The Zoom IPO (with Santi Subotovsky)

Zoom board member (and general partner at Emergence Capital) Santi Subotovsky joins us to tell the true underdog story behind the hottest IPO of 2019. Together we trace founder Eric Yuan’s incredible journey from immigrant software developer, who didn’t speak any English upon arriving in Silicon Valley in 1997, to Glassdoor’s #1 rated CEO in America in 2018. In an age where border walls have replaced open doors in Washington, and burn rates and privacy scandals have sidelined Silicon Valley’s pretense of making the world a better place, there is no better reminder than Zoom of everything that can be great about our country and our industry. Sponsors: Vanta: https://bit.ly/acquiredvantaServiceNow: https://bit.ly/acquiredservicenow26Legora: https://bit.ly/acquiredlegoraStatsig: https://bit.ly/acquiredstatsig26 More Acquired! Get email updates https://www.acquired.fm/email with hints on next episode and follow-ups from recent episodesJoin the Slack http://acquired.fm/slackSubscribe to ACQ2 https://pod.link/acquiredlpMerch Store https://www.acquired.fm/store! © Copyright 2015-2026 ACQ, LLC LinksWalt Mossberg’s review of Zoom in 2012: http://allthingsd.com/20120821/a-chance-to-call-15-friends-to-video-chat-in-high-def/Carve Outs Ben: General Magic https://www.generalmagicthemovie.com https://www.generalmagicthemovie.com/David: Dissect Season 4 https://dissectpodcast.com/subscribe-to-the-podcast/

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

• 0:00Speaker 00

  And how do you get people to be their true selves rather than? Whiskey. Where's the whiskey? That should be part of your like mobile take. One of the like airplane. In case of emergency. Like a tequila shot or something.

• 0:33Ben Gilbert?

  Welcome to season four, episode eight of Acquired, the podcast about technology acquisitions and IPOs. I'm Ben Gilbert.

• 0:40David Rosenthal?

  I'm David Rosenthal.

• 0:41Ben Gilbert?

  And we are your hosts. To introduce our episode today, I want to play you a little clip from Emily Chang on Bloomberg TV. This is from the day of the Zoom IPO, where she interviewed Eric Yuan, the founder and CEO of Zoom. As you can tell from this clip, Eric is incredibly grounded, humble, and quite a different type of Silicon Valley CEO, as we will see when we get into this episode.

• 1:06Speaker 03

  And that's very exciting, but it's also a lot of pressure. We've seen some of the recent IPOs like Lyft have a lot of volatility. Do you feel that pressure?

• 1:15Speaker 04

  I do, I do, because the price is too high, so.

• 1:21Speaker 03

  So you think the price is too high?

• 1:24Speaker 04

  Yeah, I think so. And but anyway, so yesterday we finalized the price of $36. You know, today, wow, there's a big pop. So and it is all of our control. You know, we just go back to work, so.

• 1:39Ben Gilbert?

  This IPO pop last month put Zoom's market cap at $16 billion. Today, just under two months after he said that, it has risen another 60% to $26 billion. So what's going on here? What is Zoom and what makes it so special? Today on Acquired, we dive in with one of the best people on the planet to help us tell this story, Santi Subotovsky. All right, David, so who is Santi?

• 2:07David Rosenthal?

  We're super lucky to have Santi here today. Santi is partner of Jake Saper, who was on the LP show a few months ago and is here at Emergence Capital. Santi has been on the board of Zoom since he led Emergence investment in the company in 2014. And Santi is also from Argentina and like Zoom CEO Eric Yuan, is an immigrant to the US, which we are going to talk about a lot more on this episode. Before joining Emergence, Santi, you founded and ran an online learning platform in Argentina. And you also did your MBA at HBS. And I think the class you were in had some pretty good entrepreneurs in it, right?

• 2:44Speaker 00

  We had some great people, yeah. And I actually saw them last week. We were all celebrating our 10th year reunion.

• 2:50David Rosenthal?

  Oh, wow.

• 2:51Ben Gilbert?

  Nice.

• 2:51David Rosenthal?

  That's awesome. The Rent the Runway came out of your class?

• 2:57Speaker 00

  Cloudflare.

• 2:58David Rosenthal?

  Cloudflare, yep. A few other great companies.

• 3:00Speaker 00

  Threadup.

• 3:00David Rosenthal?

  Threadup, yeah.

• 3:01Speaker 00

  We had a bunch of great companies.

• 3:02David Rosenthal?

  Yeah, that was a great year.

• 3:03Speaker 00

  I mean, to be honest, it was a horrible year to be looking for a job. It was 2009. So that's why the opportunity cost of starting a business was much lower.

• 3:13David Rosenthal?

  Yeah.

• 3:14Ben Gilbert?

  It's kind of funny. It's like your life cost of capital was very low.

• 3:18Speaker 00

  Exactly. Yeah.

• 3:20Ben Gilbert?

  Wild. Well, Santi, thanks for having us in your office today here at beautiful Emergence Capital. We're super excited to dive in.

• 3:27Speaker 00

  Thank you for having me.

• 3:28Ben Gilbert?

  Well, if you like the show and you want to go deeper on company building topics with David and I, you can become an acquired limited partner and get access to our second LP-only bonus show. On our last episode, we gave an update on a lot of our thinking from the Uber and Lyft episodes, regulation and autonomous vehicles. We also answered a bunch of LP question and answers. If you want to join, you can become an acquired limited partner by clicking the link in the show notes or going to glow.fm/acquired.

• 3:57Ben Gilbert?

  All right, listeners, now is a great time to tell you about a longtime friend of the show, Vanta. AI has scrambled the whole security picture. It used to be that you prove that you were secure once a year on audit or a static PDF, then everyone would nod and you're done. But in an AI-first world, that doesn't hold up anymore.

• 4:16David Rosenthal?

  Yep. Your risk surface changes every week now. A vendor turns on an AI feature, or someone writes in a new model without telling IT, and your posture is different than it was last week, let alone at your last audit. Vanta's own research found that around 70% of companies have this quote-unquote "shadow AI" running with no security review at all.

• 4:37Ben Gilbert?

  Right. And that's where Vanta comes in. They're the leading agentic trust platform, meaning they've built the thing that closes the gap. And the way that they close that gap is Vanta Agent. Think of it as a GRC engineer, that's Governance, Risk and Compliance, except that it's software and it doesn't sleep. It finds the issues, drafts the fixes, and cuts the time that you'd spend on vendor assessments in half.

• 4:59David Rosenthal?

  In half! Which is exactly why more than 16,000 companies today run on Vanta. Companies like Ramp, Cursor, and Snowflake all stay audit-ready and catch the risks that crop up between audits across every vendor, every AI tool, the whole environment.

• 5:17Ben Gilbert?

  And that's the real value. Trust has to be continuous now, which is why Vanta automates your security, your compliance, and the work to earn and prove trust. We're huge fans of Vanta over here, and literally hundreds of Acquired listeners have become Vanta customers at their companies over the years. So you can get $1,000 off Vanta at vanta.com/acquired. That's V-A-N-T-A dot com slash acquired for $1,000 off, and just tell them that Ben and David sent you. Well, David, I think we're ready to dive in.

• 5:47David Rosenthal?

  Let's dive in. I was thinking about how to frame this episode on Zoom, and a good lens for Zoom as a company is almost like a bridge, both between kind of eras here in Silicon Valley. You know, in many ways, it is classic, old-school Silicon Valley. It is an enterprise software startup. It's located- In San Jose, down on the peninsula. And the DNA, as we will see, came out of a classic 90s startup WebEx. But it's also undeniably part of this new wave of IPOs and part of the A plus cohort of companies that are coming out here. And it's also, on an acquired theme, a bridge between Silicon Valley and the rise of China and the tech ecosystem in China. So really excited to dive in here and dive in with Santi.

• 6:33David Rosenthal?

  But before Santi comes in the picture, we actually start in 1970, speaking of China.

• 6:38Ben Gilbert?

  Of course.

• 6:39David Rosenthal?

  In China, in the middle of the Cultural Revolution, in the Shandong province, which is in the east coast of China. And it's located about halfway between Beijing and Shanghai. And Shandong is sort of the religious and cultural birthplace of China. It contains both Mount Tai, which I believe is where Eric is from and is the most revered site in Taoism. And is where the first emperor of China was crowned. And it also contains the city of Kufu, which is where Confucius was born.

• 7:10Ben Gilbert?

  No way.

• 7:11David Rosenthal?

  And both of those are going to be very apt, as we will see with Eric and Zoom as we go along here. So in 1970, a boy named Eric Yuan is born. It's still the middle of the Cultural Revolution, but his parents, as far as we can tell, are pretty well off. His family does, does okay. His parents are educated mining engineers. Eric, early on, even though the country is converting to communism, he starts showing some entrepreneurial tendencies. He starts collecting, his parents are mining engineers, remember, he starts collecting and selling mining and construction waste and burning it down to get the raw copper inside so that he can sell the copper to recycling plants.

• 7:49Ben Gilbert?

  You know, like every young tech entrepreneur does as a child.

• 7:52David Rosenthal?

  Exactly, exactly. Apparently, he almost burned down his neighbor's house doing this.

