CHAPTER 12

Slack, San Francisco, 2018

With Spotify trading publicly, McCarthy prepared for his annual trip to the Allen & Co. conference. In July, he traveled to Sun Valley, Idaho, for the splashy affair. Hosted by the investment bank since 1983, it was an exclusive ticket available to only the most powerful in the media, technology, entertainment, and sports industries. It was also a way for Allen & Co. to reward corporate clients who chose them for lucrative engagements like advising on mergers, acquisitions, and direct listings.

Held in the rarefied air of a ski resort, the conference allowed business leaders to come together over panels, impromptu meetings, and recreational activities like white water rafting. Conference lore had it that multibillion-dollar transactions were clinched by handshake.

On this July day, McCarthy made his way past the Sun Valley Inn, where the panels and presentations took place, to the waters of the Duck Pond and a grouping of tables and chairs set up nearby for a buffet lunch. Here executives often sat down with institutional investors so they could get to know one other, or met with senior executives at other companies, and this time was no different.

Stewart Butterfield and Sarah Friar, two leaders of the multibillion-dollar messaging app Slack, had arranged to meet with McCarthy to talk through the details of Spotify’s recent direct listing. Butterfield’s attendance had rated a one-sentence mention in a July 11 New York Times article headlined “As Moguls Gather in Sun Valley, Here’s Who Might Be in the Mood for Deals.”

Butterfield launched Slack in 2013, after Glitch, the online cooperative game he was developing at a company called Tiny Speck, failed to gain commercial traction. The founder shifted the company’s focus to the internal messaging app his engineers had designed to communicate on game development and changed the firm’s name.

The Slack founder was cut from a different cloth than McCarthy. Unlike the Connecticut native, who, anticipating being drafted, trained with marines during one summer of college before the end of the Vietnam War, Butterfield was born in British Columbia to an American father who had moved north to dodge the conflict. The family settled on a commune and named their son Dharma. They didn’t have electricity until Butterfield was five years old.

Butterfield had an early entrepreneurial bug, selling lemonade and 7-Eleven hot dogs on the beach and working at his father’s movie theater. If his upbringing didn’t give Butterfield an unusual perspective, his schooling certainly did. After attending the University of Victoria, he studied philosophy and the history of science at Cambridge. He didn’t have an engineering degree or an MBA. As Slack grew, he took coaching lessons to improve his management style.

Slack was the second company Butterfield had built out of a failed gaming experiment. When Game Neverending, which he created with Caterina Fake, then his wife, failed to gain traction in 2004, the two spun out a photo-sharing tool they built. The company became Flickr, an early attempt to seize on social media and user-generated content themes. They sold it the next year to Yahoo! for around $25 million.

Friar was on Slack’s board, where she served as the head of the audit committee. She was also the CFO at Square, the app for small businesses known for its white cube that plugged into the headphone jack of an iPhone and allowed merchants to accept credit card payments. Friar ran Square’s finance department in 2015 when the company went public, giving her some familiarity with the IPO process.

As the three executives settled in under the mountain sun, the Slack executives asked McCarthy for details about Spotify’s direct listing and what he learned during it that he hadn’t known beforehand. Over the course of the next hour or so, McCarthy walked the Slack representatives through the direct listing. He stressed the importance of choosing a financial advisor they trusted. In a direct listing, he explained, the SEC forbids company executives from comparing notes with their bankers about investor interest and who might be willing to sell stock. Once it started the formal process, Slack would be dependent on its bankers to determine the supply and demand for shares. Managing those competing forces would have a lot to do with setting the share price and managing its swings when the stock started trading.

The Spotify CFO also warned Butterfield and Friar to mind the plumbing of the financial markets. Spotify struggled with the stock transfer agents, the back-office administrators who registered investor shares so that they could be bought and sold on an exchange. The firms doing that tended to use clunky decades-old technology. Calls to the customer service line sometimes went unanswered.

Spotify left its investors and employees to interact with the transfer agents individually, McCarthy said. If given a second chance, he told them that he would have asked for power of attorney and assigned a dedicated Spotify team to interface with the transfer agents.

McCarthy urged the Slack executives to carefully consider their choice.

McCarthy also encouraged the Slack executives to hold an investor day to educate the investing public about the company’s prospects. He wasn’t convinced that Slack had the right combination of attributes to pull off a direct listing, but he patiently answered Butterfield and Friar’s questions. Slack would have to overcome a series of hurdles that were different from the ones Spotify had faced and potentially insurmountable.

One of those was that the secondary market for Slack’s shares wasn’t as developed as that for Spotify, which McCarthy feared might make it more difficult to come up with an accurate reference price for Slack’s shares. Slack didn’t have the brand recognition of Spotify—the music streaming company had more than seventy million subscribers when it hit the public markets. Slack wasn’t nearly as well known among consumers and the investing public.

Looking for alternatives to email, Slack had grown quickly by partnering with tech startups like Brian Chesky’s Airbnb, which had helped pioneer the sharing economy. At one point, Slack went through a period during which it doubled its number of users every three months, making it “one of the fastest-growing business applications in history.”

By the time of the Sun Valley conversation, its number of daily active users had reached eight million. Seventy thousand organizations used it. But growth had started to slow. Its user base had grown 45 percent between May 2017 and May 2018, compared to 83 percent in the previous twelve-month period.

One attribute that Slack shared with Spotify was access to almost unlimited capital. Over the years, Slack’s success had given it almost unfettered access to capital that would allow it to pursue a direct listing if Butterfield, Friar, and the rest of the board settled on that option.

