This Week in Startups - E1145: Emergency Pod! Salesforce is reportedly acquiring Slack: winners, losers, ramifications & more!

Episode Date: December 1, 2020

FOLLOW Jason: https://linktr.ee/calacanis Referenced in this episode: Salesforce Is in Advanced Talks to Buy Slack Technologies | WSJ https://www.wsj.com/articles/salesforce-has-held-talks-to-buy-slack-technologies-11606326392?mod=searchresults_pos1&page=1 Salesforce deal to buy Slack expected to be announced Tuesday after market close | CNBC https://www.cnbc.com/2020/11/30/salesforce-deal-to-buy-slack-expected-to-be-announced-tomorrow.html

Okay, everybody, it's an emergency podcast. Salesforce is buying Slack. That's right, by all reports. Salesforce will announce tomorrow, December 1st, 2020, that Salesforce is buying Slack. Mark Benioff apparently has done it again, hot off the heels of his tableau acquisition, now acquiring what is considered one of the top companies

in all of enterprise computing Slack. Let's get into it. get back from this quick message. Wish you were in on some of the best performing IPOs of 2019 and 2020. I bet you do. Well, with our crowd, accredited investors can invest directly, easily, and most importantly, early into startups. Yes, that's right. Our crowd investors have benefited from companies going public like Beyond Meat or being bought by companies like Intel, Nike, Microsoft, and Oracle. Our crowd's investment professionals leverage their extensive networks to review some of the most promising private companies and startups in the world.

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Tevel's AI-powered flying robots, I kid you not, pick, thin, and prune orchards, helping mitigate the global shortage of fruit pickers while offering cost savings of up to 30%. It's interesting company, right? You probably want to take a look. You can get in early on Tevill, T-E-V-E-L, and other unique opportunities at our crowd.com twist. If you're an accredited investor, you join our crowd for free at O-U-R-C-R-O-W-D.com slash twist and review all the current deals with no payment involved until you decide to invest. Okay, everybody, it is an exciting day if you are a Slack shareholder or it might be disappointing because people thought Slack was going to be this independent company that grew forever

and maybe became worth hundreds of millions of dollars. But it seems to be. the company with the headwinds of Microsoft Teams constantly blowing them back and the inability to grow really fast. They seem to have put themselves in a position to be forced to be acquired by a larger company. This news broke in the Wall Street Journal last Wednesday, November 25th, and it's expected to be announced, as I said, tomorrow, December 1st, depending on when you're listening to this, according to CNBC's David Faber. And so it's supposed to be a half-cash, half-stock deal, and it will price slack at a premium. The market cap, as of today's close, about $24 billion, and Salesforce was $223 billion. So this would be worth approximately 10%

of Salesforce's enterprise value. And the deal is supposed to be in the $17 to $25 billion range. I've heard a bunch of different numbers. The stock has obviously popped massive. prior to the Salesforce's largest acquisition was Tablo, which they bought for close to $16 billion back in 2019. And you have to ask yourself, why? Why are they doing this? Well, in many cases, a big company will make a big bet like this because they can, because they have a market cap, because they have access to capital, and because keeping it out of the hands of competitors is also important. What if Microsoft, what if Google, Facebook, or another company, IBM, were to own Slack? This could be problematic for Salesforce because Slack is so, so ingrained in next generation,

startups, and mid-sized companies. It is how companies run. It's really the operating system of remote teams. When you are in a remote team, you live and breathe inside of Slack. Now, since the pandemic happened, you would think that Slack would have surged, but it didn't for some reason. And I think it's Microsoft Teams. I've only had one company out of maybe 200 active companies we've invested in, 150, maybe

are active out of the 200 plus we've invested in. I've only had one team actually invite me to a Microsoft Teams call. And it was kind of Zoom like and I understand they have a Slack like features, but I don't see a lot of Microsoft teams in the small startup space. But we do see absolutely Slack is the standard. And why didn't Slack become big like something like Zoom did during this break? I have no idea. The product seems to be a bit sag in it and super confusing if you're not part of this culture. So I think the product always had this headwind of being a little too complicated for people to understand. And the product team, although they made a really great world-class product, it seemed like they were going very slow. Some things were cloogy and maybe a little janky on the

