Initially known as Tiny Speck, the company we now know as Slack first worked on a Flash-based online game called Glitch, which developers around the country worked on for close to four years. [10] [12] Yet at some point, the team became less interested in Glitch and more interested in IRC, “the ‘80s era communication tool they were using to collaborate over long distances and long periods of time.” [12] The team appreciated that IRC allowed them to focus in on projects while tuning out other email inbox noise, and it wasn’t long before the entire company pivoted toward communications. “Never mind the part where we first tried to make a web-based massively multiplayer game and failed,” says co-founder Stewart Butterfield, who also co-founded Flickr. [3] Development of the corporate messaging service Slack actually began toward the end of 2012, and by August of 2013 Slack’s was running in private beta.
via Business Insider [19]
At launch, in February of 2014, Slack had around 15,000 daily users. [2] By August of 2014, Slack’s daily active users had grown to 171,000, and that number had swelled to 285,000 by November. [1] By February of 2015, the app boasted over 500,000 daily active users, with “tens of thousands” of new users added week over week, representing a thirty-threefold growth in just a year. Not only that, but Slack users are collectively sending 300 million messages every month, and users are actively engaged with the app for more than two hours every day. [2]
This impressive growth and engagement has understandably garnered plenty of attention from investors. In October of 2014, Slack received $120 million in Series D funding from Slow Ventures, The Social+Capital Partnership, Accel Partners, Andreessen Horowitz, Google Ventures, and Kleiner Perkins Caufield & Byers, resulting in a valuation of $1.1 billion. [10] [1] Just six months prior to that, Slack received $43 million from Andreessen Horowitz, Accel Partners, and the Social+Capital Partnership. [11] So, what has Slack done to stack the odds so monumentally in the favor of growth? We’ll look at what they did early on to set the stage for success, including:
- Defining their market space and identifying user pain
- Nailing the product experience by focusing on doing a few things exceptionally well
- Using a freemium model that fueled bottom-up word of mouth growth
Defining Their Own Market
Though Slack was certainly not the first office chat app, HipChat, Skype and other tools have served that space for years, they’ve seen far and away the most impressive early growth. One the biggest keys to accomplishing this has involved working to create a market where, despite a handful of competitors, one really didn’t exist before. Butterfield says that an estimated 20 to 30% of Slack’s users switch from another centralized messaging system like HipChat, Campfire, or IRC, yet, as he goes on to explain:
“When we asked the other 70 to 80% what they were using for internal communication, they said, ‘Nothing.’ But obviously they were using something. They just weren’t thinking of this as a category of software.” [3]
As it turns out, many of these companies who claimed to be using “nothing” were in fact using an assortment of different tools, some more ill-suited than others. According to Butterfield, “It’s a lot of ad hoc emails and mailing lists. Some people on the team might use Hangouts, some use SMS. We see groups that use Skype chat, or even private Facebook groups and Google+ pages.” [3] For this reason, much of Slack’s work in selling their solution has involved highlighting that there is a problem in the first place. By contrast, Butterfield asserts:
“If you’re building a sales team for your startup, you know you will absolutely make a decision about what CRM to use. It’s a no-brainer. If you’re a software development team, you are absolutely going to choose a system for source control. That’s a known category.” [3]
Yet because centralized messaging systems like Slack haven’t been around for all that long and people don’t quite understand why they need them, product training and market education have been Slack’s foremost concerns since day one. Just two weeks prior to launch, Butterfield sent a lengthy memo to the team at Tiny Speck—well worth a read in its own right—in which he articulates, among other things, the importance of not just building something useful, but also helping people to understand that utility. He asserts:
“Just as much as our job is to build something genuinely useful, something which really does make people’s working lives simpler, more pleasant and more productive, our job is also to understand what people think they want and then translate the value of Slack into their terms.” [6]
Butterfield goes on to claim that the above notion is in some ways just traditional marketing, but it’s also more than that. He explains:
“Our position is different than the one many new companies find themselves in: we are not battling it out in a large, well-defined market with clear incumbents (which is why we can’t get away with “Other group chat products are poisonous. Slack is toasted.”). Despite the fact that there are a handful of direct competitors and a muddled history of superficially similar tools, we are setting out to define a new market. And that means we can’t limit ourselves to tweaking the product; we need to tweak the market too.” [6]
