The Zoom IPO (with Santi Subotovsky)

Summary Notes


In this episode of Acquired, hosts Ben Gilbert and David Rosenthal, along with guest Santi Subotovsky from Emergence Capital, delve into the remarkable journey of Zoom, the video conferencing company that defied expectations to become a dominant player in the tech industry. They discuss Zoom's focus on customer happiness, its strategic move from serving SMBs to capturing the enterprise market, and the company's impressive growth trajectory, which saw it post revenues of $330 million with significant operating cash flow in 2018. The episode highlights Zoom's IPO, where it priced above range at $36 a share, leading to a market cap of $9.2 billion, and closed its first trading day at a $16 billion valuation. They explore Zoom's under-the-radar growth, its product effectiveness despite being in a supposedly commoditized market, and the importance of timing in tech ventures. The conversation also touches on the power of immigration and the company's unique management philosophy of promoting internal talent and fostering a diverse leadership team.

Summary Notes

Introduction to Acquired Podcast, Season 4, Episode 8

  • Ben Gilbert and David Rosenthal host the podcast.
  • Focus on technology acquisitions and IPOs.
  • Play a clip from Emily Chang's interview with Eric Yuan on Bloomberg TV.
  • Eric Yuan is the CEO of Zoom and is described as grounded and humble.
  • Discussion of the Zoom IPO and its market performance.

"Welcome to season four, episode eight of acquired, the podcast about technology acquisitions and ipos. I'm Ben Gilbert. I'm David Rosenthal, and we are your hosts."

The quote is an introduction to the podcast episode, establishing the hosts and the episode's focus on Zoom's IPO and market performance.

Santi Subitovsky's Background and Role at Zoom

  • Santi Subitovsky is a partner at Emergence Capital.
  • Santi has been on Zoom's board since 2014.
  • Santi is from Argentina and is an immigrant to the US.
  • Santi founded an online learning platform in Argentina and did his MBA at HBS.
  • The MBA class included notable entrepreneurs and companies like Rent the Runway and Cloudflare.
  • The economic downturn in 2009 made starting a business a lower opportunity cost.

"Santi has been on the board of Zoom since he led emergence investment in the company in 2014. And Santi is also from Argentina. And like Zoom CEO Eric Yuan is an immigrant to the US."

This quote explains Santi's early involvement with Zoom and his connection to the immigrant experience shared with CEO Eric Yuan.

Acquired Limited Partner Program

  • The Acquired Limited Partner program offers deeper insights into company building topics.
  • The program has a bonus show with updates on regulation and autonomous vehicles.
  • Listeners can join by following the link in the show notes or going to the provided URL.

"Well, if you like the show and you want to go deeper on company building topics with David and I, you can become an acquired limited partner and get access to our second lp only bonus show."

The quote promotes the Acquired Limited Partner program, offering additional content for listeners interested in company building topics.

Pilot's Role as a Sponsor

  • Pilot is a company offering accounting, tax, and bookkeeping services for startups and growth companies.
  • Pilot is the largest startup-focused accounting firm in the US.
  • Pilot's services include finance, accounting, tax, and CFO services.
  • Pilot supports companies from startup phase to growth phase and beyond.

"Pilot both sets up and operates your company's entire financial stack. So finance, accounting, tax, even CFO services like investor reporting from your general ledger all the way up to budgeting and financial sections of board decks."

This quote describes the comprehensive range of financial services that Pilot offers to startups and growth companies, highlighting their role in supporting businesses.

Zoom as a Bridge Between Eras and Geographies

  • Zoom is seen as a bridge between classic Silicon Valley and new IPOs.
  • It connects Silicon Valley with the rise of China's tech ecosystem.
  • Zoom's founder, Eric Yuan, was born during China's Cultural Revolution in Shandong province.
  • Shandong is significant for its cultural and religious history, being the birthplace of Confucius and containing Mount Tai.

"A good lens for Zoom as a company is almost like a bridge both between kind of eras here in, you know, in many ways it is classic old school Silicon Valley."

This quote frames Zoom as a company that serves as a bridge between different eras of Silicon Valley and the evolving global tech landscape, particularly the connection with China.

Eric Yuan's Journey from China to Silicon Valley

  • Eric Yuan showed early entrepreneurial tendencies in China.
  • He attended Shandong University of Science and Technology.
  • His long-distance relationship with his girlfriend inspired him to dream about technology bridging physical gaps.
  • After hearing Bill Gates speak about the information superhighway, Yuan decided to move to the US to pursue the internet's potential.
  • Yuan applied for a US visa nine times before being accepted.
  • He joined Webex as a founding engineer and rose to become VP of Engineering.
  • After Cisco acquired Webex, Yuan became VP of Engineering for Cisco's communication platforms.
  • Yuan left Cisco after 14 years to start Zoom.

