Why I am Skeptical about the Future of Slack as a Hugely Successful Stand-alone Company

For those who are not familiar with Slack, it is a tech startup that built a team communication application to reduce internal emails and boost employee productivity. It became the fastest growing software company and achieved a $100 million ARR run-rate in just over 3 years. Slack also raised a large amount of VC funding ($539 million, to be exact) and was valued at $3.8 billion during the last round.

We, at LoginRadius, also use Slack.

Slack is definitely a great success story, but the question is: can Slack be a successful software company with more than $1 billion in annual revenue? This question stuck with me when I saw Slack’s reaction to the launch of Microsoft Teams — by publishing a full-page ad in The New York Times with an open letter to Microsoft.

With this full-page ad, Slack’s message was loud and clear:

1) It wants to dominate the team communication sector of business productivity tools, from small-medium businesses (SMB) to the large enterprise market, and

2) It wants to be a stand-alone company in this area for the foreseeable future.

By the way, Slack’s high valuation left no choice for the company but to envision itself as a stand-alone company to deliver ROI to its shareholders. This high valuation is the key reason it is highly unlikely any company will acquire Slack.

Slack cannot achieve goal #2 without achieving goal #1, and I have three strong reasons to believe that it is going to be extremely tough for Slack to achieve the goal of dominating the team communications space in all markets.

1) Serving SMB Market alone is not enough: The SMB market is a good starting point to build great companies. However, only a handful of companies have achieved success by focusing solely on the SMB market, and they did so by providing a diverse array of products. Two great examples of these companies are GoDaddy and Zoho.

Slack’s present achievements lie primarily in the SMB market. In order to reach the $1 billion revenue mark, it must either diversify its offering or move up in the market by entering the Enterprise sector (Fortune 1000 companies). Being in the business productivity space, I do not see Slack building multiple applications to expand its service beyond the current communication tool. Hence, the remaining option is to tap into the enterprise market.

2) Tapping into the enterprise market with an incomplete offering is tough: The enterprise market is where the money is and is the main focus of big players such as Oracle, Microsoft, SAP, IBM, and CA Tech.

Enterprise-level corporations demonstrate two key characteristics: a) They prefer to buy a well-rounded solution for long term usage; and b) Due to the complex purchasing and decision making processes, they prefer to work with familiar vendors with whom they have existing relationships.

Here rests Slack’s problem — it does not have a complete productivity suite. The bigger players, such as Microsoft, who already have on-going relationships with large companies, are adding their Slack alternatives to their full-fledged and comprehensive productivity suites. Therefore, it is hugely unlikely that these large corporate customers are going to opt for Slack. Some might, but a majority of them will not.

3) Fierce competition ahead: Building a group chat application and integration with other tools is not very complicated, which means that Slack will come across some fierce competition from the business productivity players. This competition may not the norm of what other company faces, but it is similar to the instance where Apple entered the music market with Apple Music and killed Rdio.

MIcrosoft made its entry with Microsoft Teams and is combining the offering with free Office 365. The Office 365 already has 60 million active members, which is 15 times more than Slack’s current customer base.

Very few people are talking about the other big competitor: Google Hangouts. Google has a strong presence in the SMB space through its G-suite, which is being used by over 5 million organizations (I’m estimating over 50 million users, which is 12 times Slack’s current user base) and has been silently developing Hangouts as a group chat application for businesses. Here is a screenshot of Google Hangouts bearing a striking resemblance to Slack:

Slack is going to face some difficult competition in the SMB sector as well as in the enterprise market. However, while this does not mean that Slack will not succeed, I am very skeptical about the future of Slack as a stand-alone company with over $1 billion in annual revenue.