So for Slack, early growth came primarily through creating a market where there really wasn’t one, selling a solution to a problem that people didn’t know they had. For Slack, this was accomplished by and large through, as Butterfield sees it, “sell[ing] the innovation, not the product.” [6] He goes on to explain:
“We are unlikely to be able to sell ‘a group chat system’ very well: there are just not enough people shopping for group chat system (and, as pointed out elsewhere, our current fax machine works fine). … That’s why what we’re selling is organizational transformation.” [6]
Butterfield went on to use the hypothetical Acme Saddle Company as an example of “selling the innovation.” While the Acme Saddle Company could merely sell the product—saddles—on the basis of factors like leather quality, embellishments, durability, price, range of sizes or styles, and so on. On the other hand, they could sell the innovation—horseback riding. As Butterfield explains:
“Being successful at selling horseback riding means they grow the market for their product while giving the perfect context for talking about their saddles. It lets them position themselves as the leader and affords them different kinds of marketing and promotion opportunities (e.g., sponsoring school programs to promote riding to kids, working on land conservation or trail maps). It lets them think big and potentially be big.” [6]
Butterfield goes on to assert that the best way to find product-market fit is defining your own market, pointing out that the concept of selling the innovation is far from new. Noteworthy examples of this strategy include Harley Davidson—who sells not motorcycles, but freedom and independence—and Lululemon—not clothes for yoga, but yoga itself. When combing through Slack’s early growth strategies, the idea of selling the innovation is critical. They were not merely selling a software product, but “a reduction in the cost of communication,” or “zero effort knowledge management,” or “making decisions, faster” or “all your team communication, instantly searchable, available wherever you go” or “75% less email.” Butterfield asserts:
“We’re selling a reduction in information overload, relief from stress, and a new ability to extract the enormous value of hitherto useless corporate archives. We’re selling better organizations, better teams. That’s a good thing for people to buy and it is a much better thing for us to sell in the long run. We will be successful to the extent that we create better teams.” [6]
Because, as Butterfield explains, people buy software to address needs they know they have or tasks they need to perform. Yet, as discussed above, less than half of Slack’s user base felt they needed internal communication software. For this reason, selling productivity, stress relief, and organization helped Slack to appeal to those potential customers who perhaps weren’t looking for communication software.
“Life is too short to do mediocre work and it is definitely too short to build shitty things.”
Alongside “selling the innovation,” perhaps the most critical factor in Slack’s growth is their attention to detail in creating a genuinely useful, high quality product. The team has worked hard to ensure that Slack is simple to set up, pleasant to use, compatible with a wide range of other services, and as reliable as email. Additional functionality comes from mobile apps and a Mac desktop app. As of November 2014, around half of Slack’s users were on the Mac app, and around 55% accessed Slack via both mobile and desktop on a given day. [1] In the “We Don’t Sell Saddles Here” memo sent out prior to Slack’s Preview Release, Butterfield acknowledged the natural tendency to ignore the petty irritations and problems in one’s own product, yet nevertheless reminded the Slack team that they needed to do “an exceptional, near-perfect job of execution,” explaining:
“It is especially important for us to build a beautiful, elegant and considerate piece of software. Every bit of grace, refinement, and thoughtfulness on our part will pull people along. Every petty irritation will stop them and give the impression that it is not worth it.” [6]
Butterfield goes on to urge his team to “find all those petty irritations, and quash them,” primarily by looking at Slack as they would someone else’s software. He explains:
“Putting yourself in the mind of someone who is coming to Slack for the first time — especially a real someone, who is being made to try this thing by their boss, who is already a bit hangry because they didn’t have time for breakfast, and who is anxious about finishing off a project before they take off for the long weekend — putting yourself in their mind means looking at Slack the way you look at some random piece of software in which you have no investment and no special interest. Look at it hard, and find the things that do not work. Be harsh, in the interest of being excellent.”
