Zoom, a video chat service then popular with corporations, filed to go public on March 22, 2019.
Best known in venture and corporate circles, Zoom was far from a household name at the time. However, the groundwork for its 2020-era consumer breakthrough during the novel coronavirus epidemic was detailed during its IPO march in the years leading up to its public debut.
The company didn’t begin trading until mid-April last year, but it was through its March 2019 IPO filing that its name took on new prominence; here was a quickly growing software as a service (SaaS) business that was posting profits at the same time. As the rate at which unprofitable companies went public set records, Zoom’s growth and positive net income helped it gain brand recognition even before its shares began to trade.
Investors certainly recognized this was a rarity among SaaS companies, sending its IPO share price up 72% in its first day. The company’s equity has risen more than 100% since that first close, more than doubling in less than a year. Not bad in a market that has turned ice-cold in recent weeks.
To understand how Zoom became so valuable as a business — and later as a consumer product — let’s go back in time to consider its product and business strategies. As we’ll see, to become the video chat tool that everyone is using today, Zoom had to beat a host of entrenched competition. And it did so while making money, helping set the financial stage for its prominence today.
Product history
Zoom founder Eric Yuan was an early engineer at WebEx, one of early companies in the video conferencing space.
The company was sold to Cisco in 2007 for $3.2 billion, a nice exit, but Yuan has said he grew frustrated with the lack of product innovation as part of the larger corporate family at Cisco, and, in 2011, he founded Zoom. (For fun, at the time of WebEx’s sale to Cisco, TechCrunch called its software “expensive and bulky,” noting that “Teamslide, DimDim (open source), 1videoconference (open source), Vyew, Live Meeting and SlideShare are all competitive with WebEx in one way or another.” How many of those can you recall?)
It’s worth pointing out that the price tag for WebEx paled in comparison to what Microsoft paid for Skype a few years later. It bought the company for a hefty $8.5 billion in cash in 2011, showing that the big, established companies have wanted a piece of this market for over a decade.
But the bigger companies had to compete with a range of startups entering the space in subsequent years. People often complained about meetings being difficult to set up on the legacy systems. Over time, startups like Zoom began to grow, offering a simpler service that felt more reliable. Incumbency has its advantages, but it’s hard to overcome stuttering video or frustration getting people into the meeting in the first place.
Gaining steam
Zoom now finds itself having a moment in the middle of a white-hot market as the need for video conferencing and working from home has intensified beyond even the most optimistic estimates.
To get to this point, Zoom had to fight its way through a crowded, highly competitive market to become the de facto leader in the space.
The market includes a range of competitors, from WebEx, Yuan’s old company, to BlueJeans Network, Uber Meeting, GoTo Meeting (which is owned by LogMeIn), as well as other more established company platforms capable of offering video, like Google Hangouts, Adobe Connect and Microsoft Teams, among others.
While the Gartner Magic Quadrant is but one measurement of market strength, it’s worth noting that the analyst firm places Zoom among the leaders with giants Cisco and Microsoft in its 2019 version of market-share grid. From the enterprise perspective, then, it’s a leader. Its consumer mindshare grew as business users recognized that Zoom would also let them attend religious gatherings, yoga classes and stay connected to family while practicing physical distancing.
Venture history
As Zoom was shaking up the world of corporate video chat and laying a foundation for its later boom in consumer usage, the former startup was raising capital from private investors — first in sips, later in gulps — and putting it to work building an impressive business.
We don’t have all of Zoom’s financial results to parse, but we do have its venture capital history and its 2016-and-later accounting. The pair tell the story of the company’s rapid growth.
Founded in 2011, Zoom’s first material fundraising came the same year, a $3 million seed round according to Crunchbase, raised from TSVC, a Silicon Valley-based fund, and a number of individual investors, including Matt Ocko, who put capital into the business on behalf of an existing small fund prior to his current gig at DCVC. Zoom next raised a modest $6 million Series A in early 2013. While that round was small, its Series B was also small ($6.5 million) but quick, coming in the same year as the firm’s preceding, priced venture round.
By 2015, Zoom had raised just $16 million in known venture capital, a small sum by modern standards. Emergence led a $30 million Series C for the firm in February of that year, Zoom’s first big check. The company stacked on $100 million from Sequoia Capital at the start of 2017, bringing its total capital raised to nearly $150 million.
Luckily for us, we have financial results for Zoom from right around the time Sequoia invested. Let’s take a look at the company it put $100 million into.
Quick growth
Zoom’s S-1 filing, the document companies provide to the SEC so they can go public, covers most of its 2016 fiscal year and begins quarterly breakdowns starting in calendar 2017. As Sequoia’s investment into Zoom came at the start of 2017, the firm’s fiscal year ending January 31, 2017 is of particular interest.
In that 12-month fiscal period (February 2016 through January 2017), Zoom posted revenue of $60.8 million, leading to break-even profit for the year (discounting some non-cash share repurchase expenses). In the same fiscal year, Zoom’s operations generated $9.4 million in cash, while its investing cash costs were under $3 million.
So Sequoia had poured $100 million into a company that was breaking even on a GAAP basis and generating lots of money on a free cash-flow basis. From there, Zoom only racked up more impressive results.
In its next fiscal year (the 12-month period ending January 13, 2018), Zoom grew to $151.5 million in revenue, more than doubling its prior year’s tally. It also noted a small $3.8 million net loss, inconsequential compared to both its top line and top line growth. Zoom’s operations generated $19.4 million in cash that fiscal year.
But it was the next year that Zoom really showed what it could do. Posting $330.5 million in revenue during its fiscal year ending January 31, 2019, the company generated net income of $7.6 million and operating cash flow of more than $51 million. It was on the back of those numbers that Zoom filed to go public and was treated to a strong pricing run before a successful IPO.
This brings us back to more recent times, so let’s dial our clocks back to the company’s public offering.
Public, and growing
Zoom initially targeted an IPO price range of $28 to $32 per share. It raised that to $33 to $35 per share, before finally debuting at $36 per share. We already covered what happened to the company’s stock, but its IPO pricing history shows that public investors were excited from the moment they saw its numbers.
The boost to its per-share IPO matters as it helped Zoom raise $356.8 million, before taking into account shares set aside for its underwriting banks. That was a tidy sum for a company with more than $60 million in cash before its debut that didn’t need the money. Zoom wrapped its IPO process with nearly $500 million in cash.
The cash hoard means that Zoom is in no danger in 2020 as usage explodes; it has warned investors that its gross margins (the percent of income the firm has to spend on revenue generation, before operating costs) will decline as it supports free usage. Zoom is safe from the current winds of free-tier expense because it built a financial Fort Knox through its IPO, a transaction that was carried by its history of careful capital consumption, later cash generation and, finally, profitability, before its public debut.
If Zoom hadn’t done so well before, it may not be in the position it is today, suddenly on the hook to support endless video calls as office workers remain on lockdown. But with substantial reserves in the bank, Zoom can ramp up its infrastructure spend and make sure everyone can see their family, friends and co-workers at the same time.
We’re already starting to see usage spikes convert into paying customers at places like Slack, which is also seeing a COVID-19-related spike. Finally, then, we may see Zoom’s boom in free usage become the next thing to help it grow revenue. More when we get its next earnings report.
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