"He starts noticing that they're really unhappy with the product. This is now 22,009 2010 2011. And that makes Eric really unhappy."

This quote highlights Eric Yuan's focus on customer happiness and his dissatisfaction with the product's performance, which ultimately led to the founding of Zoom.

Eric Yuan's Philosophy of Happiness

  • Eric Yuan believes in pursuing happiness and making others happy.
  • His LinkedIn profile states "delivering happiness to our users" as his mission.
  • Customer happiness and obsession were evident in early Zoom users.
  • The philosophy of happiness is deeply ingrained in Zoom's company culture.

"I really came to understand that the purpose of life is to pursue happiness, like here in the US. That's really the most important thing."

This quote from Eric Yuan encapsulates his life philosophy, which he applies to his approach to business and customer service at Zoom.

Evolution of Communication Technologies

  • Early communication technologies were designed for fixed Internet environments, with users expected to be at desks.
  • The shift to mobile required a complete rebuild of infrastructure, which incumbents struggled with due to their monolithic architectures.
  • Eric Yuan's vision for Zoom involved rebuilding the entire software stack to accommodate modern, on-the-go usage across various devices and networks.

"And those technologies were built for a different era. [...] So you had to rebuild the infrastructure from the ground up."

The quote explains the necessity for new communication technologies that cater to the dynamic usage patterns of modern users, which was not possible with patching old systems.

Investment Philosophy and Finding Zoom

  • Emergence is thematic in its investment approach, focusing on big shifts like the move from on-premise to cloud software.
  • The firm spent three years searching for the right company in the collaboration space, emphasizing the combination of technology, timing, and leadership.
  • Zoom was identified as the right company due to its technology, the timing of the market, and Eric Yuan's leadership.

"We had a thesis. We knew that things were going to change and it took us three years to find the right company."

This quote highlights the strategic and patient approach to investment, where a clear thesis guides the search for the right opportunity.

Eric Yuan's Vision and Leadership

  • Eric Yuan saw issues within Cisco's approach to communication and collaboration but was not allowed to re-architect it.
  • Upon leaving Cisco, he initially considered a consumer application but quickly pivoted to enterprise with Zoom.
  • Investors wrote checks to Eric not because of the idea but because of their belief in his abilities and vision.

"They believed in Eric. They had full confidence in Eric, and that was a great lesson for him."

The quote emphasizes the importance of the founder's credibility and vision in attracting investment, even more than the specific business idea.

The Importance of the Right Investment Partners

  • Founders should seek partners who believe in them, not just the business, to support them through inevitable challenges.
  • Many successful companies experienced non-linear paths to success, highlighting the value of supportive partners.
  • The pivot strategy has been common among successful companies, demonstrating the need for adaptable and supportive investors.

"You should always find the right partner, someone who believes in you before they believe in the business."

This quote underscores the advice that entrepreneurs should prioritize finding investors who are committed to the founder's success, not just the business model.

Changing Landscape of Collaboration Tools

  • The purchasing process for collaboration tools has evolved, with end users becoming more influential in decision-making.
  • SaaS and freemium models have decentralized purchasing decisions, making user satisfaction more critical.
  • Happiness with a product is now a competitive advantage, as it can lead to both customer retention and evangelism.

"That's why happiness matters a lot more today than it did ten or 15 years ago, because now every interaction can lead you to lose a customer."

The quote illustrates how customer satisfaction has become essential in the SaaS model, as unhappy users can easily switch to competitors.

The Shift to User-Centric Enterprise Software

  • The transition from "bring your own device" (BYOD) to "bring your own app" (BYOA) gave users control over their software choices.
  • Consumer applications set high expectations for user experiences, influencing the demands for business applications.
  • Zoom's success in delivering a consumer-like experience with enterprise-grade features exemplifies this shift.

"When you brought your own device, you had full control on the applications that you installed."

This quote explains how the BYOD trend empowered users to demand better experiences in business applications, leading to a shift in enterprise software expectations.

Zoom's Early Growth and Education as a Beachhead

  • Eric Yuan's reputation and leadership attracted a team of engineers and early investors, demonstrating his influence.
  • Zoom's first paid customer, Stanford's continuing education department, set a precedent for its growth in the education sector.
  • Targeting education as an early market can influence future workforce expectations and drive long-term product adoption.

