The Rise of Workplace Software: Slack Edition

In one of the better founder interviews I’ve read recently, Farhad Manjoo of the New York Times asks Stewart Butterfield, “Is Slack Really Worth $2.8 Billion?”

Butterfield is the humorous and personable chief executive of Slack, a modern team communications tool that has quickly become the default messaging application for many businesses of every size, from small startups all the way to public corporations.

Started as a video game company that was going downhill, they used the remaining assets to work on an internal tool they used for messaging. It was reminiscent of past chat applications like AIM and IRC, but it’s leaps and bounds better than email. Slack has easily searchable archived interactions, fast and painless file attachments, and arguably most crucial for immediate adoption, it’s multiplatform thus there’s no installation overhead—anyone can be in Slack in literally minutes time. The way emails handle conversations, having nested messages with context disappearing per thread, is insanley arcane and inefficient, and what Slack does is make it easy for anyone to catch up on any ongoing conversations and stay in context.

The NYT interview was particularly interesting because it shows Butterfield’s candidness about the issue of valuation, his particular unique leverage in raising capital, and why raise $160 million in the first place (Short answer: Because it was offered at a great deal by some of the best VC firms. Who wouldn’t say yes to that?).

So why is the company valued at $3 billion? Because there’s only one Slack.

Q.
You’ve said before that valuations are “arbitrary.” Is Slack’s almost $3 billion valuation arbitrary?

A.
Public investors often have some underlying rationale for getting to a decent price. In this market, there are bets about how big the company’s market can be, how good the team is — but there is also just a whole lot of supply and demand.

And there are a lot of investors who have a lot of money. So when I say arbitrary, I mean that it’s not coming from some airtight, textbook formula for how to value these types of companies. It’s based on how many there are — and there’s only one Slack — and if you would like to invest in this Slack, this is the price that it costs.

It’s very highly influenced by other factors: Interest rates being low, there’s a lot of money in V.C., funds get larger as a result, but the number of deals that they do remains about the same. So therefore the amount that they invest per deal goes up, which means the valuation goes up.

What does it mean to be the only Slack? There’s literally no other company—in its market or outside of it—growing quite like it. With already 750,000 daily active users and 200,000 of them paying customers in only 14 months since launching publicly, it’s now considered the fastest growing business software of all time. They’ve been doubling in growth every three months, a rate that hasn’t waned since they first started. And having that kind of trajectory and stickiness with its users, many of whom have outrightly abandoned email for internal communication, suggests that it’s indeed on a unique curve.

Slack has swiftly introduced an application that’s much more efficient than the previous alternatives. But now it begs the question: Where else can the product innovate? What other areas can they enter? How much more can they improve team communications, or perhaps more generally, business communications in general?

One of Slack’s most attractive offerings is it can easily integrate with other apps that your company already uses, from project management, to cloud storage, to helpdesk software, to CRM, and many others. Because of its advantages, and now with its $340 million in total capital acquired, it has the potential to become the universal central hub for all kinds of business communications. It’s already acquired two collaboration startups in Spaces and Screenhero, early signs of expansion into the rest of the enterprise stack.

Slack’s biggest strength is that its core use is communications, something that is absolutely essential for teams no matter what shifts in technology arises. Butterfield said back in October, “The world is in the very early stages of a 100 year shift in how people communicate, and we’re determined to push the boundaries.” Which brings me to this tweet that was going around after Slack announced in new round of funding:

If I were Dropbox, I would be worried about Slack. Files are only as useful as their context.

— r. (@artypapers) April 16, 2015

I wrote about Dropbox not too long ago and argued that they need to be “introducing more valuable applications of their own and integrating in the apps that people can’t live without.” Slack has already become the app that teams can’t live without and their growth will only increase in the coming months. But unlike storage which is really a secondary layer, Slack doesn’t have to introduce new applications because their offering is again, already a primary use case and certainly a billable one for any business that has teams. However, I won’t be surprised if they do; as an example, Google’s mothership and cash cow is Search, but they leveraged that further through GMail, Maps, Chrome, and buying YouTube and Android, and is continuing to expand to feed their core service further.

How do I think this will play out? Slack’s business model seems to be the safer bet, and at the moment, seems to have the better long-term potential, while Dropbox still needs to own a part of the team workflow that is truly indispensable and proprietary. It’s no secret that, aside from storage, Dropbox is gunning for team collaboration but that’s a space that’s already crowded, and unless they leverage something unique and much more efficient than their competitors’ offerings, it will be tough for them to crack that area. However, as I mentioned, this is where their user experience DNA can make a killing—but they have to do it right.

I think both Slack and Dropbox can coexist successfully and cover their domains better than their most immediate competitors, but if they cross each other, Slack may have the upper hand because the context it owns is much more valuable than what Dropbox has, at least right now.

But no matter what happens, with these insane valuations and corresponding insane growth, it’s without a doubt an exciting time in workplace software. Don’t be surprised if some may butt heads or commit incest in the long run (Asana, Do, Docusign, Evernote, Quip, Wrike, I’m looking at you). The best part in today’s era is that the addressable market is much bigger than ever before and will only continue to get bigger, and more companies can still be sustainable as opposed to simply being destroyed through competition alone.

Nonetheless, may the battles begin!