How to Get a $1 Billion Valuation in Just Eight Months How can Slack, a business software company that makes a product that's less than a year old, be worth more than $1 billion?
This story originally appeared on Fortune Magazine
The business software maker can easily serve as an example of why we're in a tech bubble. Its namesake product is only eight months old and the company is worth $1 billion. How is that even possible? Is money even real in Silicon Valley?
But Slack just as easily serves as an example of a budding company that is already hinting at how big an opportunity it could be. It's not mere speculation, either. Slack has grown as much as 7% each week since it launched—a pace large companies aspire to hit each year—adding thousands of new users who pay for the service. The company has 100 employees and it's only burning $100,000 per month. Sure, it's not even a year old. But it's clearly going to be huge.
This is how you get to $1 billion so quickly.
After ignoring daily inquiries from venture capitalists all summer, Slack CEO Stewart Butterfield decided in September to take a week's worth of meetings, "to see where things were at." Slack had launched in February, a year after the company shut down a gaming product that never took off. The new product, a collaboration tool for desk workers, was an immediate hit. By April, Slack's early traction was enough for it to raise $42.8 million, valuing the company at $250 million.
The news stoked the hype around Slack. Venture capitalists witnessed its rapid adoption at their portfolio companies. The emails from investors had swelled to 10 new funding offers per week. Sometimes it from was investors Butterfield knew. (He had previously co-founded the photo-sharing site Flickr, which sold to Yahoo in 2005.) Often they were from complete strangers hoping he'd take their money.
Slack didn't need the money, but Butterfield decided to test the waters because he believed this era of easy venture capital high valuations would not last forever. "I'm one of those people who think the other shoe has yet to drop from 2008," he says. "I lost a shitload of money in 2008, and I saw the fundraising environment tighten up. I'm aware of the cycle. It's difficult to call a top, but it's pretty obvious we're far from the bottom."
There's another, slightly less rational reason Butterfield decided to raise more money: He wanted a $1 billion valuation. If Slack couldn't get that, he wouldn't raise anything. The cachet of the figure is meaningful in an intangible way, he says. It means "we're a part of that conversation about companies worth $1 billion."
He elaborates: "It's definitely a psychological threshold and it helps for certain kinds of customers. When [we're] negotiating with a Fortune 500 company on legal terms of service for some detail about what sort of deal they will get in the third year, then having the comfort of knowing we're highly valued and financially secure, that really helps."
A billion dollars goes a long way with big hires, too. "There is a class of employees who are more risk-averse and work at some company like Google or Facebook and they have a mortgage and kids," he says. "It helps a lot of those kinds of people as well."
But is the $1 billion valuation actually based on any real metrics? Were any numbers crunched, any spreadsheets analyzed, or any public comps selected? Not really. "There are fairly precise methods for putting a value on future cash flow given steady business," Butterfield says. "We're not in that position, obviously." Put another way: Slack is growing too quickly for projections. At its last public announcement, 45,000 teams with 365,000 daily active users were paying to use Slack. "Every single day except holidays is a record for that day," he says. "Every Tuesday is the best Tuesday we've had."
So why not pick the big, round number that helps with customers and recruiting? Butterfield acknowledges there's quite a bit of growth baked into Slack's valuation. "You have to choose some numbers," he says. "One billion is better than $800 million because it's the psychological threshold for potential customers, employees, and the press."
Slack had no problem getting investors to agree to the $1 billion valuation, by the way. Butterfield only wanted to raise $100 million; he ended up with $200 million in commitments and closed the round at $120 million. In the three months since raising the money, Slack has just about doubled everything—customers, revenue, users—and Butterfield expects it will repeat the feat in the next four months.
So far Slack has only spent around 1% of the money it raised, Butterfield says. He's confident that even if the economy turns south, Slack will be fine. "We're able to weather pretty much any storm," he says. "You'd have to be in a meteors-hitting-the-earth scenario before Slack as a business would get into trouble."
For more on Slack and the phenomenon of billion-dollar startups, read "The Age of Unicorns."