"I believe that if we could measure the impact on happiness within students and graduation rates of those people using Zoom. We should probably see an increase there."

The quote suggests that Zoom's focus on the education sector not only served as a strategic entry point but also potentially improved user satisfaction and outcomes in that space.

Freemium Model and Understanding Customer Needs

  • Zoom's freemium model with a 40-minute limit for meetings was based on data showing most productive business meetings lasted 45 minutes.
  • The model encourages use and allows for seamless integration of non-paying users, leveraging the network effect.
  • Zoom's approach demonstrates a deep understanding of customer needs and the importance of user experience in adoption.

"We just want people to use it, and if they can't pay, they can use it for free, and if they want to pay, they can remove that restriction."

This quote reveals Zoom's strategy to prioritize widespread usage and customer experience, even offering the full product for free to some users.

The Decision to Invest in Zoom

  • The product's functionality and Eric Yuan's leadership convinced investors of Zoom's potential.
  • The investment process involved recognizing the importance of strong leadership and commitment to building a quality product from scratch.
  • The relationship with Eric and Zoom grew through personal interactions and observing the company's operations and vision.

"I became obsessed with Eric and the product."

This quote captures the investor's conviction in both the product's potential and the founder's vision, leading to a strong commitment to the investment.

Initial Engagement with Zoom

  • Speaker A describes the early interactions with Zoom and Eric Yuan.
  • The goal was to build a relationship and convince Eric to partner with their firm.
  • Speaker A invited Eric to present to his team, despite Eric not actively raising funds.
  • The hook for the meeting was the dissatisfaction with Skype and curiosity about Zoom's potential as a replacement.

"And I would drive down to Santa Clara to meet with Eric and the team on a regular basis to build a relationship and try to convince him to partner with us."

The quote indicates Speaker A's proactive approach to relationship building with Zoom, demonstrating the importance of personal engagement in venture capital.

Zoom's Pitch and Live Demo

  • Eric Yuan pitched Zoom to Speaker A's team without traditional metrics, instead conducting a live demo.
  • Live demos are considered risky, but the Zoom product performed well, impressing the team.
  • The successful demo led to further interest in Zoom's potential.

"What he said is, everyone in the room, download Zoom now we're going to do a live demo."

This quote highlights the unconventional but effective pitch strategy that relied on the product's performance rather than metrics.

Due Diligence and Investment Decision

  • The metrics discovered during due diligence exceeded expectations.
  • Zoom's performance and user behavior (churn and return rates) indicated a strong product-market fit.
  • The firm decided to partner with Zoom, seeing both the product's potential and an opportunity to add value beyond capital.

"The metrics were a lot stronger than what we even anticipated."

The quote reflects the surprise and excitement about Zoom's underlying business metrics, which were a key factor in the investment decision.

Scaling and Market Strategy

  • The focus was on scaling Zoom's go-to-market strategy, initially targeting SMBs and then moving to mid-market and enterprise.
  • Speaker A and their firm helped Zoom by introducing them to experienced marketing and sales leaders.
  • The partnership with Zoom was based on strategic value, not just financial investment.

"Exactly. Scaling, go to market."

This quote summarizes the strategic direction for Zoom's growth, emphasizing the importance of scaling and market penetration.

Venture Investment and Personal Conviction

  • Speaker A discusses the personal stakes involved in making a large investment in Zoom.
  • The investment was seen as a career-defining moment due to its size and the high conviction required.
  • The firm's unanimous enthusiasm for the deal was a critical factor in proceeding with the investment.

"Santi, you're betting your career in venture, because if this doesn't work, I mean, it's going to be hard to get out of this."

The quote conveys the high stakes and personal risk involved in the investment decision, reflecting the pressure and conviction required in venture capital.

Post-Investment Experience and Team Dynamics

  • Speaker A had a positive experience post-investment, with Zoom consistently exceeding expectations.
  • The discussion touches on the importance of building a strong, humble, and diverse team.
  • Both Speaker A and Zoom faced challenges and rejections, highlighting the underdog status they shared.

"It was one of those board meetings where we would show up and Eric would say, we didn't do what we said we're going to do, we did better."

This quote exemplifies the positive surprises and strong performance Zoom exhibited post-investment, contributing to a positive experience for the investors.

Zoom's Growth and Adoption

  • Despite rapid growth, Zoom remained under the radar, with grassroots adoption driving its success.
  • The company's user-friendly experience led to organic growth, even when other technologies were standardized within organizations.

"True, but they were completely under the radar. People wouldn't even know what Zoom did."

