Slowing global economy is biggest risk to Slack's productivity push

16 October 2019, 17:15 | Updated: 16 October 2019, 17:42

One of the big business themes for 2019 has been, as the year has progressed, the growing reluctance of investors to back tech and "new economy" companies coming to market.

Plenty of 'unicorns' - companies that have been around for only a handful of years but which have already been valued at more than $1bn - have listed this year.

Some of them have done well, such as the meat substitute company Beyond Meat, whose share price currently sits at roughly twice the price at which it made its debut at the beginning of May.

Others have done less well. Shares of Uber languish at 30% below the price at the ride-hailing app's Initial Public Offering (IPO) in May.

Those of its rival Lyft, which came to market at the end of March, are down by 44%. Shares of Peloton Interactive, which sells connected exercise machines and which runs interactive exercise classes, are down by 22% since its IPO at the end of September.

The biggest clunker by far is Smile Direct Club, the cosmetic dentistry 'disrupter', which floated just over a month ago. Its backers have seen the smiles wiped from their faces following a 55% drop in the shares.

The loss of enthusiasm has led to some IPOs being dropped altogether this autumn.

Endeavor, owner of Hollywood's oldest talent agency and the Ultimate Fighting Championship mixed martial arts promotion company, abandoned its proposed $7.2bn IPO at the end of last month.

And, in the most high-profile reverse to date, the parent of the shared office provider WeWork abandoned its IPO last month after existing investors objected to the $15-$20bn valuation that would have been placed on it.

One company which has fared slightly better than most has been Slack Technologies, the workplace messaging company, which came to market at the beginning of June.

It took what remains a slightly unorthodox step of coming to market via a so-called 'direct listing', in which a company simply lists its shares on the market, rather than - as with a traditional IPO - raising new money by getting investment banks to bring in new investors and underwriting the issue.

The approach, which was also taken by the music streaming service Spotify, remains rare but is popular among companies that do not need to raise any new money but are listing their shares for other reasons, for example, allowing employees who own shares a way of cashing in some or all of their holdings.

Companies adopting this approach have to pay less to the investment banks for bringing them to market. They also reduce the risk that their shares are under-priced, something that the banks often do in order to ensure that new investors enjoy a first day 'pop' in the shares, but which results in a transfer of value from a company's existing shareholders to its new ones.

This particular route to market appears to have helped Slack.

Its shares came to market on 20 June with a price tag of $26 per share, valuing it at $15.7bn, but that price shortly afterwards briefly spiked to an all-time high of $42.

They have since slipped to today's price of $23 which, compared with the original launch price, does not look too bad a performance compared with some stock market debuts this year.

Speaking with Sky News today Stewart Butterfield, Slack's co-founder and chief executive, insisted he had no regrets at all about coming to market.

He said: "I think the quarterly [financial reporting process] is quite good at driving some urgency in the company but also our last private market valuation, about a year before we let out, was $11.93 and now it's about twice that."

Mr Butterfield pointed out that with $859m on its balance sheet, Slack had had no need to raise new money at the time of its listing and had taken a conservative approach.

He said he thought that it was very early to judge the fortunes of the 'new economy' companies to have listed this year.

He went on: "As they say, in the short term, the market is a voting machine and in the long term it's a weighing machine."

One of the big questions investors have concerning Slack - whose best-known product is a group chat app for the workplace - is how it is coping with competition from Microsoft, the world's second-largest company, whose rival product, Teams, comes free with Office 365.

But Canadian-born Mr Butterfield, who co-founded the photo sharing site Flickr and then sold it to Yahoo for $25m, insisted Microsoft was "an important partner in many respects" for the 500,000 product developers using the Slack platform.

"The difference I think is that we released some numbers last week on engagement - Slack's paid users spend nine hours a day connected with the service, 90 minutes a day in active usage and it becomes a fundamental driver of how the [customer's] business operates.

"We expect not to have 100% market share in a market that's going to have hundreds of millions of people. There's maybe 200 million people whose working lives are mediated by email, we'll all be using some service like this and…we expect to continue to lead the market for quite a while."

Mr Butterfield, who was in London for Slack's customer conference, pointed out that, in September, Slack exceeded 12 million daily users - a rise of 37% on the same period in the same month last year.

Yet the entrepreneur will have his work cut out to convince some sceptics on Wall Street.

Keith Weiss, an analyst at investment bank Morgan Stanley, today cut his target for Slack shares from $38 to $28, citing competition not only from Microsoft but also from Facebook, whose Workplace product now has 3 million paying business customers. He told clients today that Slack faced some challenges in converting potential users to paying customers.

Fans of the company, however, argue that Slack is in a sweet spot in that its services are cloud-based - where most big companies are now directing their IT spending - and is also bringing together on its platform lots of other cloud-based software applications that might not otherwise be connected to one another.

It is easy to see how this could generate big savings for businesses going forward. For instance, groups of lawyers are already negotiating contracts via Slack.

Perhaps the bigger question is the extent to which companies will continue to spend heavily on IT. All the signs are that the US economy is starting to slow and, accordingly, some businesses will batten down the hatches. Spending on IT is an area that traditionally suffers under such circumstances.

Mr Butterfield believes Slack will eventually become so ingrained in the lives of its users that businesses - seeing the productivity benefits - will continue to pay for the service. The next few years will prove whether he is right.