• 7:57David Rosenthal?

  That was, maybe that is when he saw the light that technology-enabled businesses were better than.

• 8:03Ben Gilbert?

  Santi, did you know this when you were making the investment that he was so irresponsible and reckless?

• 8:07Speaker 00

  We didn't. We would have still backed him.

• 8:11David Rosenthal?

  I think he learned a good lesson there because he does not burn capital, as we will learn. And so he goes off to university at the Shandong University of Science and Technology. But his girlfriend at the time, who would soon become his wife, goes to another school that is about a 10-hour bus ride away. And it's on these bus rides between their universities that, as legend has it, Eric starts daydreaming about how technology could one day bridge this physical gap between him and his girlfriend, soon to be wife, but many people around the world, and would lead to many things eventually Zoom. But before that, he graduates, he ends up getting his master's degree after undergrad, graduates, he marries his girlfriend, he goes to work.

• 8:54David Rosenthal?

  And in 1994, the company he's working for in China sends him to Japan for four months. And while he's in Japan, he sees Bill Gates give a speech there. These are the days of the information superhighway. And he hears Bill talk about the information superhighway, and he thinks, this is the future.

• 9:12Ben Gilbert?

  David, I was looking at this in your research, and it's kind of ironic, given how Microsoft missed the web and how then Bill Gates had to sort of about-face the company, writing that classic internet memo that he wrote. It's amazing that Bill Gates is actually the one who ended up inspiring Eric and so many others, you know, when Microsoft almost had a very existential moment about the internet.

• 9:35David Rosenthal?

  Yeah, and crazy that like, a speech Bill Gates gives in Japan, you know, in 1994, that is heard by a, you know, young man from China, ends up leading to the most successful IPO in the US of 2019. Like, the world is just crazy. So Eric goes back to China, and he realizes, though, that he's inspired by the internet, but the internet in China is still a long way away. It's not going to be mature for a long time. And if he really wants to be part of this, what is going to change the world, he needs to come to the US and he needs to come to Silicon Valley. So he knew an entrepreneur from China who had gone over to Silicon Valley. I believe it was Min Xu, who was the co-founder and CTO of WebEx. Min had come over.

• 10:20David Rosenthal?

  Over, I believe, to teach at Stanford. And that was how he got to Silicon Valley. Min ends up hiring Eric into this fledgling startup of WebEx, which is also communication, not video communication to start, but communication across the internet. The first step in bridging the gap between him and his wife.

• 10:38Ben Gilbert?

  And the main focus of WebEx at this time was was not video conferencing, but screen sharing.

• 10:43Speaker 00

  Correct. Yeah, that's how they started.

• 10:45David Rosenthal?

  Yeah, screen sharing and presentations. And so Eric says, great, I'm going to join you. I'm going to come over to the US. I just need to apply for a visa, a work visa, to come over. And me and my family will come on over. Well, he applies, this is 1995, and his application is rejected. But Eric is undaunted. He continues, he applies again and again and again and again and again and again. And he ends up applying a total of nine times before his visa is accepted. I mean, it's just crazy, that tenacity and that desire to come to Silicon Valley, come to the US, be part of this, to put up with all of these rejections and keep coming. It's just amazing.

• 11:27Speaker 00

  Yeah, that's something else that Eric and I connected really well on. I had to go through a similar experience coming from Argentina. And until like a month ago, I was still going through the process of like back and forth and visa and green card and another visa and an extension and a rejection. And those letters that said you have 30 days to leave the country.

• 11:50David Rosenthal?

  Oh, my God.

• 11:51Speaker 00

  And showing up at one of those Infopass offices, standing in line, trying to explain a case. So, yeah, we bonded over that as well.

• 12:00David Rosenthal?

  You just recently became an American citizen, right?

• 12:02Speaker 00

  Yeah.

• 12:03David Rosenthal?

  Congratulations. I mean, this is not a political show, but this is the one topic that just comes up again and again. Like, this is so crazy. This is, again, the most successful IPO in the world of 2019, and all these great people involved in it. And they just want to be here and work. And like, the US makes it so hard. So, anyway.

• 12:22Ben Gilbert?

  Sidebar over to Santi for a second. Like, while being a general partner of emergence and doing the work in economic development and creation that you do, did you, you had to like mandatorily leave the country for periods of time to?

• 12:36Speaker 00

  Yes, I got notified that my status had changed, and I had to figure out some other ways if I wanted to stay here.

• 12:46David Rosenthal?

  Wow. Yeah. That's just so incredible.

• 12:50David Rosenthal?

  Well, congratulations on finally becoming a citizen. Thank you. I hope that inspires a lot of people listening to this show on both citizens and not as citizens here. So when Eric finally does make it to California in 1997, he shows up, he and his wife come to California and he comes, starts working physically at WebEx. There's just one, one problem. He doesn't speak English. He doesn't speak English like at all. He can write code really well, but he's really hungry to learn and grow. And he, but he's so focused on writing code as a founding engineer of WebEx and developing WebEx that he doesn't actually take English language classes. He just learns and picks up English from working here and working with his teammates,

• 13:35David Rosenthal?

  which again is incredible. And, and even though that's how he starts, he is really interested in management and hiring and developing people. He rises up, he becomes an engineering manager. He ends up getting promoted to becoming VP of Engineering at WebEx. And then in July of 2000, WebEx goes public and ends up getting acquired a number of years later by Cisco for $3.2 billion in 2007. Eric is then promoted within Cisco to become VP of Engineering for all of their communications platforms. By the time he leaves Cisco to start Zoom, after 14 years in total at WebEx and Cisco, talk about loyalty, he's managing 800 people across the globe.

• 14:16Ben Gilbert?

  I may have actually reported to Eric and I don't think I ever knew it, but I interned with Cisco in the summer of 2008 and 2009 and worked in the telepresence unit. And so I'm sure somewhere in the management chain, either sort of in, I guess, because I was a test engineer and then an engineer, I probably did end up actually reporting to Eric.

• 14:35David Rosenthal?

  You were one of the 800.

• 14:37Ben Gilbert?

  I don't know if they count interns.

• 14:40David Rosenthal?

  So by the end, though, of Eric's time at Cisco, after the acquisition, he was going around and spending a lot of time, a lot more time, with Cisco customers and former Webex customers that are now Cisco customers. And this is going to sound simplistic, but bear with us here because it's really important. He starts noticing that they're really unhappy with the product. This is now, you know, 2009, 2010, 2011. And that makes Eric really unhappy. And again, this sounds simplistic, but this is really important for Eric and for Zoom. Happiness is kind of like his philosophy. I want to say a quote that he has here. He says, you know, along the way, he talks about his career.

• 15:24David Rosenthal?

  "I really came to understand that the purpose of life is to pursue happiness." Like here in the US. "That's really the most important thing. I also learned how to pursue happiness, especially how to pursue sustainable happiness. You've got to make others happy. If you make others happy, your happiness will be sustainable." So for me to apply that philosophy to the company world, to the business world, if we can make a customer happy, our company will be happy. That happiness is also sustainable. And so if you looked at his LinkedIn profile today-

• 15:54Ben Gilbert?

  That's wildly enlightened.

• 15:55David Rosenthal?

  It's like, I told you Confucius was going to be important. If you look at Eric's LinkedIn profile today, it doesn't say CEO of Zoom. It says, "Delivering happiness to our users. Your happiness is my happiness." And so I'm just curious for Santi to bring you in here. This philosophy of Eric's, you know, obviously it permeates the company, which we're going to get much deeper into. But like, what did you make of this when you first met him?

• 16:19Speaker 00

  I mean, we heard it directly from the early customers. I mean, when we came across Zoom, this was back in 2013. That's the first time that we came across the product Zoom. And we came across the company because of a personal need that I had. Being from Argentina, I tried every technology to stay in touch with friends and family. And there's a big difference when you're trying to transact and when you're trying to build a relationship with technology. When you're transacting, then you can deal with issues, even though it is frustrating, you just deal with them because you want to get to the end of the transaction. But when you're trying to build a relationship, if the technology doesn't work,

• 17:03Speaker 00

  then that's detrimental to that relationship. So that's why I felt I was not staying in touch with my friends and family because I dreaded those communications. And that's when I started trying every technology. And in 2013, I tried Zoom and it worked. And this was very early in the life of Zoom.

• 17:22Ben Gilbert?

  It was about two years after the company was founded, but during the first year of its operations.

• 17:26Speaker 00

  Yeah, a few months after they released the product. And we not only experienced that the product worked, but then after having those first initial calls with my friends in Argentina, I started getting random invites from other people in Argentina for Zoom calls. So it not only worked, but people loved it and they started sharing that with their friends. And that was the light bulb moment where we said, there's something here. And then another interesting piece of information is when we were doing diligence on the company, we talked to early customers and what we heard is lines up along the,

• 18:08Speaker 00

  if you turn off Zoom, I'm going to quit my job and I'm going to join another company that has Zoom.

• 18:14Ben Gilbert?

  Whoa.

• 18:14Speaker 00

  So it wasn't just customer happiness.

• 18:17Ben Gilbert?

  Yeah.

• 18:18Speaker 00

  It was like customer obsession. Customers were incredibly thankful because Zoom was enabling them to do their jobs and be happy while they were doing their jobs.

