterfield and team succeeded by focusing on defining their market well and building a product that’s both great at fulfilling the needs of their market and sticky.
Additionally, they also did a great job of formulating their strategy and business model in a way that supports the product strategy.
Because of the above, I am very optimistic about Slack’s future as a public company. Even if market analysts seem to be pretty cautious at the moment.
Disclaimer: As of writing I own no shares in Slack, though this could change following their listing later today. This article does not constitute investment or financial advice.
