Not Slacking off

By Jason Sedawie 25 June 2019 4 min read

Slack is a workplace messaging app. It aims to bring the consumer messaging experience to work. Slack is interesting because it’s trying to disrupt email usage while trying to improve real-time collaboration and document sharing.

"You don’t know you need Slack, but once you have it you can’t live without it."

This was overheard at Spaceship, and for us it’s been true: if you want to know what is happening at Spaceship, as a Spaceship employee, you jump on Slack.

Searchable log of all conversation and knowledge (SLACK)

Slack increases transparency and sharing across teams. Emails are about individuals rather than topics, creating silos of information. Slack is about teams, projects, emojis and GIFs. Users can easily follow discussions and share documents related to projects or topics. As any user knows: a picture is worth a thousand words.

Growth is not slacking off

We like Slack’s viral growth. It’s a bit like social media with user network effects, and their freemium model makes user adoption easy. Users can convert to paying customers for more advanced functionality or more usage. Around 65 per cent of paying accounts invite guests.

Some interesting stats, from the last week of January 2019:

  • 1 billion messages were "slacked."
  • Customers spent an average of 90 active minutes each day, or more than 50 million hours collectively on Slack.

Slack has more than 88,000 paid customers, including more than 65 companies in the Fortune 100. Beyond that, Slack has more than 500,000 organisations on the free subscription plan.

We don’t talk anymore, we like to Slack

Like many companies worth investing in, Slack is more than just a company: it’s become a verb. We’ve already mentioned the number of messages “slacked” above. The software is unusual in that it is used across teams. It’s used horizontally, not vertically, across businesses, increasing communication and document-sharing across divisions.

For example, Salesforce is dominant for sales but it’s not used across divisions or teams, whereas Slack is.

Source: Slack investor video

A lot of positives to slack about

There is a lot to like, but in particular:

  • Continual growth: users recommend other users, and they spend more. (See yearly customer/cohort data below.) Slack’s dollar retention rate is 138 per cent, so customers not only renew, but spend more each year. Magic. (See annual recurring revenue below.)
  • Subscription revenue: recurring customers and sales on a monthly or annual basis.
  • Network effects: more users lead to more users.
  • Slack is a verb: most users don’t really care about enterprise software but users seem to care about Slack.
  • Horizontal software: across-team usage means more potential customers and stickier software as Slack integrates into workflows.
Source: Slack Form S-1 Filing

Sharing channels = more growth

An option that we think will increase Slack’s virality is the shared channels capability. Shared channels allow for secure inter-organisation communication and collaboration. The feature is still in beta but the ability to work on projects across companies is compelling for the potential network effect and user growth. Over 15 per cent of paid customers have used this feature to connect with other paid customers.

Every email user is a potential Slack user

We like to invest companies that are changing human behaviour or as we like to say Where the World is Going. Email is used extensively by businesses. We believe Slack’s real time group messaging adds to email. It’s a big market; every email business user is a potential Slack user. Customers are bringing their workflows such as onboarding and customer support into Slack, increasing switching costs. Churn levels are likely to be low dependant on an individual company’s growth rate and turnover. We think Slack is a leader in a new category.

Microsoft teams for free is the major risk

Microsoft is the team to beat. Microsoft bundles its Teams app free to Office 365 users.  According to Microsoft, more than 500,000 businesses use Teams, compared to Slack’s 600,000. Microsoft is the productivity king, leveraging their existing customer base; in response, Slack offers more than 1,500 app integrations, appealing to new customers that may not even consider Office 365. We believe Slack’s singular focus and open software integration is an advantage; it's become an ecosystem for communications and sharing. For us, Microsoft’s Teams is the key competitive risk, though we believe the market is large enough for two players.

Money? No thank you, we have enough

Last week, Slack conducted a direct listing. Unlike a traditional IPO, employees and investors can sell stock on the first day of trading instead of the usual six-month share lockup period. Following Spotify’s earlier example, Slack won’t issue new shares for cash. We like this direct listing model; it creates a “real” price, as all shares are available to be sold. It also means that Slack isn't raising new money. This is a real positive as it means Slack has money and there is a pathway to profitability in sight. Enterprise software is a hot investment area with high valuations. However, replacing email and bucking the traditional IPO is interesting. With that in mind, Slack is definitely a company on our watchlist.

Important! We’re sharing with you our thoughts on the companies in which Spaceship Voyager has considered investing for your informational purposes only. We think it’s important (and interesting!) to let you know what’s happening with Spaceship Voyager’s potential investments. However, we are not making recommendations to buy or sell holdings in a specific company. Past performance isn’t a reliable indicator or guarantee of future performance.

Words by
Jason Sedawie Right Chevron

Jason is a Portfolio Manager at Spaceship. He tries to surf on the weekend and enjoys helping our customers achieve their financial goals by investing in where the world is going.

Not Slacking off