Zoom: An IPO Done Right?

How one videoconferencing company surprised us all.

Eric S. Yuan, CEO of Zoom. Photo with credit to Zoom.

On March 22nd 2019, Zoom filed their S-1, the registration form in anticipation of their initial public offering (IPO). An IPO is the first time that the shares of a company are able to be traded on a public stock market. This allows companies to raise more funding through selling their shares and also allows investors and option-holding employees to cash out.

More interestingly, since public companies have to report on their profit and loss, an S-1 filing is typically the first time that a private company exposes their internal workings to the rest of the world. Revenue, growth, number of employees, net loss, you name it: it’s in the document.

S-1 filings are often the subject of excitement and scrutiny on sites such as Hacker News, as keen members speculate and pick apart the inner workings of these so called unicorns: privately held startup companies with a valuation of $1 billion or more.

As the Zoom S-1 appeared online, many of us had to pick our jaws up off of the floor.

Who are they?

What do Zoom actually do? Well, they pretty much do one thing really well: video communications. We’ve been using Zoom at Brandwatch for a few years now, and what others have reflected in the commentary around the filing is true: it does indeed just work. That’s true for video calls with two participants as much as it is for company meetings with hundreds of people dialing in.

A Zoom call in action.

Zoom was founded in 2011 by Eric S. Yuan. Previously, Yuan was a founding engineer at WebEx, a video communications company that was acquired by Cisco in 2007. After the acquisition, he felt that the only way to address a number of fundamental issues with the product was to rewrite it from the ground up. Cisco leadership didn’t listen, and the rest is history.

Video communications were, and are, a passion of Yuan’s. As a young man, he used to live 10 hours by train from his girlfriend in mainland China, and would wonder whether there could be an easier way for humans to have meaningful connections remotely.

After realizing he couldn’t make the product he was so passionate about at Cisco, he decided to go it alone and founded Zoom. A number of ex-WebEx engineers decided to join him, and within two years they released their first version of the product. They now have 1,702 employees globally.

Usually we are used to unicorn growth coming at a cost, whether that be high financial risk through large raises, toxic culture or complete dilution of company mission and values. As an outsider looking in, it seems that Zoom hasn’t compromised on any of those fronts.

Let’s dig in a little deeper at some of the interesting and unusual things that we’ve learned from Zoom’s filing, and see why it has attracted a lot of commentary and excitement. Is it truly an IPO done right?

They’re profitable

When the filing was posted online, I did what I usually do: scroll right on down to the second page where a high level summary of the financial data is written.

Our revenue was $60.8 million, $151.5 million and $330.5 million for the fiscal years ended January 31, 2017, 2018 and 2019, respectively, representing annual revenue growth of 149% and 118% in fiscal 2018 and fiscal 2019, respectively.

Wow! But here’s the pinch: those excellent revenues and growth are usually fueled by throwing petroleum on to the fire and running at a significant loss. So, on to the next sentence:

We had a net loss of $0.0 million and $3.8 million for the fiscal years ended January 31, 2017 and 2018, respectively, and net income of $7.6 million for the fiscal year ended January 31, 2019.

…they’re profitable?

Silicon Valley is all about growing or dying. If you’ve got an idea that looks like it’s working out, you soak the company and kerosene and set it on fire: hire like crazy; code like mad; sell, sell, sell. If you don’t, you lose. There’s often one chance to become the dominant company in the market, and you don’t want to concede that chance to someone else who can grow quicker than you, no matter what.

What this typically means is that companies that are teeing up to float on the public markets are operating at a heavy net loss: they are choosing to spend more up front for growth in the hope that it pays off in the future.

Just look at some recent S-1 filings:

  • Pinterest, who filed on March 22nd, the same day as Zoom, made $755M in revenue in fiscal year 2018 but a net loss of $63M.
  • PagerDuty, who filed on March 16th, made $79.6M revenue in fiscal year 2018, but a net loss of $38.1M.
  • Lyft, who filed on March 1st, made $2.2B revenue in fiscal year 2019, but a net loss of $911.3M.

Running at a net loss is often a necessary evil to enable the kind of growth required to get a shot at an IPO, which is why each S-1 form often contains a telling phrase:

“We have a history of net losses and we may not be able to achieve or maintain profitability in the future”

That doesn’t sound too promising, however it’s standard fare in technology company filings. You pretty much gloss over it. However, that phrase was nowhere to be seen in the filing from Zoom. They’re in the black. Comfortably.

The web interface is a second class citizen

If you’ve ever used Zoom, you’ll have noticed that in order to join a video call, you are asked to download the native application. And I’m not just talking about a mobile application; I’m talking about a desktop application. Yes, that’s annoying. And yes, most SaaS companies that have floated let you access their service via the browser, as it is the easiest barrier to entry for most users, and also makes the development process simpler: engineers are only building for one platform.