This is where Slack elegantly steps in, letting you create ad-hoc channels to push information to groups of people. Did Product Design just publish new wireframes? No problem, just publish to the relevant channel. Does Dev think a key constraint has not been captured? No worries, you can start to have a conversation about it which is captured right there in Slack so other team members can get up to speed. Plus it integrates with Jira, Dropbox or your service du jour (even with Yo at the time of writing this answer).” [8] So how did Slack pull this off? They managed to build an elegant, intuitive application by working to be great rather than good and nailing a few core features to near perfection.
Laser Focus on Core Features
One concept that was incredibly important to the founders during Slack’s development was Gmail creator Paul Buchheit’s influential blog post, “If your product is Great, it doesn’t need to be Good.” In essence, Buchheit’s argument is that it’s more important to do a few things really well than for every single thing to be perfect. As Butterfield explains:
“All of the founders here are past the stage where we have a lot of ego about building something our way. We set ourselves an incredibly high quality bar, and we’re just not going to be happy if we don’t reach it. … We don’t cut corners, and we try to focus on the few things that are most important to our product vision.” [3]
This doesn’t mean that Slack’s founders didn’t care about minor product features. Rather, they focused their initial energy on perfecting a few core features based on the assumption that users wouldn’t notice everything Slack’s early iteration lacked if they did a great job delivering on those key features. For Gmail, those initial features were search, threaded conversations, and “the then-unimaginable one gig of storage.” [3] After much discussion regarding Slack’s core features, the team finally decided on search, synchronization, and file sharing. Butterfield explains:
“We had a lot of conversations about choosing the three things we’d try to be extremely, surprisingly good at. And ultimately we developed Slack around really valuing those three things. It can sound simple, but narrowing the field can make big challenges and big gains for your company feel manageable. Suddenly you’re ahead of the game because you’re the best at the things that really impact your users.” [3]
It wasn’t just Buchheit’s understanding of Good vs. Great that influenced Slack’s development. According to Butterfield, Google has set the bar very high when it comes to what people expect from search. He explains, “People need to feel confident that when they read a document or conversation, they don’t have to worry about labeling or storing it — that they’ll be able to find it again later if and when they need it.” [3] Of synchronization, Butterfield explains that one of the most troublesome features they observed with every other internal platform was that they weren’t conducive to multiple devices, so Slack has focused on what they refer to as “leave-state synchronization,” which allows users to pick up exactly where they left off, no matter which device they were working on. When it comes to file-sharing, Slack chose to focus on the ability to quickly paste images or drag and drop files for a simple, intuitive UI. While not exactly flashy, these features make up Slack’s core functionality in a way that makes sense to initial users and is pleasing for those who use the app all day.