margins like inviting other teams to your team slack. So you want to have your accountant or your law firm or maybe two companies are working on a joint project together and they want to be in the same Slack room. It was super confusing. And I've actually had these discussions with Stuart from Slack on publicly on Twitter, and he's very responsive to it. I also said just a couple weeks ago, maybe two weeks ago I said to him, why isn't there like a universal URL so I could be people.com slash Jason, just like I have a Twitter URL, Twitter.com slash Jason. He's like, oh, we're working on that. That's definitely in the works, that universal identifier where I had a profile and everybody would be able to follow that profile and that profile would follow me from

organization to organization. It would be really cool because if I were to leave a job, I'd still have my Slack profile. I could still have followers. I could still have conversations with people outside of my work. That would have been a great vision, but it feels like Slack maybe couldn't get and couldn't scale to that next level. Now, they were doing, if you look at, you know, the amount of revenue is pretty amazing that, you know, they, they were at $200 million a quarter in revenue. If you look at that run rate of, you know, $800 million or so in revenue, in other words, in a year, they do 800 billion. Well, a $24 billion market cap like we're talking about here would be 30 times revenue. Think about that, right? Three times eight is 24. You've had the couple zeros, boom. So 30 times

revenue. And so if you look at Salesforce, their run rate is 20 billion in revenue. That's a lot of revenue, right? More than 20 times what Slack has. And they're giving them basically 10% of the organization's value. So that makes you wonder, why is this, why are they doing this? Because they're currently Salesforce is valued at 11 times their revenue, right? So their market cap's $223 billion. They've got $20 billion. So that's 11x. Then you again look at Slack, $800 million, 24x. There's got to be a theory here, a thesis. What is the thesis that they have? Well, my thesis or theory would be that Salesforce thinks they can run this independently, yet use their Salesforce at Salesforce and their marketplace to make this the hub of all of their products and to get big

enterprises who already have Salesforce to just add Slack and have Slack be part of that whole sort of operating system there, right? And if they have all these young companies, those young companies can grow into the whole suite of products that Salesforce has. And remember, you have to think opportunistically. If the opportunity to buy Slack was there and Slack is flat, maybe a bunch of the large shareholders in Slack had lost faith. And they were just like, you know what, this thing's not going to break out. If it was going to break out, it would have broken out. It's growing slow.

It's got Microsoft. We need to make a decision here. So maybe the board was just like, you know what? This is a safer bet for us to cash in our chips now and to move on and make this part of a bigger enterprise where they can funnel more potential customers to it. Because they obviously were having a hard time getting past this Microsoft team's competitor. So this is, you know, kind of, I don't want to say defeat, but if it was growing massively and the board felt that this was like a home run, maybe this offer would seem like you were leaving money

on the table just to get a 30 or 40% premium on the current stock price. The board was probably like, you know, we really want to go 10x here. We want to go 20x here. We want to become a $250 billion company. We'd rather get there on our own, get to $150 billion, whatever it is, like Tesla has or Peloton is doing or Uber is doing right now, other companies. Like, can this be a strong independent company? And I guess they made the decision. We don't think that this can be a strong independent company. Now, why this company didn't merge with Zoom? That would have been a juggernaut.

Because Seth was been around a long time. Might have made more sense for Zoom and Slack to collaborate, but I guess Zoom maybe just didn't want to make the offer. And then you have to wonder, why would Microsoft allow this to happen? Why wouldn't they get involved? I guess they'd feel like their product is good enough, or maybe they don't want to pay the price for Slack, or they don't want to have yet another brand to manage. If you look at it in context, you know, Facebook did something similar when they bought WhatsApp for $19 billion, and that was a significant portion of the value of Facebook at the time. And I think history would look at that as a pretty good acquisition. Maybe they overpay it a little bit, but thankfully nobody else got that brand, right? So there's a blocking

strategy there. It's a blocker. So if Salesforce gets this, keeps them in the game, Oracle doesn't get it, Microsoft doesn't get it. That's a blocking strategy. Which is why Microsoft probably should have made a run at it, and I'm sure we will find out that they did. Also, in this sort of zone, LinkedIn got acquired by Microsoft for 26 billion. So this is amongst the biggest acquisitions we've seen in tech. I mean, there are obviously telecom deals and silicon deals that have occurred as well that are very large. But outside of those giant telecom deals, HP merger, all that kind of stuff, this is up there in modern history as one of the largest that we've seen in a long time. Remember, YouTube was 1.6 billion.

