Zoom’s second quarter results, which were reported earlier in the week, were off-the-charts as the company’s platform has become a must-have for consumers and businesses alike. Revenues came to $663.5 million, up from $145.8 million during the same period a year ago. There was also a profit of $185.7 million. Wall Street was looking for only $500 million on the top-line and $134 million in earnings.
With the drop in the markets this week, Zoom stock has taken a hit. But the return is still nearly 10X since the IPO in April 2019.
Keep in mind that Zoom is not a typical Silicon Valley startup. CEO and founder Eric Yuan did not raise large amounts of capital in the early days. He actually spent two years developing the Zoom app. And when he launched it, there was virtually no spending on marketing.
Before Emergence Capital’s Santi Subotovsky met with Eric in 2014, he had spent about three years evaluating conferencing startups. He believed that the trend of cloud computing would lead to a transformation in collaboration.
“People wanted a tool that they could love, not something a CIO has mandated that everyone should use,” said Subotovsky. “There was also a shift in how people were using devices. They would switch from hardwired to Wifi to cellphone networks. But the old school collaboration tools were not designed for this.”
Subotovsky’s own life story was also key with the investment thesis. As someone who grew up in Argentina, he knew that many people lacked sufficient bandwidth for high-quality communications platforms. In other words, the market for conferencing was still untapped.
Now Subotovsky did evaluate a myriad of startups but Zoom was the one that clearly stood out. But there was a problem: Eric did not want to raise capital.
He thought bringing on institutional investors would be too distracting. He instead wanted to be laser focused on making the best product.
For Subotovsky, he did not give up. He went on to build a relationship with Eric and talked about the benefits of having more scale, which would be essential if Zoom wanted to sell to large enterprises.
It’s All About The Product
Eric would eventually make a pitch to Subotovsky and his partners. Consider that there was no investor deck or financials. Rather, Eric did a live demo of Zoom—which he pulled off flawlessly. “He pitched the product, not the company,” said Subotovsky. “But he gave us complete access to all the data. And once we saw it, we were blown away. We had never seen something as capital efficient as Zoom was.”
One of the main advantages of the system was that it was video-first. At the time, the rival systems were mostly about screen sharing. So Zoom was truly innovative. There was also a deep technology foundation, which was easy to integrate and configure.
It certainly helped that Eric had an extensive background with conferencing. Back in 1997, he joined WebEx as a founding engineer. But he would leave the company in 2011 because management ignored many of his suggestions.
In February 2015, Zoom announced a Series C round for $30 million. Emergence led the investment and there was participation from existing investors, such as Li Ka-shing’s Horizons Ventures, Yahoo co-founder Jerry Yang, Qualcomm Ventures, and serial biotech entrepreneur Dr. Patrick Soon-Shiong
To get a sense of the traction of Zoom, the company had grown its customer base from 4,500 to 65,000 during the past two years and the number of meeting participants went from 3 million to 40 million.
Emergence wrote a check for $20 million, which was the biggest one in the company’s history. The equity percentage was also below its normal threshold. “This investment was nerve-wracking,” said Subotovsky. “I was trying to find investors to see the vision. But people would not even take a meeting.”
No doubt, the investment has turned out to be one of the most successful during the past decade, if not in the history of venture capital. For the most part, the deal highlights how important it is to focus on emerging market trends and to not give up on your convictions. After all, Zoom’s market value is roughly $101 billion.
Note: If you want to see my interview with Subotovsky—of course, which was on Zoom—you can check it out here.