Gaining Initial Users
Slack had taken shape enough by March of 2013 that the team was using it for themselves, but they knew they needed to observe how Slack worked in the wild, so in May of 2013 they began, according to Butterfield, “begging and cajoling friends at other companies,” including Cozy and Rdio, to try Slack. These six to ten initial companies allowed the company to observe how the product functioned for teams of different needs and sizes, helping them to work out the service’s initial kinks. Butterfield explains:
“Rdio, in particular, was much bigger than us. They used it with a small group of front-end developers for a while but then it spread to the whole engineering group and then to all 120 people in the company. … Suddenly we saw what the product looked like from the perspective of a much larger team, and it was pretty gnarly.” [3]
This process continued throughout early 2013—they shared Slack with progressively larger groups, observed how it functioned, and made changes and improvements. Soon they were ready to share Slack with a larger audience, and Slack’s “Preview Release” began in August of 2013. Though this essentially amounted to a beta release, Butterfield says that they “didn’t want to call it a beta because then people would think that the service would be flaky or unreliable.” [3] On the first day, Slack received 8,000 invitation requests. Within two weeks, that number had grown to 15,000. Because of the team’s previous experience with Flickr, Slack got plenty of press very early on, with TechCrunch, ReadWrite and VentureBeat each posting articles about the company—two of which referred to Slack as an “email killer”—within days of the Preview Release. According to Butterfield’s estimation, these kinds of news stories account for around 20% of media success, while “the other 80% is people posting about that article. I almost never go to news sites—it’s overwhelming how much content is out there. But I will pay attention to what my friends are picking up and sharing.” [3] This initial press, which was picked up and shared by friends and fans via social media, helped to drive the early influx of invitation requests. Slack’s preview release lasted just over six months. As Butterfield explains, “From August 2013 to February 2014, we went through those initial 15,000 sign-ups — and more that we got over the course of time — and incrementally improved the new-user experience until we felt like we had gotten all the low-hanging fruit.” [3]
User Feedback
Listening to, learning from, and responding to feedback has always been important to Slack’s team—not just from a customer satisfaction perspective, but also for product development purposes. Slack responds to around 8,000 Zendesk help tickets and an additional 10,000 tweets per month. [3] While this is certainly a massive undertaking, the company takes user feedback very seriously. Butterfield explains:
“Whenever [team members] hear something new that seems like it’s actually a really good idea — or it’s a pretty good idea but it’s very easy for us to implement — it gets posted to a channel where we discuss new features. That’s an ongoing, daily thing. There have already been 50 messages posted today.” [3]
In the company’s early days, they looked at their customers as testers, paying extra attention to those teams they knew should be using Slack successfully. When these users reported that something wasn’t working, Slack made it their top priority to fix it immediately. At launch, Slack had three team members devoted exclusively to “customer experience,” a combination of quality assurance and customer support that involves “everything from parsing customer feedback and routing it to the right people to fixing bugs.” [3] The most recent number puts Slack’s customer support team at 18 people, six of whom work on Twitter around the clock. Though Twitter is now flooded with praise for Slack, that hasn’t always been the case. Nevertheless, Butterfield says that even these early criticisms were welcome, because “every customer interaction is a marketing opportunity. If you go above and beyond on the customer service side, people are much more likely to recommend you.” [3]
Bottom Up Word of Mouth
In October of 2014, Butterfield attributed much of Slack’s initial growth to word of mouth, claiming, “The growth has been completely insane and almost entirely on word of mouth. In fact, we just hired our first marketing person, but he doesn’t begin until next week.” [11] Within the organizations that adopt Slack, use tends to spread in a grassroots, bottom-up fashion—from one team to another until the entire company is communicating via Slack. As Butterfield explains:
“It’s probably true that no one is going to go for a giant switch over from SAP to WorkDay, even though it would probably save them money, because that involves hundreds of thousands or millions of dollars that gets decided top-down during a budgeting process.” [11]
He goes on to point out that Slack, contrast, is just 22 cents per day, an amount “that people put on their credit cards and no one even really notices that it’s happening.” [11] Butterfield, in an on-stage interview at the SaaStr conference [18] shared that large organizations such as Adobe will have tens of teams running their own instances of Slack, which makes it easier for their Account Managers—the company boasts no salespeople—to close larger, paid deals. This grassroots growth strategy is aided by large public groups of Slack users who have aggregated around shared interests [19] and Twitter. The latter is particularly important and Butterfield attributes a great deal of Slack’s positive buzz to Twitter. He says:
“We bet heavily on Twitter. Even if someone is incredibly enthusiastic about a product, literal word of mouth will only get to a handful of people — but if someone tweets about us, it can be seen by hundreds, even thousands.” [3]
For evidence of whether this strategy is paying off, look no further than Slack’s Wall of Love.
