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Slack's massive funding round is everything amazing and insane about the startup bubble

Slack's massive funding round is everything amazing and insane about the startup bubble


More cheddar for Mr. Butterfield

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Slack announced yesterday that it raised $160 million at a $2.8 billion valuation. The company hasn't spent a penny of the $120 million it raised just last October. When Slack raised that money, founder Stewart Butterfield said it was enough to last them 60 years. Besides creating a Scrooge McDuck style swimming pool, why exactly would a company take on such an ungodly amount of cash while claiming at the same time that is has no need for it? We hopped on the phone with Butterfield to find out.

"It’s the best time ever in the history of the world, or at least the tech industry, to raise money. Will it get better? It’s possible. Six months from now, we might say darn it, we should have waited," Butterfield told me. "On the other hand it’s a pretty amazing deal. In a certain respect it would have been irresponsible not to take it for five-ish percent of the company on clean terms."

The best time in the history of the world to raise money

For those not familiar with venture capital, Butterfield means he only had to give up a small percentage of the ownership in Slack to get this new funding, and that the deal didn't come with a bunch of crazy terms which favored the new investors. Like we said before, HBO's parody of Silicon Valley simply can't keep up with the insanity of what's happening in the real world. But does a good deal alone justify raising money? And if so, how many times over?

There are some concrete factors that made raising more money attractive. "The market pressure is pretty crazy. I don’t have any data on inflation in salaries, but it seems like the expectations around salary and equity are 20 to 30 percent higher this year than last year, and the same is true for the year before that." Butterfield explains that hitting the magic mark of a billion dollar valuation, a unicorn in today's startup parlance, is also a psychological threshold that helps with hiring and customer acquisition.

A billion dollar valuation is table stakes for top talent

Along with the cost for talent, the price of real estate is also spiking in San Francisco. "We just moved out of our temp office. That was $62 a square foot when we first rented it, and now nine months later we can sublet it for $75 per square foot."

While he insists that the funding is far more than Slack needs for day-to-day operations, Butterfield believes it's important in case a big opportunity presents itself. "The money is useful in terms of creating options. Just cause we aren’t going to immediately spend it doesn’t mean it wouldn’t be great when we find a company we want to acquire."

What are the margins like on the company? "We're growing so fast it's very hard to know," Butterfield said. The financial model might change if Slack decides to start spending anything on sales or marketing. Right now it's just spreading by word of mouth. Slack claimed 73,000 paying customers back in October of 2014. It says it has over 200,000 now. "The margins are like any other enterprise software company, which is to say, they are very good."

A war chest in case you need to wait out a winter

I asked Butterfield if he was concerned that the rapidly ballooning valuation of the company might outstrip what it can fetch at a public offering. There have been several enterprise software companies recently that found themselves underwater after their IPO.

He acknowledged it was a danger, but pointed to the success of Etsy, a company in which he was an early investor, as an example of thinking long term. "Is it something to be concerned about? Yes. But the way things are now, we have an indefinite amount of time before we have to go public. With this money, we can wait a decade if we have to, until the timing makes sense."

What would the impact be if this bubble were to pop? Butterfield believes it wouldn't be anything like the dot-com crash, pointing out that the total size of startup investments each year, roughly $50 billion, is just a fraction of our larger financial markets. "Will our growth slow down, of course, it's the law of large numbers," he admits. "But right now it's crazy. We keep doubling in size. It's hard to wrap your head around." The rest of the world is thinking the same thing.