• 18:30Ben Gilbert?

  I think this is something that's really easy to forget. Like a lot of things we cover on this show, technology moves so quickly that we sort of acclimatize to what it is today. And I'm remembering back, a friend of mine started a company and it was three of them that grew to 12 of them and a live workspace. And I remember him telling me, my morning is five or six Zoom calls with some of our most loyal customers, just to like, understand what's going on with them. And I was like, You can't do that from video call. Today, it seems quite reasonable because you're like, oh yeah, it's probably Zoom is very reliable. Like, that makes sense to me. But I remember being in shock at the time. I'm like, you can actually get the consistency and quality of understanding

• 19:13Ben Gilbert?

  how your, the customers of your startup are going from doing Zoom calls every morning.

• 19:18David Rosenthal?

  From your apartment?

• 19:19Ben Gilbert?

  Yeah. And I, like, that memory is really grounding for me for how bad that technology used to be.

• 19:24David Rosenthal?

  Yeah. So, speaking of, you know, this was the Cisco technology and WebEx before then, of course, there were competitors.

• 19:32Ben Gilbert?

  Oh, and expensive. I mean, the other thing is, in my head, I remember thinking, well, I've never heard of Zoom, but what are you using for that? Because, like, I know there's, like, enterprise-y things, but you can't afford that. And they probably won't even send a sales guy to talk to you. But also, like, I, you know, I use Hangouts and I use Skype. Like, that's, that's a very different class of thing. That can't be working for you. And, and this middle didn't, didn't exist.

• 19:57Speaker 00

  And, and those technologies were built for a different era. If you think about a lot of the incumbents, they were built for a time where people were sitting at a desk with fixed internet. So, everything was monitored and controlled. Now, people are on the go. And you're using your laptop, your desktop, your phone, on wifi, 3G, switching from cell towers. So, you had to rebuild the infrastructure from the ground up.

• 20:27David Rosenthal?

  Yeah.

• 20:28Speaker 00

  And that's what a lot of the incumbents couldn't do. Because they built this monolithic architecture. And then they were just trying to patch it and adapt to the new world. And that's where Eric had this great vision that he had to rebuild the entire software stack.

• 20:46David Rosenthal?

  Yeah.

• 20:46Speaker 00

  And that's what he did. He worked really hard, even before releasing the first product, to make sure that everything worked.

• 20:52David Rosenthal?

  Yeah.

• 20:52Ben Gilbert?

  So, Santi, did you, going through all the hardships that you did to try and communicate with people in Argentina, did you have an investment thesis around, someone's going to make this better and I'm on the lookout for it? Or was it more just, I'm trying to solve my own problem and, oh my gosh, this company happens to be a great investment?

• 21:09Speaker 00

  So we're incredibly thematic here at Emergence. We were not just running around saying what's hot and trying to follow what everyone else is doing. The way the firm was started was with a big thesis that software was going to move from on-premise to the cloud before it was obvious. And that's why we invested in Salesforce early on when, again, it wasn't obvious. In this specific case, we had a thesis. We knew that things were going to change. And it took us three years to find the right company. We talked to a number of companies in the collaboration space. And we could never find the right company. And the right company is not just the right technology.

• 21:48Speaker 00

  It's a combination of the right technology, perfect timing, and the right leadership. And that's why when we came across Zoom, we liked the technology. And then we met Eric. We fell in love with Eric. And the timing was right. So even though the company wasn't raising capital when we met, we kept on building that relationship, forging a partnership that eventually ended up in an investment.

• 22:16David Rosenthal?

  You know, we've already talked a little bit about Eric's background and what makes him special. But this is, he saw all the things that were broken within Cisco. And he went to Cisco senior leadership and said, I want to re-architect how we do our communication and collaboration platform as VP of engineering here within Cisco and build this product right. They didn't let him because they were obsessed with, these were the days of Yammer and Jive. And Cisco thought the future of enterprise collaboration was Facebook for work. And I like Zoom is a bad, better. But anyway, so in June of 2011, Eric finally leaves the company. He's 41 years old at this point. Right after he leaves, a whole cadre of basically anyone who had ever worked with Eric

• 22:59David Rosenthal?

  immediately gives him money, just blank check to back him to work on whatever he's going to do. And he knows he wants to start a company. And I believe the first idea, Santi, correct us if we're wrong, is he actually thought he wanted to build an application on top of video chat. The company was initially called SaaS B.

• 23:19Speaker 00

  It was more of a consumer play, not an enterprise play.

• 23:22David Rosenthal?

  Yeah. But then pretty quickly, he figured out that actually the real big opportunity is just do what we should have done within Cisco, outside of Cisco. That's when the company became Zoom.

• 23:32Speaker 00

  That episode that you just shared about Eric's life is very unique for him because people wrote him a check, not because they loved the idea. I mean, some people even hated the idea. It's like, what are you going to do this? But they believed in Eric. They they had full confidence in Eric and that was a great lesson for him. And that's what he used every time he raised capital. When he raised capital, he didn't share all the information. He didn't do the typical dance that most entrepreneurs do. It's like, oh, this is my dad.

• 24:06David Rosenthal?

  Look at my MRR, blah, blah, blah.

• 24:08Speaker 00

  It was more about, I want people who are investing in me, who are convinced that I'm going to do something. And then if I get to that point, then I'm going to open up and share everything else. But if I don't get there, then it makes no sense because businesses change. And he saw it with SaaSby. SaaSby became Zoom. The business changed. It went from a consumer product to an enterprise product. And if someone had invested in the consumer product, they might have pulled their money when Eric said, we're going to do enterprise. But given that people invested in him, people were supportive of whatever Eric wanted to do.

• 24:46Ben Gilbert?

  For folks listening out there who are sort of first time founders or more junior in their career, that's a move you can you can sort of execute when you're 41, have led a gigantic organization and have the track record that Eric has, in addition, of course, to the personality that he has.

• 25:01Speaker 00

  I disagree.

• 25:02Ben Gilbert?

  Yeah.

• 25:02Speaker 00

  I think that you should always do that. You should always find the right partner, someone who believes in you before they believe in the business. Because if they believe in you, they're going to be with you in good times and bad times. And believe me, a lot of these companies that we're now talking about, oh, great outcomes, they went public, they got acquired. It wasn't a straight line and they had their moment.

• 25:26David Rosenthal?

  The whole point of the show.

• 25:27Speaker 00

  Yeah, I mean, it's, I mean, you know it. It's not a straight line. And you want people who believe in you, who are going to help you when things are tough. Especially when things are tough, because that's when you need a true partner. When things are going well, then everyone's going to be a cheerleader and they're all going to be your best friends. But you want to make sure that you not only get the right partner, but you also get the right group of people. Because partners are just one piece of a firm. You want to make sure that everyone is invested in your success.

• 26:01David Rosenthal?

  Yeah, we just talked about this, but I want to highlight again, of the A+ companies who've gone public this year that we've covered, I think now three of four have been pivots. I mean, Zoom was a pivot.

• 26:13Ben Gilbert?

  Pinterest was a pivot.

• 26:13David Rosenthal?

  Pinterest was a pivot. Lyft was a pivot. Uber was not a pivot.

• 26:17Ben Gilbert?

  I mean, their real line of business is not where they started.

• 26:21David Rosenthal?

  True. Yes, well, it was a pivot to peer-to-peer ride sharing. I, we can debate whether we can classify that, but it's such a good point, like, and absolutely, and you know, we take this to heart, I think, you know, any, any great investor and partner does, that the most important thing is the DNA of the team you're backing. And if you believe in them, you know, it's, we like to say that the early stage is turbulent. You have to believe in the pilot's ability to navigate the turbulence. So I want to spend a minute before we move into building Zoom. So what was it that was making, making Webex customers so unhappy? Santi, I'm curious from, from your perspective, especially having a thesis coming into the space, like, lots of people, and we'll get into other, other companies that competed

• 27:04David Rosenthal?

  with Zoom over time, but this was not a unique insight to Eric. Like, there was something that had changed. What, what was it about the collaboration space?

• 27:13Speaker 00

  I think a big change that a lot of these big incumbents missed was the purchasing process for these products. When Webex got started, and you talked about it earlier, they were selling to IT because they had very high price points, and they just needed IT to be okay. They didn't need IT to be happy. They just wanted IT to be okay with whatever product they were selling. And it was more about, yeah, we're compliant, we're secure, we check all these boxes.

• 27:48Speaker 00

  If your users hate it, who cares? We're just gonna make sure that we cover your back and that we check all the boxes.

• 27:56Ben Gilbert?

  Classic enterprise software is the user is not the buyer.

• 27:58Speaker 00

  Correct. That changed over time with SaaS and this freemium models. The end user became the buyer and then the purchasing decisions got decentralized from just pure IT to the end user and then IT needing to manage. I mean, the CIO now needs to manage all the applications that people are buying independently. And that's why happiness matters a lot more today than it did 10 or 15 years ago. Because now every interaction can lead you to lose a customer. Early on, if you just took the CIO on a big trip and fancy dinner and they were happy with you,

• 28:41Speaker 00

  that was totally fine, even if the end users hated your product. So that's why there's where you're gonna find the next opportunities. Just ask people which products they use, which products are they happy about and which products they hate.