Freemium
Like many SaaS companies—notable examples include Evernote and Dropbox—Slack operates on a freemium model. Quartz.com’s Dan Frommer refers to Slack’s freemium tier as “an actually-useful free service,” explaining that “many groups (including Quartz) are happily communicating on Slack for free.” [1]
Nevertheless, by November of 2014, more than 73,000 Slack users were paying for the the premium service, which includes a full message archive. It’s not hard to see the benefit: as more and more work takes place via Slack, the ability to call up details and conversations via search becomes well worth the 22 cents per day.
In November of 2014, Slack business analytics lead Josh Pritchard claimed that, without taking new sales into consideration, Slack’s subscription revenue was growing at around 8% monthly. He went on to assert that “This is, as far as I know, unheard for an enterprise SaaS company less than seven months after launch.” [5] In February of 2015, Business Insider’s Eugene Kim reported that Slack’s paid users had risen to 135,000, and that the company was adding $1 million in annual recurring revenue every 11 days, in addition to the $12 million in annual recurring revenue established over the previous year. [2] And in November 2014, Slack’s free-to-paid conversion rate was 30%, which Nir Eyal and Ciara Byrne cited as “one of the highest in the enterprise business.” [5]
So what is it in particular about Slack that’s so conducive to the freemium model?
Onboarding
One of the key’s to Slack’s success is their simple, painless onboarding. It has an obvious interface, focused around channels—communal chat rooms, typically organized around a topic or team—and direct messaging. Chats can be live in real time, or asynchronous, depending on who’s online when. Teams can sign up and start talking to each other right away.”
Slack’s signup process is straightforward: a new user enters his or her email address and then receives a link, which takes them to a simple registration form. After this, new users are prompted to add team members—the most crucial step—as well as integrations with other apps. Of the close to 220,000 teams created in Slack, more than 30,000 are actively using it. According to Butterfield, “Most people who fill out the form and hit submit — more than 90% — never invite anyone or start using the software.” Nevertheless, as Butterfield goes on to explain:
“However, because one active team has an average of eight or nine members, we have close to 250,000 daily active users. We have more daily active users than teams that were ever created. So we lose a bunch, but the ones that we get to really try it out stick with it.” [3]
But what are the factors that determine whether those who try Slack will “stick with it”—what does Butterfield really mean by “really try it out?”
Slack’s “Magic Number”
Though, as First Round asserts, there are industry-standard metrics for engagement and retention, “at the end of the day, only you can really determine your company’s magic numbers—the numbers that shed light on who is really using your product (and how you can get them to keep using it).” [3] For Twitter, that magic number was 30—users who followed 30 others were much more likely to remain engaged with the service over time. For Facebook, that number was 10—users who added 10 friends within a week were likely to stay active on Facebook. The magic number concept has also been significant for Slack, as Butterfield explains:
“You have to figure out what conversion means in your case. What does retention mean? What does activation mean? For every business, it’s going to be slightly different because of the nature of the product and the kinds of people who use it.” [3]
As it turns out, Slack’s magic number is 2,000—that is, users who send 2,000 messages are much more likely to keep using and eventually paying for the service. According to Butterfield:
“Based on experience of which companies stuck with us and which didn’t, we decided that any team that has exchanged 2,000 messages in its history has tried Slack — really tried it. For a team around 50 people that means about 10 hours’ worth of messages. For a typical team of 10 people, that’s maybe a week’s worth of messages. But it hit us that, regardless of any other factor, after 2,000 messages, 93% of those customers are still using Slack today.” [3]
Slack considers the 2,000 message mark a critical metric, and from the moment someone enters his or her email address to request a link, the app is designed to propel users toward that magic number.
