How Did Slack Justify That $7B Valuation?

Big Money Riding on Slack

On Tuesday, August 21, Slack said that they had closed a $427 million Series H funding round, boosting the valuation of the company to $7.1 billion. The new funding brought the total raised by Slack to $1.26 billion.

$7.1 billion is an incredible valuation for a business with 8 million daily active users. However, only 3 million of those are paid subscribers, which gives Slack $200 million in annualized recurring revenue.

Changing Landscape Since 2016

Apart from hoping that Slack will be bought by one of Microsoft’s competitors, it’s puzzling how investors can justify the funds they’ve pumped into Slack. Sure, Microsoft appears to have considered buying Slack for $8 billion in 2016 (a deal that seemed to offer even less value than their Skype purchase), but that was then.

The landscape around Slack changed fundamentally and permanently when Microsoft launched Teams into preview in November 2016. Things didn’t get any easier for Slack when Teams achieved General Availability in March 2017 and then launched a highly functional free version to compete head-on with Slack in July 2018.

Teams Growth within Office 365

The last official figure (April 2018) for Office 365 was 130 million monthly active users. Given that Office 365 has grown by 3-odd million active users per month, it’s reasonable to say that the figure now is in the 145-150 million range and that it will reach 160-165 million by the end of 2018. Teams is available for all small business, enterprise, education, and developer Office 365 plans, and has just been launched into the U.S. government cloud, so the vast bulk of the Office 365 user community is a potential for Teams.

Apart from noting that Teams is used by 200,000 organizations, Microsoft isn’t saying how many subscribers actively use Teams. If each organization has 100 people using Teams, that’s 20 million users. However, I suspect that the number is smaller because it takes time for organizations to go through the planning process before they launch something like Teams into full production. Companies need to figure out how Teams works alongside email, for instance, and how to help their employees make good decisions about how to use the sometimes baffling array of collaborative technology that’s available inside Office 365.

Even so, there’s a ton of growth for Teams inside an essentially captive base and it seems likely that Teams will outgrow Slack by a considerable margin.

Teams Integration with Office 365

Add in Microsoft’s investment in cloud-based meetings and phone integration to move users off Skype for Business Online to Teams, the integration with Office 365 functionality such as SharePoint Online, OneDrive for Business, Planner, Azure B2B collaboration (guest users) content search, compliance records, and retention policies, it is difficult to see why an existing Office 365 customer would consider Slack. After all, they’re already paying for Teams in their Office 365 subscription.

Looking Forward

Even if they’re stuffed with money after the latest funding round, Slack knows they are in a life and death contest with Teams. They’re doing some intelligent things like removing competition (HipChat) to bulk their user base, but you wonder how much Slack can grow over the next few years in the face of full-blown competition from Teams and the unrelenting pressure from Microsoft’s marketing.

Competition is good and the fact that Slack is a strong competitor with good ideas and a large installed base will spur Microsoft on to improve Teams in areas like the desktop client, performance, and functionality. There are many good things about Teams, but the accelerated pace of development and the need to keep on introducing new features shows through from time to time when things don’t work quite right.

Microsoft can’t afford to relax with Slack so active, especially in the area of convincing ISVs to adopt and embrace their platform. The struggle for supremacy in chat-based collaboration technology should be fascinating viewing over the next few years.

For more information about Teams, read Chapter 13 in Office 365 for IT Pros – and then continue to learn about how to use PowerShell with Teams in Chapter 14, and the transition from Skype for Business Online to Teams in Chapter 16. We think we have Teams covered!