• 28:56David Rosenthal?

  It cuts both ways, right? It's not just if customers are unhappy in a SaaS world, you're gonna lose them. There's also a multiplicative effect on the upside. If they're very happy, they're gonna become evangelists. And the buyers now are actually distributed and have buying power. Whereas like if with an enterprise product, if users loved the product before, like it didn't matter because the CIO was the one making the decision.

• 29:18Ben Gilbert?

  It was so funny because predating this, like two or three years before this, there was this phrase that was floating around in like 08, 09 that was the BYOD, bring your own device and CIOs hated it. I mean, there's this thing that IT suddenly had to deal with iPhones for the first time on their corporate networks. And people saying, I need to be able to get my email on my phone. And it's not BlackBerry, but like, I like this thing so much that you can pry it from my cold, dead hands. And it's amazing that it actually went hardware first and then took a few years to trickle into software. And now, you know, you look at Zoom, you look at Slack, so many of these companies, their distribution is bottom up and sometimes even their payment is bottom up because it's any employee with a Credit card can can sign up for it. So Santi, my question to you is, why did devices come first?

• 30:03Ben Gilbert?

  And now we're in a bring your own software world in IT?

• 30:07Speaker 00

  Yeah, it's kind of we moved from bring your own device to buy your own app. I feel that the devices unlocked that purchasing power. Because when you brought your own device, you had full control on the applications that you installed. And a lot of the consumer applications were driving this incredible user experiences. Because they needed to make sure that you were paying for those consumer applications. So they knew that you had to hook them and deliver value. And that rewired the way people thought about business applications. So it's like I have this great consumer application that I use to communicate with friends.

• 30:49Speaker 00

  And now I'm going into business and I'm still using my phone. And it doesn't work and I can't can't set up conference calls. So I'm going to use a consumer application. So then when you were able to create a consumer like experience with enterprise grade security and features, that's when you win the enterprise game. And that's what what Zoom has accomplished.

• 31:17Ben Gilbert?

  All right, listeners, now is a great time to thank our longtime friend of the show, ServiceNow. If you are running a large enterprise, AI agents are likely spread across every team. And deploying them is no longer the hard part.

• 31:31David Rosenthal?

  Yeah, the hard part is knowing what permissions they have, what employees are using them for, or what decisions AI is making. AI security for an enterprise at scale is not a small concern, like the risks are real.

• 31:45Ben Gilbert?

  Exactly. And the challenge with AI is governing it, securing it, measuring it, and making sure that it actually delivers value. That is why ServiceNow built the AI control tower.

• 31:55David Rosenthal?

  Yep. AI Control Tower gives enterprises a single place to see, manage, govern, and optimize AI across the entire business. And it works with any AI, not just theirs. Every device on your network, every permission across every system, every AI agent, visible and secure in one place.

• 32:12Ben Gilbert?

  And ServiceNow can do this because they've spent more than 20 years building the operational backbone of the enterprise. The workflows, governance, approvals, security controls, and institutional knowledge that power how work actually gets done across IT, HR, customer service, finance, and security.

• 32:28David Rosenthal?

  ServiceNow already runs more than 100 billion workflows annually and trillions of transactions for more than 85% of the Fortune 500. So when companies need a place to govern AI at enterprise scale, they're building on a platform at the center of how their business already operates.

• 32:45Ben Gilbert?

  And in a future that isn't going to be one AI, it's going to be thousands of AI agents working across every function of the company. But the question is, who's managing them all?

• 32:54David Rosenthal?

  So if you're trying to turn AI ambition into real business outcomes and make it work safely, securely, at scale, go check out servicenow.com/acquired and tell them that Ben and David sent you. So, once Eric landed on Zoom and got going, this after leaving and raising his seed round from all the folks that he'd worked with in the past, this episode is full of incredible stats about Eric. Forty engineers of the 800 that he had worked with at Cisco come over and join him to build this new technology from the ground up that's gonna, you know, pursue customer happiness. Maybe that says a little bit about Cisco during that era, not to bash on them too much, but it says a lot about Eric, like 40 engineers right off the bat.

• 33:35David Rosenthal?

  And they just crank for basically two years, building this product. And then finally, at the end of 2012, they get their first paid customer, which is actually the Stanford Continuing Education Department. And this was, was super cool. Also, right before then, they got a review from Walt Mossberg in All Things D.

• 33:55Ben Gilbert?

  That's not a bad first write-up.

• 33:56David Rosenthal?

  Before they had a single paid customer. What a great write-up. And Walt is just glowing. We'll, we'll link to this review in the show notes, you know, in his, in his typical Walt way, you know. glowing about how great the product is and how well it works. And it's funny, he talks about it as a consumer application, even though at that point they were a business application, but that's how good it was. But anyway, so Stanford is the first customer and I think that, Santi, let's talk about this. I think that actually ends up becoming a great beachhead customer for them. Because education, this was the time of the rise of MOOCs and Coursera had just launched. There's Udacity and, and to you, or Tutor, which became to you.

• 34:35David Rosenthal?

  And all of these universities around the country were thinking about like, what is our online education strategy and component? And Zoom becomes the way that they deliver that. Education is still a huge vertical for Zoom, right? I mean, something like 90 plus percent of universities use it.

• 34:50Speaker 00

  It is a huge vertical and I think it makes perfect sense for this disruptive technologies. Because if you think even about Apple, the way they did it, they went into the education vertical because that's where you capture the next generation. The older generation is probably okay with what they have. Things are not going to change, but the younger generations are expecting a different type of experience. And then those younger generations get into the workforce and they demand the same type of experiences. So this was not only a great decision by Eric to focus on education early on, but I feel that they also created a lot of value.

• 35:36Speaker 00

  Because if you're trying to communicate to someone and deliver a message and people are remote, they can't show up to class and you have a seamless way to communicate, that's going to have a huge impact. So I believe that if we could measure the impact on happiness within students and graduation rates of those people using Zoom, we should probably see an increase there.

• 35:59David Rosenthal?

  Yeah, I was thinking about it as education was a great beachhead customer because they were ready to adopt. But that's such a good point, too. Like, again, what a perfect strategy to go in. These, these people, these kids are all going to go join the workforce. They're going to show up and then be like, ew, I'm using a Polycom?

• 36:17Ben Gilbert?

  That's icing on the cake, right? Timing is, is all about. Are you solving a customer's pain point in a way where they didn't have this sort of pain before, where there's sort of an opportunity for you to slide in there? And, you know, all these companies had already bought, you know, the IT departments had all bought video conferencing quote unquote, systems before. And so there was not really an opportunity there, but this sort of slipstream that happened with MOOCs, that happened with students expecting to be able to watch things remotely. It sort of enabled you to go, oh yeah, that's exactly what we're for. And then you get this massive upside later of a 20 year benefit of them sort of joining the workforce and selling within their own companies.

• 36:55David Rosenthal?

  Yeah. So the other really, really smart thing that Zoom did in their freemium model with, with go to market was Zoom wasn't and still is free for anyone to use the full product for up to 40 minute meetings. How did, do you know Santi, how they landed on the 40 minute?

• 37:15Speaker 00

  Yeah, I mean, Eric spent a lot of time in this space, so he knew the stats and he knew that most productive business meetings were 45 minutes long. So that's why 40 minutes was the magic number. And we still have a lot of people using Zoom for business and using the free version. And as you said, they get access to the full product. They get to experience the full experience. And then we see them, they use it for 40 minutes, they drop and they start a new meeting and we're totally fine with that. We just want people to use it. And if they can't pay, they can use it for free. And if they want to pay, they can remove that, I mean, that restriction.

• 37:59David Rosenthal?

  Yeah. It's so, such a smart, like I think just demonstrates such a great understanding of like the customer and customer needs.

• 38:08Ben Gilbert?

  Yeah. And the, and the business model, like when you have a business that requires a network effect to work, like video conferencing, it is, it provides a ton of value to do it with at least one other person. It provides literally zero value to do it alone. And so providing an-

• 38:23Speaker 00

  If you're, if you're using Zoom by yourself, you have bigger problems.

• 38:28David Rosenthal?

  There's gotta be some use case out there. Yeah, day 45.

• 38:34Speaker 00

  I mean, people are recording messages with Zoom, so there are some use cases, but it's not

• 38:38David Rosenthal?

  You may not have.

• 38:41Ben Gilbert?

  But, but, but the idea that like to take advantage of the inherent network effect that's both necessary to make the product work and enables this incredible business that we're now seeing really as a public company today, you have to be able to, if you're paying, communicate with someone who's not paying and make that incredibly seamless for them. Or even if you're trying to use it for the very first time and, and you know, you're not paying yet, being able to, to jump right in on that in a network effect business is crucial to success.

• 39:14Speaker 00

  It is. And on top of that, if you think about Zoom, and we talked a lot about happiness, people are not only buying video conferencing from Zoom, they're buying an experience. And that's what enables a company to do more than just video conferencing. If you, if you've been following the recent announcements, I mean, they released phone and Zoom rooms and the marketplace. And that's because our customers want us to do more. They don't want a phone solution. They want the Zoom experience with their phones. They don't want a room solution. They want the Zoom experience in the conference room. And that's magical when you get to that point.