Instagram was one billion. Beats by Dre was three billion. I mean, these things were very small by comparison. This is essentially 20, if it winds up going out of 20 billion or 24 billion, this would be the equivalent of 20 Instagrams or 15 maybe YouTube acquisitions. Now, those were in a different era, but here we are. And it is super notable. Salesforce is getting this because it does seem like somebody else would have made a run at it. And so you got to wonder maybe they just weren't willing to pay the price, or they just feel like the company is stuck in the mud and they're not going to get out of it. Now, there are some customers who are paying Slack a lot of money. There are 87 customers paying over $1 million a year to use Slack. And that has been growing.

So those are the big fish. Those are the whales in the system. I think that's where Benningoff sees that he has an opportunity. Maybe there's another 500 customers who will spend a million dollars a year. Maybe there's more than that. Maybe there's a thousand customers. And you know what? If anybody knows who those customers are, it's Benioff and Salesforce. Because they know who's got big, huge sales teams. They know who's using their CRM systems. They know who's using Tableau. They already have them as customers. And they can just look at that list of, let's say, the top 500 Salesforce customers and look at the top 500 list at Slack. And I bet you when they looked at those two lists, they said, wow, Slack is not into these large organizations yet. We have an

opportunity to help them and accelerate and grow that 87 people spending a million dollars a year on the product. Maybe we can make it 870, right, at a zero. And that would be a thesis that could work. Revenue was up 50% year over year. So that is a high growth company. And if you look at how they grew, they grew to 200 million for the, for Q1, 21, 215 million, which is up 49% year over year. And obviously that's only 7% quarter over quarter. they're up to 130,000 total paid customers. So I think that they're very popular amongst smaller companies, but not the big companies. And they're not as predatory.

Like if you look at the pricing of Slack, they only charge you for people who use the product. They kind of got some interesting, not cutthroat ideas in the product. So if you were to sign a thousand person company up and only 100 people use it, they only bill you for 100. I love that as a user. But it does fly in the face of sort of the best practice. of everybody just charging, however many number of accounts that you have, not just the active ones. In terms of the winners, you know, congrats to Stewart and the founding team and the investors in Slack. It's the end of a journey in a way. Usually these companies are not destroyed

anymore. It used to be when a company got bought, you could kind of flip a coin. It's the end of the brand, like in the Yammer days, which Microsoft bought for a billion and you don't hear anybody talking about Yammer. Usually the big companies would screw up the acquisitions. Now they've gotten really good at it. So Facebook left Instagram alone. And, YouTube was kind of put in their own building and left alone by Google, you're starting to see this best practice tableau has obviously done well under Salesforce, where the big acquiring company lets the culture exist and doesn't break the culture, doesn't break the momentum of the company.

So I would assume that Mark Benioff is smart enough, wise enough, given his knowledge of the history and the industry and building such a giant company that he knows not to screw these things up. So it's kind of a bummer, you know, I think, that the company, couldn't keep growing and then use its public stock to acquire other companies. And it does seem like there was some sort of a product roadblock inside the company where they just couldn't get new features out, couldn't get new competitive products in market to get people excited. They just did a good job of being solid, right? And there was no real competitor except for Microsoft Teams to come out of this hip chat, gave up and wound up selling to them. So you have to wonder, is there going to be a new

chat enterprise software that emerges. Now that Salesforce has bought this, I think you're going to see another round of people looking and saying, hmm, maybe now is a good time to launch a competitor. Now you'd say, why would that be? Very simple. When these big companies acquire them, they get a bunch of indigestion, right? We talked about that. Like, can they acquire this without squashing it? Can they acquire it and accelerate its growth as opposed to slow it down? Who's going to run it? Do you have somebody great? Is Stewart going to stay with the company? Or is Salesforce going to run it? all the, those are all the questions that are going to come up and be the second order questions if in fact this deal goes through. But either way, congratulations to all the