“Hooks”
Another potential explanation for Slack’s stickiness comes from Nir Eyal and Ciara Byrne. They attribute Slack’s high levels of customer loyalty and engagement to the habit-forming nature of the app, explaining:
“Slack leads users repeatedly through a cycle called a ‘hook.’ The four steps of the hook include a trigger, action, reward, and investment, and through successive passes through these hooks, the new habit is formed.” [5]
According to Eyal and Byrne, rather than radically change user behavior, those at Slack designed the app to displace existing habits and behaviors by making them easier and more efficient. To do this, Slack relies on triggers, defined by Eyal and Byrne as “a cue to action.” They explain:
“By focusing on only the triggers that matter and by making it easier for users to respond through any number of devices, Slack increases the likelihood of the user taking the key action—opening the app.” [5]
After the trigger and the resulting action, the next step in Slack’s hook is the reward. They explain, “Slack taps into team members’ need to feel included as well as their fear of missing out on important work-related information.” [5] Not unlike Facebook or Twitter, Slack’s reward comes from “new tidbits of information or approval from peers, which arrive at unpredictable intervals.” [5] Eyal and Byrne explain that it’s the intermittent nature of these rewards that is so habit-forming. The final part of Slack’s hook is the investment, which asks users to “put in a bit of work into the product to make it more useful and therefore increase the likelihood of using it in the future.” [5] According to Eyal and Byrne, users invest in Slack in several ways, including sending invitations to coworkers, sending messages, adding integrations, and eventually paying for the service. They explain:
“Slack understands the power of getting users to invest. In fact, whereas most enterprise tools offer limited features during free trial periods, Slack holds almost nothing back. The company wants to maximize usage and therefore opportunities to form the Slack habit.” [5]
Eyal and Byrne go on to point out that the two features Slack does limit for free users—the quantity of searchable messages and the number of external tools that can be connected—are not necessary to Slack’s functionality until the point at which users are already “hooked.” They explain:
“Slack makes the path from new to habituated user as smooth and as swift as possible. It effectively triggers checking the app, delivers immediate social and information rewards on an intermittent basis, and prompts users to invest by adding colleagues, content and eventually cash.” [5]
Though it’s likely not one but several factors contributing to Slack’s successful implementation of the freemium model, Eyal and Byrne’s understanding of Slack’s “hook” is quite provocative.
Acquisitions
In September of 2014, Slack acquired the document editing and collaboration app Spaces for an undisclosed price and terms from entrepreneur Simon Vallee and former Google engineer Hans Larsen. Of the acquisition, Butterfield said that Spaces was to be integrated into the current Slack format. The Slack blog post announcing the acquisition explained:
“Our mission at Slack is to make people’s working lives simpler, more pleasant, and more productive. Spaces is clearly aligned with this, and after spending some time together, we reached the conclusion that integrating our products made too much sense to pass up. So in the coming months, we’ll be working on doing just that.”
The post goes on to explain that like most teams, Slack works with documents daily, and they often feel like they’re fighting with their tools. Yet in doing away with “the document’s print legacy—things like page ‘breaks’ and ‘tab stops,’” Spaces was able to create a document more suited to how most people currently work. As Butterfield explains,
“We’re not trying to convince people to use Slack instead of Google Docs. We don’t think it should be competitive, but complementary … If you’re writing a term paper or an article, I don’t think Spaces will replace what you’re using right now. But if you’re collecting story ideas of a certain individual or company, like references and documents, and organizing that information, Spaces would be great.”