• 39:58Ben Gilbert?

  And it sounds like the vision is really to, to become sort of a full-scale collaboration productivity company. Is that, is that sort of how you think about it?

• 40:06Speaker 00

  We're listening to what our customers want and we're building based on what, what our customers need. So, so that's why we released these products, because that's what our customers wanted us to do.

• 40:20David Rosenthal?

  I want to get to, you know, kind of now's the point. So Eric and team, they built Zoom, they've got the education beachhead vertical, the companies and the product is starting, starting to spread virally. You started using it as a consumer to start. Walk us through how your relationship grew with Eric and the investment process. And in particular, I'm interested in, you know, you mentioned you've been looking at the space for three years. You met with, there were and are lots of competitors out there, run by smart people who also get all the problems in the space. What was it about Zoom that like you were like, this, this is the one?

• 40:55Speaker 00

  First of all, it started with the product worked. Even before meeting Eric, I knew there was something special in the product. And then when I met Eric for the first time, I realized that it was more than just the product working. It was strong leadership and someone who was committed to doing things right, not taking shortcuts, not building on top of open source stuff just to patch things together, change the UI and deliver quick value. He was focused on doing the right thing. So then I became obsessed with Eric and the product. I remember stalking him. They had this small office in Santa Clara, Ironside Road, I think.

• 41:40Speaker 00

  The elevator never worked and they had boxes piled on and cameras stacked on top of refrigerator and boxes. And that was the state of the art setting. And, and I would drive down to Santa Clara to meet with Eric and the team on a regular basis to build a relationship and try to convince him to partner with us. My goal was to invite him to present to my team. And he said, I don't have a pitch deck. I'm not raising, so I'm not going to do that. And the hook that we found was, look, we're using Skype in the office.

• 42:20Speaker 00

  I had bought a Skype camera that I would use to talk to entrepreneurs and I hated that. Can you come in and talk to us about how Zoom is going to replace that?

• 42:30David Rosenthal?

  Do a sales pitch.

• 42:31Speaker 00

  Exactly. And he came in and he basically pitched us on Zoom and the pitch was very risky because he didn't present the metrics and NPS and all that stuff. What he said is, Everyone in the room, download Zoom now. We're gonna do a live demo. And if you've been in this industry doing a live demo, it's incredibly risky. And we all downloaded the product and we were in Zoom.

• 42:58David Rosenthal?

  So did he leave the, did he leave the office, go somewhere else and present on the?

• 43:01Speaker 00

  No, we were all in the same room and we joined the Zoom call and it worked incredibly well. And people were kind of, okay, there's something here.

• 43:11David Rosenthal?

  That's amazing. So, uh, so, so what happened from there? We were talking with Jake a little bit ahead of time. As you said, Eric wasn't, he wasn't raising, he didn't have his, you know, numbers prepared. You started digging in on diligence and, and then you found a big surprise, right?

• 43:28Speaker 00

  Yeah, I mean, the metrics were a lot stronger than what we even anticipated. And we've seen great businesses. I mean, we, we work with companies like Box and Yammer and Salesforce early on, but this metrics were off the charts. And to be completely honest, I don't think the team knew exactly what they were doing because they sent us like the data dump, a lot of information. And for weeks, we tried to piece things together. And a lot of people couldn't even see what was going on. So we saw some trends like people were paying for Zoom and then they were churning. And in this standard industry, if someone churns, that's bad.

• 44:12Speaker 00

  But then a few months later, those people came back. So we saw those return rates, people were addicted to Zoom. Some people just needed to use Zoom once a month, once every two months. Some people were using it on a daily basis. So when we pieced everything together, we were completely blown away by the fundamentals of this company. So having seen the product work, having been obsessed with Eric for a long time, and then seeing all this underlying metrics, that's what drove us to, yeah, we, we should partner with this team and help them build a big company. And, and we also felt that we could add some value beyond just the capital because we've seen a few. Of this movies play out in the past.

• 44:57Ben Gilbert?

  I mean, this is what Emergence does. You're able to figure out how to take these companies and professionalize sort of the ability to sell at scale and enterprises.

• 45:06Speaker 00

  Exactly. Scaling go to market. And when we first started working with Zoom, it was mostly focused on the SMB sector. And we knew that over time, we had to go up into mid-market and enterprise. And that's what we focused on. I remember having conversation with Eric, even before we invested, where we started introducing him to great heads of marketing, great heads of sales, so that their team could learn from other people and take the company to the next level. So I feel that that combined with our approach to partnership is what convinced Eric and the rest of the team to go ahead and partner with us. And even though we wrote a very big check when we invested in the company,

• 45:52Speaker 00

  the largest check Emergence has ever written, the company never used our capital. So they were not looking for capital. They were looking for a true partnership to help them scale the business.

• 46:04Ben Gilbert?

  This is amazing, hearing it from the Zoom side. Can you talk about a little bit what it's like as a venture investor to write the largest check ever from your firm in this really high conviction bet in this quite unusual scenario of the way that you're sort of chasing the company and it's not as formal of a presentation? Like, what is your life like in that moment?

• 46:25Speaker 00

  My life was kind of hell because I didn't have a lot of experience. I mean, I still don't have a lot of experience in venture. I'm learning a lot. And this was going to be a big investment and it was going to be my investment. I remember one of my partners telling me, Santi, you're betting your career in venture. Because if this doesn't work out, then I mean, it's going to be hard to get out of this. But I had

• 46:54David Rosenthal?

  No pressure, though.

• 46:55Speaker 00

  No, but that made me think

• 46:57David Rosenthal?

  Yeah.

• 46:58Speaker 00

  about the conviction. And then after doing all the diligence and after everyone met Eric, we came together as a team. We make decisions as a team here and everyone was not just supportive of doing the deal, but we have this bar that we call unanimous enthusiasm. Everyone needs to be excited about the partnership and we were all there, even though we didn't all start there as we did more work and everyone met Eric, they tried the product. We got to this point where we said, yeah, this is something that we need to do, even if it doesn't work out. But yeah, it didn't feel great.

• 47:33David Rosenthal?

  Yeah. That was leading up to writing the check and making the investment. How did your emotions like evolve after that? Like, you know, and obviously it worked out. But, but how long did it take before you felt pretty good about it?

• 47:51Speaker 00

  I felt pretty good about it all the time because what I invested in, the relationship with Eric and team, that has never changed. So I didn't get any surprises. I mean, all the surprises were positive surprises. It was one of those board meetings where we would show up and Eric would say, we didn't do what we said we're going to do, we did better. So

• 48:18David Rosenthal?

  That's such a hard job as a venture investor.

• 48:20Speaker 00

  It was a good feeling all along. And the more time I spent with Eric and the team, the more excited I got. Because initially it was just video conferencing. Then it's, okay, our customers want us to do more. We can do more. And that's how we kept on expanding the TAM. And that's where we are now. And we still hear our customers wanting a lot more from Zoom than what we're offering. So it's been a great journey. And for me personal, it's been great because when I wanted to join venture, I got a lot of rejections. I was talking to over 70 firms.

• 49:03Ben Gilbert?

  It's like being an entrepreneur.

• 49:05Speaker 00

  Yeah, I was. I mean, it was my sales pipeline and I had a sales pipeline, different, I mean, different conversion metrics and funnel. And a lot of the no's I got were not Specific about my track record, they were more about me as an immigrant, as a Latino inventor. And that was before people got a lot more politically correct. This was back in 2010. And a lot of people said, Latinos are not inventor. So you should try to find a different job here in the valley. So I always had that chip on my shoulder where it's like, I'm gonna prove you wrong. It's like, I got a lot more energy from those conversations.

• 49:50Speaker 00

  Unfortunately, the emergence team gave me a chance. And I couldn't be more thankful for what they did for me. A few people in venture, Alex Mendez, who's a founder of Storm Ventures, he believed in me and he helped me a lot, would have very long conversations, and he had no vested interest. So there were a few people that helped me out. And I'm incredibly appreciative of that. And also Eric and the team who trusted that we could help them out as well.

• 50:19David Rosenthal?

  Yeah, that's such an amazing story. And thank you for sharing it. I can only imagine you going through that on the venture side. I mean, I think I would imagine Eric probably went through a lot of that on the founder's side, too.

• 50:34Speaker 00

  Yeah, he got a lot of rejection early on when he tried to raise capital. That's why he decided that he was not going to raise capital. And even when we invested in the company, and we could tell the company was doing really well, people wouldn't even take meetings with Eric. So when I would talk to my friends in venture about Zoom, it's like, no, we're not doing anything in video conferencing. It's a race to the bottom. Or there were different comments about it. People wouldn't even take the meetings.

• 51:04David Rosenthal?

  Wow, that's so incredible.

• 51:06Speaker 00

  So that's why I feel that when people are looking just for a category, they might miss out on great people.

• 51:13David Rosenthal?

  Yeah, yeah, totally.

• 51:15Ben Gilbert?

  Especially because, you know, if you believe, which has shown to not be true, that the raw video conferencing technology is commoditized. Like, it's not. Zoom is still excellent and it is widely true that most others are not as good. As you were talking about TAM expansion, by leveraging that customer base and that happiness and that love for the company into all these other things, that you're completely blind to that TAM. Otherwise, I mean-

• 51:41David Rosenthal?

