How To Make Sense Of Slack’s Valuation

It’s been interesting to read the hand-wringing about Slack’s recent round, which values the company at $2.8 billion. How could a company that barely existed a year ago, and was valued at $1 billion only 6 months back, now be worth $2.8 billion? Surely this is proof of an irrational funding environment. But to my mind, people have it backwards: Slack is a cause of today’s frothy environment, not a symptom of it.

Like AirBnB and Uber, Slack is an outlier — a truly remarkable product. It has three characteristics that make it unlike any other software company targeting enterprises:   

Horizontal: Slack’s for everyone

Almost all enterprise products are built for a specific function, such as sales, marketing or IT. The only exceptions are productivity applications like Google Apps or Microsoft Outlook and Office, which make them the closest proxies. Today, 1.1 billion people use Microsoft Office and analysts estimate about 500 million use Outlook. If Slack can capture even 2% of those Outlook users, at current pricing it would generate $840 million in annual revenue. Because anyone can use it, the market opportunity for Slack is much larger than for other enterprise applications.  

Viral hooks: Slack sells itself

Like a consumer product, Slack taps the social graph on your phone via email and contacts to spread virally within an organization. Without any sales or marketing, the company has 750,000 daily active users and 200,000 paying users. At $7/user/month, Slack earns $1.4 million in monthly revenue, and the numbers have doubled since the beginning of the year. There is no other enterprise company who can make a similar claim — everyone else has to hire salespeople or spend on marketing. In time, Slack will have to do the same but its organic adoption is unprecedented for a startup company. 

High engagement: Slack is addictive

Just as teenagers live on Snapchat, people over 25 rely on Facebook, and people outside the US depend on WhatsApp, knowledge workers quickly come to depend on Slack. It moves conversations from email to “channels” which anyone can tune into, becoming a virtual water-cooler. At many companies today, if you want to know what’s going on, you don’t walk the hallways as Eric Schmidt might have done 10 years ago, you check out Slack. 

None of this means that investing in Slack at a valuation of $2.8 billion is a good idea. The company is small, and faces many risks. Growth could slow because existing companies are notoriously reluctant to bring in new systems – many are still using Lotus Notes! The company has huge competitors like Google and Microsoft who hold the advantages of scale, distribution and broader product suites. Then there are the execution risks that come with rapid expansion, such as how to maintain the culture as the company grows. The biggest challenge is often managing expectations, though the humility and intelligence of Slack’s founder will help mitigate that particular danger (as evidence, read his interview with the New York Times).

The opportunities and risks before Slack are impossible to quantify, which makes any valuation highly subjective to the point of being irrelevant. What’s more important is that Slack has the potential to be a truly transformative company, and that does not happen very often. 

One sign of danger is when companies of no intrinsic value are given ridiculous valuations. That’s true for several other companies who claim to be the next Uber or WhatsApp, but are in fact fairly run-of-the-mill businesses. But it’s not true for Slack.