Then in January of 2015, the company made its second acquisition, this time of the team screen-sharing tool Screenhero, along with its six-person team, for cash and stock. [16][10] Screenhero, a Y Combinator alum founded in 2013, raised $2.6 million before being acquired by Slack. TechCrunch’s Ingrid Lunden explains:
“And as someone who has used a number of these services for work, I think that Screenhero definitely stands out for its simplicity and power. With very little lag, it’s easy to forget that the person controlling your screen is potentially thousands of miles away, and the quality of the voice services on top of that add to the slightly unnerving feeling that there are little people in your computer.” [13]
Initially, Screenhero will continue operate separately from Slack for both existing and new users. After Screenhero’s functionality is fully integrated into Slack, however, the app will shut down. Of the acquisition, Butterfield says:
“This is not the typical ‘Our Incredible Journey’ acquisition, where the product disappears — everything will survive and thrive, just immersed in Slack … Slack integrates with hundreds of other services, but there are some core features that work best when built directly into the platform.” [16]
According to Lunden, Slack actually made an offer to Screenhero in 2014, but CEO and co-founder Jahanzeb Sherwani initially refused. Yet as Screenhero’s user base continued to expand, the offer became more appealing. Sherwani says:
“We were under no pressure to sell from anyone, but we were using Slack; we were spending more time in it. The product is great, and so is the team. It seemed like a natural fit.” [13]
Though it’s uncertain exactly how Slack’s integration of Screenhero will look once it’s all said and done, Lunden speculates that Slack could offer Screenhero functionality as yet another service layer for driving paid useage or, by contrast, as a means of opening up Slack to new verticals, including customer support. [13]
Potential Concerns and Future Growth
When asked by Dan Primack in October 2014 if his experience selling Flickr to Yahoo had any impact on whether he’d eventually sell Slack, Butterfield responded:
“It’s definitely an influence. Not just on me, but there are four other people working with me who were on the original Flickr team and it was very frustrating for all of us. Flickr was just nine people out of Yahoo’s 11,000 when it was acquired, and because we were such a small piece it was difficult for us to hire people. It’s not that Yahoo was bumbling, it was just too big. I’m 41 years-old now, and I’m not sure I’ll have this large an opportunity again. We’ve got no motivation to sell when there’s so much opportunity in front of us.” [11]
So despite speculation to the contrary, it seems that Slack’s founders have no plans to sell the company anytime soon. There’s also been some debate over just how remarkable Slack’s functionality really is—in particular, what made Slack take off and not competitors? Though there’s no denying that much of Slack’s success comes from working to define their market, that doesn’t mean that comparable communication software didn’t already exist—the most notable of which is perhaps Yammer, which sold to Microsoft in 2012. Other competitors include Atlassian’s HipChat and Campfire. Slack’s critics argue that there isn’t much to differentiate the service from it’s competitors, and many also feel that the valuation of $1.1 billion is inflated.
While acknowledging that the early slope of Slack’s growth curve is “pretty awesome,” Lemkin assert that a $1.1 billion valuation assumes that Slack will perform better or equal to Workday, which went from $0 to $100 million in five years and grew almost 100% year-over-year after hitting $100 million. So while acknowledging that “the world is even bigger today for SaaS than it was when Workday started,” Lemkin nevertheless asserts that Slack needs to get to $100 million within four years to justify all this investment. In January of 2015, Business Insider’s Eugene Kim expressed similar concern over Slack’s “jaw-dropping” valuation. In particular, Kim shows concern over whether it’s possible to come up with meaningful business projections because of just how quickly Slack is growing. Kim goes on to assert:
“Slack claims to be adding $1 million in annual recurring revenue (ARR) every month, with “near perfect” retention rates. ARR doesn’t mean actual revenue. But it’s a good indicator of a cloud software company’s health since it represents the value of the total subscription contracts expected to recur for the next 12 months. Based on those metrics, Slack would have made a little over $12 million last year. … That amount of revenue doesn’t seem like enough to justify Slack’s billion-dollar valuation, but it does show that companies are willing to pay for its service. And that’s what the VCs are counting on.” [7]
Despite what detractors say, Slack has shown remarkable growth, and it’s hard to ignore just how impassioned many of the app’s users are. Only time will tell whether the company’s valuation was indeed well-founded.
Written by Morgan Brown, co-author of Hacking Growth.