  And go-to-market innovation, too. I mean, the 40-minute premium model. Like, nobody else is doing that.

• 51:45Ben Gilbert?

  Illustrated no better than WebEx being bought for $3.2 billion in 2006 or '07, or whenever that was. Today, Zoom's market cap, you know, they were 16 after their IPO, 26 billion we're recording today. Like, the enterprise value of this company is, number one, not just about video conferencing, and number two, turns out that wasn't a commodity in the first place.

• 52:11Speaker 00

  Yeah. I also feel that there's a lot of bias when it comes to venture investments, and people are looking for the next artificial intelligence, blockchain-powered, whatever. And there are some basic building blocks that go through those renewal phases. CRM and what Salesforce did was not a new technology. It was a new way to deliver an existing technology. Same thing for Zoom. So there are a lot of existing markets that go through replacement cycles, especially when the incumbents miss out on the big changes in the market.

• 52:50Speaker 00

  When was the last time that you heard someone say, "I love email and the way things are being handled"? Or, "I love calendar"?

• 52:59David Rosenthal?

  You're foreshadowing our season end here.

• 53:00Speaker 00

  Or, "I love CRM"? There are a lot of those core building blocks that are gonna go through big transformations. And if the incumbents don't see it, other people are gonna take advantage of that.

• 53:13David Rosenthal?

  Yeah.

• 53:15Ben Gilbert?

  All right, listeners. Now is a great time to talk about a new partner of ours here on Acquired, Logora, the agentic operating system that is redefining how the world's best legal teams work.

• 53:28David Rosenthal?

  Yep. It's sort of obvious that AI is going to completely change the legal industry. I bet most of you listening have dropped a contract into some sort of AI chatbot out there. Logora took that insight and asked the question, what if you really built something with that power from the ground up for the legal industry?

• 53:44Ben Gilbert?

  So the founders did exactly what great founders do, operate with obsessive customer focus. They embedded inside a massive law firm for months. They sat with the lawyers just watching how the work really gets done.

• 53:59David Rosenthal?

  And that's how you get features that customers love, like tabular review, where you drop in a folder of hundreds of contracts and it pulls every key term into a grid a lawyer can actually work with. Logora's bet here is interesting. Since it lets each lawyer handle more complexity, any given person can increase the quality of their work and do higher value work. And this means that the pie can grow even as each individual task takes less time.

• 54:23Ben Gilbert?

  And they recently launched Logora Agent, offering greater intelligence and performance. The agent lets lawyers set an objective. Then it can handle the planning and the execution and delivery of the final product. Legal teams get to maintain full control and transparency since they're still involved where judgment is required.

• 54:42David Rosenthal?

  And Logora works where you already work. You can use it within Microsoft Word while redlining or drafting. The early Logora numbers essentially speak for themselves. When they have a head-to-head pilot with their top competitor, they win 70% of the time. Logora now has over 100,000 lawyers on the platform from 1,200 legal teams in 50 countries. And crazily, they went from 1 million to 100 million in ARR in about 18 months.

• 55:12Ben Gilbert?

  Truly insane numbers. And that is the real test. Plenty of things demo well, but the question is whether a busy associate actually reaches for it during crunch time, or whether a partner trusts it before going into a conversation with a major client. If your legal team wants to check it out, whether you're a law firm or you're in-house at a company, you can learn more at logora.com/acquired and just tell them that Ben and David sent you.

• 55:37David Rosenthal?

  Well, before we wrap up with the Zoom IPO, I want to build on what we were just talking about a minute ago and kind of the underdog status of you, of Eric. Can you talk a little bit about both the senior management itself at Zoom and the philosophy? I mean, unlike, I would imagine, a lot of, well, a lot of companies in the valley and a lot of companies Emergence works with, Eric talks a lot about, you know, they don't really recruit superstar outside execs to come into Zoom. They build from within and people who are, who are hungry, who have the capacity to learn. What have you seen being on the board and being part of this process of building the management team?

• 56:16Speaker 00

  I need to disagree that they don't recruit superstars. They don't recruit known superstars.

• 56:24David Rosenthal?

  Yeah.

• 56:25Speaker 00

  But publicly known.

• 56:26David Rosenthal?

  Yeah.

• 56:26Speaker 00

  But the people they recruit to lead the different functions are superstars and people who've worked with them recognize their superpowers. But they're not the ones that are being listed in every list of, oh, who are the top 10 CMOs? Let's hire one of those.

• 56:45David Rosenthal?

  Yeah. You won't see a, you know, former president of Oracle coming to work for Zoom anytime soon.

• 56:51Speaker 00

  You're gonna look for the people who are actually doing the job and are going to work incredibly hard and are going to connect with the mission of the company. And that's another area where Emergence connected really well with Eric. So if you think about me, I'm a general partner now. I joined as a senior associate. And when I joined, I was doing everything from like copies to coffee to setting up technology. I still do that. I'm tech support and I don't care.

• 57:21David Rosenthal?

  You made possibly the best investment in the firm's history by doing tech support for conferencing, right?

• 57:27Speaker 00

  And I still, I mean, we still do that. And we recruit people as senior associates and we invest in them to make sure that they become the next generation leadership. But Kevin Spain, who's also a general partner, joined the firm as an associate. Jake, who you guys know, also joined as an associate and now is a partner. So we invest in rock stars before everyone recognizes them. And we do what it takes to make sure that we create the right conditions for them to succeed. And that's what, what Zoom does. And the team there is one of the strongest teams that I've ever worked with, and it's probably the most humble team that I've ever worked with.

• 58:08David Rosenthal?

  Yeah. And one other thing to point out here, you know, again, we're being super laudatory of Zoom because it deserves it. Like of the named senior executives on the S1 for the IPO, other than Eric, all of the other named senior executives are women. Try and find another company in Silicon Valley that looks like that.

• 58:27Ben Gilbert?

  And that is not a story that they're sort of pounding the pavement with. You'll notice that this is true and it's not the cover of Fast Company.

• 58:35David Rosenthal?

  You probably didn't know that.

• 58:36Speaker 00

  Yeah. Yeah, I was talking to one of the executives at Zoom. She described Eric as Eric doesn't see color, doesn't see shape, doesn't see anything. He just sees raw talent. So that's why he's not saying, oh, we are an incredibly diverse team, because he's not going to use that for marketing. He's just going to do the right thing. And that's been a strong core value of the firm, just doing the right thing, even if people don't even notice.

• 59:06David Rosenthal?

  Yeah, I was shocked that I hadn't heard Zoom or anybody else talk about that before. And going through the S1, I'm like, wait a minute.

• 59:12Ben Gilbert?

  Yeah.

• 59:12David Rosenthal?

  This is, this is different.

• 59:15Ben Gilbert?

  Yes, absolutely different. All right. So I want to catch us up before. So Santi, I want to ask you to sort of lead us through after the investment through today and other funding rounds, other milestones. One thing that we did skip over in sort of the growth of the company is we said founded in 2011, they launched in January of 2014. Let's just take a moment to acknowledge how ridiculous it is that five months after launch, they had a million total participants in their video conferencing. And then 18 months after launch, continued to accelerate to 10 million participants by June of 2014. I mean, this company was growing like a weed from day one.

• 59:53Speaker 00

  True, but they were completely under the radar. People wouldn't even know what Zoom did. And that's because they were not selling to IT. They didn't have the billboards. It was more of a grounds up adoption. People were using Zoom even when their companies were standardized on different technologies. And that's just because they wanted a better experience. We saw a lot of that where people were just using Zoom. It's like, yeah, I don't tell anyone, but I'm not going to schedule a call with one of the other companies.

• 1:00:31Ben Gilbert?

  That was Google for search when I worked at Microsoft and then it was Google for docs when I worked at Microsoft.

• 1:00:36Speaker 00

  We see that a lot.

• 1:00:37David Rosenthal?

  You worked on the office team, Ben.

• 1:00:39Ben Gilbert?

  I did. Well, I did a lot of competitive research.

• 1:00:41David Rosenthal?

  All right, competitive research.

• 1:00:43Ben Gilbert?

  So Santi, catch us up. So Emergent leads a $30 million round in the company. They continue to grow very well. What did growth and then what did future funding look like between then and the IPO?

• 1:00:54Speaker 00

  We, when we invested, this was back in 2014. The company was mostly SMB. So the next big challenge we had was going up from SMB to mid-market and enterprise. And we did that probably like 2015. We started getting some mid-market and a few enterprise customers. And that's when we saw that this was not just an SMB product, but big companies were willing to standardize on Zoom. And again, we were not raising capital. The company has been profitable for a while, as you can see, in the S1.

• 1:01:35Speaker 00

  But then we got approached preemptively by Sequoia and Eric had always had an admiration for that firm. And they were good partners. They did a good process and we ended up partnering with them. And after that, we, we never raised more capital.

• 1:01:53Ben Gilbert?

  It's amazing.

• 1:01:54David Rosenthal?

  Yeah.

• 1:01:55Speaker 00

  And I think we never touched the Sequoia money either.

