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Slack: Creating Value for Individuals and Capturing Value with Corporations

Slack is a SAAS company that offers a real time messaging and communication tool for individuals to work within small and medium sized teams. The company is being built by Steve Butterfield; the previous founder of Flickr (personally, Slack is the collaboration tool of choice for my startup Voxel8 and I enjoyed reading more about it when Emily Fifer wrote about it as a digital winner). A recent equity investment of $120MM valued the company at $1.2 Billion dollars less than 2 years after launch. The company valuation is a direct result of Slack being able to articulate and demonstrate how it is going to create and capture value.

Photo of Owen McCarthy
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Slack creates value by creating an intuitive and easy to understand user experience.  Their maniacal focus on UX is in attempt to kill email and its related spam and inefficiency.  Users can talk to each other in internet relay chat channels, send direct messages, create private groups, and integrate with external services (e.g. Google Docs, GitHub, Dropbox, Zendesk, Stripe, etc).  It then allows corporations to search all messages on the platform providing a really strong institutional memory for collaboration.
 
The following screenshot shows the layout and how it integrates with other platforms:


Slack became popular soon after launch, as showcased by this graph showing a snapshot of the growth last year: 



However, increasing the number of users is not the only ingredient needed for the recipe on how to capture value.  For this, Slack uses a freemium model.  They allow anyone to download the application for use within their corporation; however they offer tiered prices ranging from $6.67 to $99/month/user for access to different layers of functionality.  The exact breakdown is as follows:
                                                          


The freemium model is an effective choice for Slack.  They can focus on an almost unlimited potential user base, convince individual people to use it for their teams, and then go to corporations to try to formalize the adoption and security associated with the product.  They can clearly articulate the benefits of upgrading, such as increased integrations into Slack and the ability to search all of your messages (not just the last 10,000).  Slack can show proof on how these individuals use their platform and determine what product innovations need to be in the paying category.  Thus far, they have been able to convert 73,000 individuals to the premium service at an average of $13/user/month – amounting in a $1MM/month recurring revenue stream.  

The main tension for Slack will be the reaction of the corporate IT people.  They traditionally have sacrificed the custom flexibility that Slack provides for security of the product.  This will be a key tension that Slack needs to address if it wants to raise its conversion rates and capture the appropriate amount of value for what it is creating.  Overall, this company has tremendous potential and have shown early signs of being able to keep this balance.  
 

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Photo of Amit

Great post, Owen! I agree that Slack is a killer app. I also agree they are pursing the Dropbox model of land and expand. My view is that chat is just their first tool for enterprise collaboration. And the fact that they've been able to grow revenue to such a level on just that is amazing (they're doing $1M of revenue every 11 days I believe). I think they will soon expand into other areas of enterprise collaboration. This is a tough space and everyone is trying to crack it (Dropbox, Box, Evernote, Atlassian, etc.). But we've seen with WhatsApp and others how valuable messaging apps can be, so Slack may have a good shot.

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