The quote underscores Zoom's stealthy growth trajectory, with its success being driven by user satisfaction rather than high-profile marketing efforts.

Venture Capital Biases and Market Misconceptions

  • Speaker A notes biases in venture capital, with investors often chasing trendy technologies.
  • Basic building blocks, like video conferencing, can undergo renewal cycles and offer investment opportunities.
  • Zoom's success challenges misconceptions about commoditized markets and the value of fundamental technologies.

"Yeah, I also feel that there's a lot of bias when it comes to venture investments."

This quote points to the tendency in venture capital to overlook basic but essential technologies in favor of more hyped sectors, highlighting the importance of recognizing renewal opportunities in established markets.

Emergence's Investment in Zoom

  • Emergence led a $30 million funding round in Zoom in 2014.
  • The company initially focused on SMBs (Small and Medium-sized Businesses).
  • The challenge was to scale from SMB to mid-market and enterprise customers which began around 2015.
  • Zoom attracted mid-market and a few enterprise customers, showing it wasn't just an SMB product.
  • The company was profitable and did not raise capital frequently.
  • Sequoia Capital approached Zoom preemptively for investment, and Zoom partnered with them without needing to use the invested funds.

"But then we got approached preemptively by Sequoia and Eric had always had an admiration for that firm and they were good partners, they did a good process and we ended up partnering with them. And after that we never raised more capital."

This quote highlights Zoom's financial stability and strategic partnership with Sequoia Capital, which allowed them to avoid further fundraising.

Growth and Scaling Strategy

  • Zoom's strategy to sell to SMBs is seen as a way to focus on the end-user experience.
  • Convincing SMBs to buy a product is a strong foundation for scaling up to larger businesses.
  • The transition to mid-market and enterprise requires understanding new pain points, such as CIO concerns about integration, security, and compliance.
  • CEOs need to know when to say no to potential customers if the product is not ready, to avoid becoming an outsourced development shop.

"So if you can convince an SMB to buy your product and use it, then it's going to be hard to create that customer love when you move into mid market and enterprise."

This quote emphasizes the importance of building a strong foundation with SMBs to ensure customer satisfaction before scaling up to larger clients.

Zoom's Impact and Market Position

  • Zoom has influenced the way companies operate and has potential for changing work culture.
  • The company's growth has been consistent, with significant revenue increases from 2016 to 2018.
  • Zoom's IPO in April 2019 was successful, with the stock price surging 72% on the first day of trading.
  • The company's philosophy during the IPO was to ensure all stakeholders, including new investors, were happy.

"I believe that Zoom is democratizing and globalizing the pursuit of happiness because it's enabling people to realize their dreams regardless of where they are."

This quote reflects Zoom's mission to affect work culture positively and its global reach.

Financial Metrics and Market Response

  • Zoom's financial health is indicated by its profitability and efficient customer acquisition cost.
  • The company's S-1 filing shows strong operating cash flow and a short payback period for customer acquisition compared to competitors like Dropbox and Docusign.
  • Investors and markets value growth, but profitability is also crucial.
  • Emergence's experience with enterprise investments allows them to help entrepreneurs focus on the right metrics for growth and profitability.

"But ultimately, and Zoom has shown us this, markets care about profitability. They do care about growth, but profitability is also important."

This quote underscores the balance between growth and profitability as a key factor in a company's success in the eyes of investors and markets.

Long-Term Success Factors

  • Maintaining high customer satisfaction is crucial, as indicated by the Net Promoter Score (NPS).
  • Attracting the right talent that aligns with the company's mission and vision is essential for scaling and international expansion.
  • The company's future success will be determined by its ability to continue growing and delivering value to customers.

"And the second thing that we need to make sure that we continue to focus on is making sure that we attract the right people."

This quote stresses the importance of hiring individuals who are not only skilled but also committed to the company's long-term goals.

Evaluation of Zoom's IPO and Future Outlook

  • The discussion around Zoom's IPO pricing reflects the company's inclusive philosophy towards investors.
  • The success of Zoom's IPO is graded based on its ability to leverage the event to grow into a significant collaboration company.
  • A key concern is whether Zoom can expand beyond video conferencing and continue its growth trajectory.
  • The company's focus on customer happiness and attracting the right talent will be pivotal in its continued success.

"Are they able to use that new cash generated or do something with either the IPO proceeds or what it means now to be a public company, to really grow into this really important collaboration company in the world, that all investors believe that it can be this $26 billion company."

This quote considers the potential of Zoom's IPO proceeds to fuel further growth and expansion, which is a factor in evaluating the company's future performance.

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