But not Zoom. Instead, you have to do the annoying thing and install their application, or if you’re at work, have your IT team install it: an even higher barrier to entry. Zoom do offer a web interface, but it has extremely limited functionality, and that’s a conscious choice.

Yet, the annoyance of having to install an application doesn’t matter at all if the service is of excellent quality. And it is. We have held Zoom meetings with hundreds of people dialing in, and the quality of the calls has only ever suffered when we have had problems with our Wi-Fi. We’ve never had any issues from Zoom: it’s impressively reliable. The screen sharing functionality is excellent, allowing our engineers to do remote pair programming sessions with their colleagues on the other side of the world.

I presume that the reason Zoom rely on their users downloading native applications is that it gives their engineers more control over the experience of the service: it can exploit, or avoid, particular quirks with each operating system, and the native applications can be built in such a way that take full advantage of whichever proprietary communications protocols that they have invented.

And although downloading and installing software is annoying, and especially painful in a heavily administered workplace, jumping through the hoops is acceptable because when compared to the utter pain of poor quality video conferencing, it’s barely any hassle at all.

They heavily use data centers

One of the bullet points in the summary of risks in the S-1 is as follows:

Interruptions, delays or outages in service from our co-located data centers and a variety of other factors would impair the delivery of our services, require us to issue credits or pay penalties and harm our business…

Oh, that’s interesting. Co-located data centers? Does this imply that Zoom isn’t completely running in the cloud like a majority of SaaS companies?

Scrolling down further, we see the following:

We currently serve our users from 13 co-located data centers in Australia, Brazil, Canada, China, Germany, India, Japan, the Netherlands and the United States. We also utilize Amazon Web Services and Microsoft Azure for the hosting of certain critical aspects of our business.

Wow, Zoom have physical hardware in 13 data centers around the globe! One could consider this is an “old school” way of running infrastructure when compared to how easy the cloud providers make it to scale and replicate services globally at the click of a button. However, in the same way that delivering their service via native applications gives them greater control over the user experience, not relying on cloud providers to obfuscate important low level details such as networking and bandwidth ensures an excellent level of service to the customer.

Customer acquisition is paid back in less than a year

In Alex Clayton’s excellent breakdown of the Zoom S-1 filing he shows how incredibly efficient Zoom’s customer acquisition is when compared to other companies:

It only takes 9 months for a customer to make the company profit. This almost unheard of in SaaS. Usually first year renewals are critical, as customer churn means net loss. But not Zoom. Every twelve month contract signed is money in the bank.

They’re actually happy

Yuan describes his role as “keeping his customers and employees happy every day.” That certainly seems to be true, since Zoom reported a 72 net promoter score in 2017, and they won an Employee’s Choice Award on Glassdoor in 2018.

Zoom have previously written about their internal Happiness Crew, that take a holistic approach to employee engagement. This ranges from holding office events to organizing volunteering efforts for charities.

Yuan noted that in his past, even though WebEx had achieved success on paper, it had come at the cost of morale.

“…even with 14 years of hard work on [the product], I did not see a single happy customer. Every day, I was not happy. My engineers, they were not happy. Every day, it just felt like ‘Oh my God, what happened?’”

Zoom’s culture and hiring is similarly built around trusted interpersonal relationships. It was previously reported that 65% of new hires had come from internal referrals. Yuan even stated that at the beginning of Zoom, he rarely interviewed anyone: the idea was that if he trusts you, he’ll also trust your friends.

This hiring ethos has gone in a different direction to what would be expected from most Silicon Valley companies, with Zoom preferring to hire for potential and trustworthiness rather than track record. Yuan states that their employees can grow with the company as it itself grows, and everyone can learn the same working philosophy together.

Ding ding ding

The impressiveness of Zoom’s S-1 is less because they’re growing faster than other technology companies. It is inspiring because they’ve legitimately chosen to do business in the best way for both their staff and their customers. The financial success is secondary to this mission, yet it is proof that it can follow a great product and culture. Staff and their families win as well as the users.

Zoom have a simple product that does one thing exceptionally well. But simple is never easy. Putting the user experience first forces some tough engineering choices. They use native applications because it gives the best user experience. They use co-located data centers because they give the best reliability of service.

I think that we have a lot to learn from Zoom. Maybe focussing on building a great product and company is enough, after all. We don’t need to be on fire, or in massive debt, burned out, stressed, or ethically questionable to float. Maybe it can be simple as a video call.

Best of luck when the bell rings, Zoomers. Y’all deserve it.