investors. For me, it would be disappointing if, for example, Uber were to sell as an shareholder in Uber. If they were to sell, you know, to Google or to, you know, Amazon, I would feel good in a way, but, you know, because it would be the end of the journey and it would be an exit. but I would also be kind of bum that they didn't keep that independent spirit alive and become a trillion-dollar company eventually or become, you know, a $500 billion company. You really, as an investor, want to see them become independent concerns that exist forever, like Amazon and Facebook and Google have, and Tesla has. Tesla could have been taken out at $50 billion, $75 billion by Apple or Google, but now at $500 billion or whatever their market cap is, they're going to be a strong

independent company for some time to come. So great job. It's opportunistic. right? You have these, the stock market is on a tear, but Slack's stock has not gone up and appreciated the way other companies have. So when they have that funny money and you've got a lot of equity, that's why probably half of this is cash, is because the people who are selling their shares in Slack, if that report is in fact correct, they would like to cash in some chips and get cash, but they probably won't have the upside of maybe owning it. Now, if Salesforce stock goes up 10%, like Amazon did after Whole Foods, it went up, not 10%, but the value. of Whole Foods. Theoretically, on paper, Benioff could get this for free. If the market cap goes

up $25 billion because people believe that Salesforce is a bigger player and that this is a creative and that this is going to be a catalyst for Salesforce's existing products and that sales force's existing team is going to be a catalyst to drive more people to use Slack and adopt it because it's more trusted in the large enterprises, I wouldn't be surprised if Salesforce goes up $10 billion, $20 billion in the month after this. acquisition if it in fact occurs because that'd be a great sign that it was, you know, a great acquisition and the market believed in it. So we'll see it's a bittersweet, bittersweet, if true, for the shareholders. I'm sure they would have rather seen it become a large, independent

company. And if you just think about like, if you're a Slack user, they have built an audio and video that hasn't changed and it's kind of buried in the product. And it hasn't changed in a year or two. I haven't seen any new features. And I always thought to myself, why are people even using Zoom if they're using Slack because when you're in a Slack room, you just click, start a call and you don't have to install another piece of software. You don't have to leave that piece of software. You can use the same chat room as opposed to firing up a second chat room. And I just think Slack didn't do a great job of marketing these products to existing users. I never got an upsell inside of Slack like, hey, would you like to set up a call or, you know,

can you make a channel that is a reoccurring weekly meeting? So let's say you had a weekly Wednesday staff meeting could you make a room that was also the call and have it be a calendar item, you know, sort of thing. It just didn't seem like the product vision, it almost like it topped out, right? And they didn't have somebody there making bold visionary bets, which is something that happened sort of with Twitter, too. They kind of just stagnated and they couldn't get really great products out there. Remember, moments was a bust. These fleets are a bust. The audio is a bust. they screwed up Vine. You can see when a company's product team is putting out stuff that doesn't work and isn't refined or their product is just stagnant, that's when you know like these things can

occur. And actually, Benitoff was in the running to possibly buy Twitter. That was a really weird one. Remember that? He was thinking about buying Twitter. So anyway, he's an ambitious guy. He likes to buy things and build big buildings. Good for Benioff. I think this is going to, I think it'll work out for them. I think they can get that $800 million in. revenue. I think they can 10-ex it over the next, you know, couple of years. And if they do, that's a pretty good deal, right? It gets a $5 billion, $10 million. I'm sure this $5 to $10 million in revenue left to unlock there, and it would wind up paying for itself. Okay, great job, betting off. Sorry to flag shareholders, if this is in fact the end of the road. I would have

liked to see it going a different direction. And we'll see you all next time. Bye-bye. This week in startups is brought to you by our crowd helps you invest early in pre-IPO companies alongside professional VCs. If you're interested in investing, you can join our crowd for free at OUR-C-R-O-D.com slash twist.