• 1:01:58David Rosenthal?

  I mean, there's such a such a difference from other other companies that are IPO-ing this year.

• 1:02:05Ben Gilbert?

  Absolutely.

• 1:02:06Speaker 00

  We've had another company back in the days, a company called Viva Systems.

• 1:02:09David Rosenthal?

  Yeah.

• 1:02:09Speaker 00

  That went through a very similar.

• 1:02:11Ben Gilbert?

  Is it correct, they only raised $7 million and they only raised it from emergence?

• 1:02:15Speaker 00

  Yeah, and they only used less than half of that. And they're now a 20-plus billion dollar company.

• 1:02:21Ben Gilbert?

  It's crazy.

• 1:02:23David Rosenthal?

  I think we should look for those types of companies.

• 1:02:25Speaker 00

  And actually, what's also interesting is that the founder and CEO of Viva Systems is now on the board of Zoom. So when we invested in the company, we knew that we needed some of that enterprise DNA. So Peter Gassner joined the company. And that's why you see a lot of similarities in the way Zoom scaled compared to Viva.

• 1:02:49Ben Gilbert?

  How does that work? Is he, when the company was private, is he like the outside independent?

• 1:02:53Speaker 00

  He's an independent, yeah.

• 1:02:54Ben Gilbert?

  Got it.

• 1:02:55Speaker 00

  And he's an independent with a lot of enterprise knowledge.

• 1:02:59Ben Gilbert?

  Yep.

• 1:02:59Speaker 00

  And a lot of company building knowledge. You don't just want to have a lot of investors.

• 1:03:05Ben Gilbert?

  Right.

• 1:03:05Speaker 00

  On the board. You want people who who build real companies.

• 1:03:09Ben Gilbert?

  Yeah. So before we switch to the IPO, there's probably a lot of people out there, and I know I'm thinking it too, sort of pattern matching off of that comment you made. We started SMB. In fact, I remember when we had Scott Dorsey on and he was talking about Exact Target, they started with his email marketing software that sold to Salesforce and their initial customer was a dry cleaner that was right there in Indianapolis on around the corner.

• 1:03:29David Rosenthal?

  I forgot about that.

• 1:03:30Ben Gilbert?

  Started the small business and ended up scaling up to be, you know, everything from small business, SMB, enterprise, mid-market. They became a tremendous enterprise company. And I was always shocked that, oh, my gosh, this software that you're originally selling to dry cleaners at some point, like you can sell to Nike and Microsoft. As an enterprise SaaS investor, is that typical? Like this thing that Zoom went through and being able to flip the switch and move from SMB to enterprise, would you suggest people go about that strategy in building their businesses?

• 1:03:59Speaker 00

  What's nice about that strategy is that you focus on the end user. Because when you're selling, To an SMB or a VSB, everyone cares about the money that they're paying you and about the experience. So if you can convince an SMB to buy your product and use it, then it's going to be hard to create that customer love when you move into mid-market and enterprise. So I believe it's a great strategy to get that customer love early on, but it's not easy.

• 1:04:32David Rosenthal?

  Yeah.

• 1:04:33Ben Gilbert?

  That's got to be a trying moment for the company doing the first few enterprise customers and really understanding those pain points.

• 1:04:39Speaker 00

  Yeah. And then making sure that you're not only serving the end user, but the CIO will have his or her opinions about how to integrate into the platforms they're using. And they'll ask about security and they'll ask about compliance. So you need to have that figured out. And that's why early on, I remember conversations with Eric where he said, oh, we have this big customer that wants to standardize on Zoom, but I told them that we're not ready. And the contract value was much bigger than what we were getting from other SMBs. But he was right. And that's sometimes what

• 1:05:18David Rosenthal?

  And you were like, are you sure we're not ready? Like, can we be ready tomorrow?

• 1:05:23Speaker 00

  Aside great CEOs from OK CEOs, that they know when to say no. And that's probably harder than saying yes. But if you're building a big company, those initial experiences that you're going to get with mid-market or enterprise could end up killing you. Because if you're not ready, you might become an outsourced development shop for that enterprise. And that might kill the rest of the business.

• 1:05:47David Rosenthal?

  Well, what's, what's cool with this strategy, my favorite customer stat from, from the S1 was Uber. I forget where Uber started with, with Zoom, but it grew and grew and grew over the years to the point where Uber now does, according to the Zoom's S1, 14 million meeting minutes a month on Zoom across the organization. Like, think about that. That's, that's crazy. But that's like growing with the company and you're starting with, you know, just small teams with an Uber and using it to communicate. And then like, next step is like, get some bigger paid plans. Next step is talk to the CIO. And next thing you know, the whole company is standardized on Zoom as the way they collaborate.

• 1:06:26Speaker 00

  And it not only grows with the companies, but it also changes the way companies run. I believe that Zoom is changing the way we work and I can see it in some of our biggest customers and I also see it here at Emergence. When I first started here at Emergence, most of our investments were here in the Bay Area. Last year, 60% of our new investments are outside of the Bay Area. So bringing us back to this pursuit of happiness, I believe that Zoom is democratizing and globalizing the pursuit of happiness because it's enabling people to realize their dreams regardless of where they are.

• 1:07:06David Rosenthal?

  Yeah. All right. I'm going to take us quickly through the IPO. So post Emergence investment in essentially calendar year 2016, the company does 60 million in revenue is cash flow positive, doesn't use the Emergence investment. The next year in 2017 does 150 million in revenue. 2018 does 330 million in revenue with 51 million in operating cash flow and files to go public in March of 2019 of this year.

• 1:07:35Ben Gilbert?

  That's net income positive, folks, not a loss, which is the first time you're hearing us talk about that this season.

• 1:07:40David Rosenthal?

  Yeah, that plays well with public market investors, it turns out.

• 1:07:43Ben Gilbert?

  Sure does.

• 1:07:44David Rosenthal?

  The IPO prices the evening of April 18th at $36 a share above the range, which had already been raised during the roadshow. That equates to a $9.2 billion market cap. And then it closes the first day of trading, as we heard at the very, very top of the show on Thursday, April 19th, up 72% to $62 a share or a $16 billion market cap. What was that day like?

• 1:08:11Speaker 00

  It was an exciting day and the question that I got asked a lot was, did you guys feel that you were leaving money on the table by pricing at 36? But this is very in line with how Eric runs Zoom. He was inviting new people to join our journey. Those new investors were going to be our new partners and he wanted everyone to be happy. So not just existing investors or people selling. So it was pretty

• 1:08:41Speaker 00

  Much in line with the type of company that we want to build. Make sure that we attract the right investors and that the right investors believe in what we're building long term. I came back home and I described this to my wife and it felt like, uh, like when you get married, you stay for a long time, you start building and making sure that you're ready for that big day. Then you have that big day, you celebrate with your friends and family. Then you go back home and you need to start dealing with the rest of your life.

• 1:09:12David Rosenthal?

  You have a marriage to build, yeah.

• 1:09:13Speaker 00

  You have, I mean, kids and this and that. So that's a phase that we're in. We're still building and we're still focusing on making sure that our customers are happy.

• 1:09:24Ben Gilbert?

  All right, David, so let's dive into the playbook.

• 1:09:27David Rosenthal?

  Well, one, I'll just highlight again, real quick, you know, as we started at the top of the show, just the power of immigration and like grit and people wanting to build things and come here and do it here in Silicon Valley and in America. What a shining example Zoom is of that. And you are too, Santi. I mean, amazing. But I also want to say, Santi, you mentioned this, I want to highlight it again. In the beginning part of the episode, every big market or most big markets, I think, they go through cycles of disruption and cycles of innovation. And I think it's so easy to forget that. You look at the video conferencing market and you're like, well, that's done. You know, it's big, but it's done. And these big markets, they're always going through these cycles and you need to know where you are in the cycle.

• 1:10:10Ben Gilbert?

  Yeah, that's a great point. I've got a couple. One is on the product side. So I opened this episode with, so what's going on with this company? What makes it so special? I want to talk about the product side and then I want to talk about what's going on with the business. So on the product side, we danced around this, but basically what you have is something that people thought was a solved problem, which David, you alluded to, it's not. People thought it was a commodity and Santi, as you alluded to, it wasn't. So it was an actually good experience for an essential piece of doing business that had a mandatory network effect built in. And I think when you mix those things together, like that product's going to grow, like that's going to do very well. And so when you look at the business impact On that, what's going on with the company now?

• 1:10:53Ben Gilbert?

  When Jake, Santi's partner here at Emergence, joined us on the Limited Partners Show, he made the comment that what we like to look for is triple, triple, double, double in SaaS companies, that the first few years, first two years, it's great to see it triple, second two years, it's great to see it double, and it sort of gets smaller after that. Zoom is still a massive growth story. They grew over 100%, so more than doubling year-over-year last quarter, and that's eight years after the founding of the company. So this is still a superstar growth story. The payback period, when Zoom pays to acquire a customer, right now is averaging around nine months, and that's an implied payback period from reading the S mon. For reference, Dropbox is about 16 months, and DocuSign's about 30.

• 1:11:38Ben Gilbert?