Slack’s fundraising history matched the influx of cash that had flooded Silicon Valley during the years of its existence, fueled by mutual funds and other public market investors who had begun to “cross over” into private funding rounds. In October 2014, investors valued Slack at $1.1 billion, making it one of about forty companies globally with a $1 billion or larger valuation. That was double the amount from the prior year, the Wall Street Journal reported, when the term “unicorn” was first used to refer to companies worth more than $1 billion. “In short, 2014 was the year the tech sector went into hyper-drive,” the newspaper said.

Slack more than doubled its valuation the following year, to $2.8 billion, when it raised another $160 million in April, leading Butterfield to gush to the New York Times about the money available in the private markets. “I’ve been in this industry for 20 years,” he said. “This is the best time to raise money ever. It might be the best time for any kind of business in any industry to raise money for all of history, like since the time of the ancient Egyptians.”

In early 2016, Slack raised another $200 million at a $3.8 billion valuation. The round was led by Thrive Capital, the venture firm run by Josh Kushner, the brother of Jared Kushner, son-in-law of then Republican presidential candidate Donald Trump.

Slack’s growth was so explosive that it soon attracted competitors. Facebook had its own challenger, Workplace by Facebook, and then in November 2016 Microsoft unveiled its long-awaited Microsoft Teams. The latter was a broadside against Slack—free for existing Microsoft customers, which included an installed Office 365 user base of 85 million people, and available in 180 countries. Microsoft pitched it as a “digital forum” that could be customized for each company, or even among teams within the same company.

Slack showed a plucky side. On November 1, 2016, one day before Microsoft CEO Satya Nadella was scheduled to show off Teams at a Microsoft launch event, Slack emailed a number of reporters with updated usage numbers, saying it was now being used by 4 million individuals daily, and by 28 of the largest 100 companies in the United States.

The following morning, Slack took out a full-page ad in the New York Times that it addressed to Microsoft—an open letter that offered 796 words of advice, modeled on a famous 1981 Apple Computer ad that taunted IBM. It mimicked the Apple ad’s large, bold introduction (“Welcome, IBM. Seriously.”) in its salutation:

Dear Microsoft,

Wow. Big news! Congratulations on today’s announcements. We’re genuinely excited to have some competition.

We realized a few years ago that the value of switching to Slack was so obvious and the advantages so overwhelming that every business would be using Slack, or “something just like it,” within the decade. It’s validating to see you’ve come around to the same way of thinking. And even though—being honest here—it’s a little scary, we know it will bring a better future forward faster.

However, all this is harder than it looks. So, as you set out to build “something just like it,” we want to give you some friendly advice.

Slack said a product’s features weren’t as important as its design and appeal to humanity. Microsoft representatives told media outlets that the company thought there was room for more than one player in the space.

In an interview with the Wall Street Journal after the Microsoft Teams launch published in an article two weeks later entitled “Slack Girds for Battle with Messaging Rivals,” Butterfield said, “I’ve been paranoid about this for a long time.”

By the time of the Sun Valley conversation, Butterfield had already fielded other ideas about how to enter the public markets. Less than a year earlier, in September of 2017, early Slack investor and board member Chamath Palihapitiya had sponsored something called a special purpose acquisition company, or SPAC. Known colloquially as a blank check company, it was structured as a shell corporation that raised money to buy another company. Palihapitiya’s SPAC raised $690 million by selling shares to investors with the stated intention of looking to buy a company “operating in the technology industries.”

Blank check firms had been around since the early 2000s and were considered a financial backwater populated by shady characters prone to malfeasance, hardly the province of blue chip corporations or hot Silicon Valley startups. They were often lampooned for enriching their sponsors and giving unproven companies a side door to the public markets if they couldn’t meet the high bar of doing a traditional IPO.

Like all blank check firms, Palihapitiya’s raised money by selling shares in an IPO. It didn’t have an operating business or assets other than the cash raised in the IPO, which it held in a trust until its sponsor—Palihapitiya and his business partner, Ian Osborne—found a company to buy. Then, the cash raised in the IPO would be used for the acquisition.

The brash Palihapitiya was a six-year-old when he emigrated to Canada from Sri Lanka with his family. He got into engineering and secured a job at Facebook in the early days, rising to manage many aspects of the company’s growth. When he left in 2011, he’d amassed enough wealth to become part owner of the Golden State Warriors, San Francisco’s hometown NBA team.

While the prospectus for Palihapitiya’s SPAC didn’t identify a target, one person briefed on his thinking said the investor aspired to take Slack public. He approached Slack and proposed the idea.

Slack’s board wasn’t interested. Board members including Butterfield, Friar, and venture capitalists Andrew Braccia of Accel and John O’Farrell of Andreessen Horowitz briefly considered the option before ultimately dismissing it. (In November 2019, Palihapitiya would complete a merger between his blank check firm and Virgin Galactic, Richard Branson’s space company. In December 2019, Palihapitiya stepped down from Slack’s board.)

That was in the past as McCarthy, Butterfield and Friar concluded their conversation and returned to the conference.

One month after the Sun Valley conversation, Slack announced yet another fundraising, bringing its total haul to $1.26 billion over the course of its relatively short corporate life.

The company raised $427 million from existing investors and new growth equity investors like Dragoneer Investment Group and General Atlantic, who led the round, and T. Rowe Price, Wellington Management, Baillie Gifford, and Sands Capital. The round, which saw investors purchasing shares for $11.91, valued the company at $7.1 billion.

In September, reports began to surface that the company was considering a stock market listing for the first half of 2019. The Wall Street Journal said that Slack was in active preparations for a listing it had been informally preparing for since 2017. In an October interview with the Journal, Butterfield told the newspaper that Slack had yet to sell shares to the public because it didn’t need the money.

“If this was 15 years ago, we would have been public by now for sure, with many times more revenue than companies would typically go public with,” Butterfield said. “But companies in that era didn’t grow as quickly as we did. And companies of that era didn’t have this completely, historically, unprecedented private market.”