  So when you look at the efficiency of spending marketing dollars and getting that back from revenue, wildly, wildly efficient. And so that leads to a business that is cash flow positive, that is now net income positive, and you can just sort of see in the stock price why everyone just believes that this is such an amazing business.

• 1:11:58Speaker 00

  That's an advantage that we have. We've been doing enterprise investments for the last 15 years. So we've seen a lot of these companies. So when we see those underlying metrics, and when we do those cohort analysis, we can see which companies are doing incredibly well. And we can also help shape that, because now with a lot of capital available, some companies are not even focusing on doing the right thing. They're just spending a lot of money and focusing on growth at any cost. But ultimately, and Zoom has shown us this, markets care about profitability. They do care about growth, but profitability is also important. So that's why, having seen this movie play out in the past,

• 1:12:43Speaker 00

  we can also help a lot of entrepreneurs focus on the right metrics. And a lot of entrepreneurs have no idea how those metrics stack up against other companies. And there are a lot of things that they could do. And even if they don't do it early on, because they just want to focus on growth, you need to understand, at scale, what are you going to change to make sure that you continue growing and you continue delivering and building value?

• 1:13:09Ben Gilbert?

  Yep. All right, moving to grading. So the way that we do this for IPO episodes that just happened is rather than sort of issuing your grade, we say, what makes it an A and what makes it an F and what makes it somewhere in the middle?

• 1:13:22David Rosenthal?

  Over the next five years.

• 1:13:23Ben Gilbert?

  Right, right. And so as history plays out, you know, I think execution wise, totally an A+. You can, I'm sure people will quibble and have quibbled over should they have priced higher and the company been able to raise more money versus, you know, sharing the profits with the new investors. Love the company philosophy there on sharing with the new investors and the upside. The thing that will make this an A+ five years from now is in doing this financing event and doing an IPO, and of course, great to get liquidity for all existing shareholders, are they able to use that, that new cash generated or do something with either the IPO proceeds or what it means now to be a public company to really grow into this really important collaboration company in the world,

• 1:14:08Ben Gilbert?

  you know, that, that the stock, that all investors believe that it can be this $26 billion company. And so I'm super optimistic about that. I think the thing that, that would paint this as a negative picture would be if, if, you know, that, that it turned out that the real business was just the video conferencing and there wasn't this, this additional value to be gained by being a Zoom customer, or if they hit some ceiling on growth and they didn't continue growing in the, in the way that they could and the TAM actually ended up being smaller. Personally, I don't think that's going to be the case, but I think as you're looking at, at Zoom over the next five years, those would be the things to look at.

• 1:14:45Speaker 00

  And on top of that, what I would add is that the key driver that's going to help us deliver results is making sure that our customers are still happy. That's why the NPS score is critical for us. And we keep tracking that score because that means that we're doing the right job. And if we keep our customers happy, then our employees are going to be happy, our investors are going to be happy, our partners are going to be happy. And the second thing that we need to make sure that we continue to focus on is making sure that we add Attract the right people. We talked a little bit about the people who succeed at Zoom.

• 1:15:25Speaker 00

  And those people are not just rock stars, but they're people committed to the mission and vision of the company. And we need to make sure as we scale, as we hire more people, as we expand internationally, that we keep on attracting the right people into Zoom.

• 1:15:42Ben Gilbert?

  Well put.

• 1:15:43David Rosenthal?

  Well put.

• 1:15:44Ben Gilbert?

  All right, David, carve outs?

• 1:15:46David Rosenthal?

  Yeah, we haven't done carve outs in a while.

• 1:15:48Ben Gilbert?

  We have not. So I went and saw an excellent movie this weekend with myself and four other folks from the PSL team, largely engineers that had a deep appreciation for the history, saw the documentary General Magic.

• 1:16:03David Rosenthal?

  Oh, man, I tried to convince Jenny to go with me a couple of weeks ago.

• 1:16:09David Rosenthal?

  She was up for it, but I could tell she wasn't like really up for it, so.

• 1:16:12Ben Gilbert?

  I mean, it was incredible. I have some issues with the immense amount of drone shots and sort of random pictures of California water, but it was so well done. And for listeners who are wondering, what is he going on and on about? General Magic was a company that David and I have mentioned on a couple of episodes that in the early 90s was formed to basically invent the smartphone. And they went public, they were, they had a product.

• 1:16:39David Rosenthal?

  It's technically a spin out from Apple?

• 1:16:40Ben Gilbert?

  It was technically a spin out from Apple.

• 1:16:42David Rosenthal?

  I mean, we're gonna have to do an episode on this.

• 1:16:43Ben Gilbert?

  It was led by Mark Parat, the founding engineers were Andy Hertzfeld and Bill Atkinson. So the original Macintosh team, Susan Kerr was there. And then you really start to dig into all the people. It's Tony Fadell. He was like this like crazy, long haired intern, Andy Rubin. So when you look between Tony Fadell and Andy Rubin, like there's, what are they? It's 98% of the smartphone market ended up being, you know, co-created by those guys at different companies. It's Kevin Lynch, who was, I think was the CTO of Adobe and now leads the Apple Watch team. He's Apple's Senior Vice President of Something Technology. There's Twitter's CTO, there's the former CTO of the US government to Barack Obama.

• 1:17:25Ben Gilbert?

  I mean, the immense talent that came out of this plucky company. That by all accounts wildly failed. Like, they went kaput in a big way. But not only the storytelling, but the ambition and correctness of their vision. But just, you know, as Santi alluded to, the timing is really what matters in these things. Far too early. But one of the things that made it really special, too, is they had a documentarian shooting a lot of footage while they were building this thing. And so they just had immense, immense old VHS tapes, I guess. It certainly looked like that to draw on, to create the documentary.

• 1:18:01David Rosenthal?

  Wow. It's like the early days of Alibaba.

• 1:18:03Ben Gilbert?

  Oh, it's so wild. I mean, it's a bunch of hippies on the floor, barefoot, building computers together. Like, that's all the company meetings are like, sitting on the floor. It's great. We'll link to it in the show notes. Listeners, if you have an appreciation of technology history and are a nerd about sort of Apple stuff, smartphone stuff, early days of a lot of the roots of Silicon Valley today, definitely check it out. It's touring right now. It is an independent documentary. I assume it'll be available online at some point if you miss it on the tour. But super, super fun to go see.

• 1:18:36David Rosenthal?

  Oh, man. I can't wait to watch this. Well, so, speaking of truly, truly excellent recommendations that Ben, you have made to me on Carve Out's past, Dissect, season four of the Dissect podcast.

• 1:18:48Ben Gilbert?

  Oh, nice.

• 1:18:49David Rosenthal?

  Season four is Flower Boy by Tyler, the creator. And so good. It's been one of my favorite albums of recent years for a long time. And Cole just does such a great job dissecting it. And if you are into music at all, and even if you're not, if you're into a choir-type podcast about anything, you will love this season.

• 1:19:13Ben Gilbert?

  I guess the way that we try and dissect companies, Cole dissects music, both lyrically, what on earth is going on with this track and this artist, but then also from a music producer perspective, and dissects the actual track, piece by piece. And it's...

• 1:19:27David Rosenthal?

  Yeah, not just from a music producer perspective, but I also really love, it's like from a music theory perspective, too. Like, why do these chords work here? And like, what is Tyler doing with, like, you know, stepwise motion here? It's very cool.

• 1:19:41Ben Gilbert?

  That's awesome. I haven't listened to the season. I gotta do it. I listened to the Kanye season and it's excellent.

• 1:19:45David Rosenthal?

  Also truly excellent.

• 1:19:47Ben Gilbert?

  All right. Bring it home.

• 1:19:48David Rosenthal?

  Let's bring it home. All right, listeners. Now is a great time to talk about one of our favorite companies, Statsig.

• 1:19:56Ben Gilbert?

  Yes, there is a reason why the best product teams rely on Statsig, whether they are iterating on their core product features or shipping AI-powered experiences at scale.

• 1:20:07David Rosenthal?

  Yep. In the crazy speed of today's AI world, shipping fast is just table stakes now. It's basically trivial to build and deploy your app constantly. The real advantage is how quickly you learn what changes actually created value for customers and how fast you can use that signal to guide what you ship next.

• 1:20:27Ben Gilbert?

  This is where Statsig comes in. It brings experimentation, feature flags, and product analytics into one unified system so teams can ship safely, test rigorously, and directly link what they changed to how users actually behaved.

• 1:20:40David Rosenthal?

  So if you want to make learning your competitive advantage, whether you're building new AI experiences or just evolving your existing core product, go to statsig.com/acquired to get started.

• 1:20:51Ben Gilbert?

  All right. With that, listeners, thank you so much, Santi. It's been a real pleasure. Can't imagine having done this episode without you and so fun to get to have this conversation together.

• 1:21:01Speaker 00

  Thank you very much. This was a lot of fun.

• 1:21:03Ben Gilbert?

  Yeah. Well, listeners, if you aren't subscribed and you like what you hear, you should. We'll be continuing to cover all of the big upcoming tech IPOs. And of course, if you want to hear sort of deeper insights on SaaS investing from Santi's partner, Jake, or dive into any of the other company building topics, you should consider becoming an Acquired Limited Partner at glow.fm/acquired or clicking the link in the show notes. And with that, we will see you next time.