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There's nothing crazy about Slack's $2.8 billion valuation

Slack CEO Stewart Butterfield.
Slack CEO Stewart Butterfield.
kris krüg

The one-year-old corporate messaging company Slack has raised $160 million in a deal that values the startup at $2.8 billion. As always happens when a young company raises a lot of money, people are describing this as evidence of a tech bubble — an unsustainable increase in the value of technology stocks.

People have been saying there's a technology bubble for the past decade, and so far they haven't been proven right. But pointing to Slack's $2.8 billion valuation as evidence of a bubble is particularly unconvincing.

Back in the 1990s, there were a lot of tech startups with no revenue and no real plans for earning revenues. That was a bubble, and those companies failed when the bubble popped.

More recently, there have been companies — like Twitter and Facebook in their early days — with no revenue but a totally plausible plan for generating revenue by showing people ads. People shouldn't have been surprised when these companies started making a lot of money, and yet they were.

But Slack isn't in either of these categories. It has one of the most straightforward possible business plans: charge businesses a monthly fee on a per-user basis. Slack's prices start at $6.67 per user per month, so if it has 200,000 paying users, as the New York Times reports, then the product should generate at least $16 million in revenues this year.

Obviously, $16 million in annual revenues isn't enough to justify a $2.8 billion valuation. But the opportunities to grow that number are obvious. First, 200,000 people is a tiny fraction of America's — to say nothing of the world's — workforce. There's opportunity to have 2 or even 20 million paying users over the next decade, which would translate to more than a billion dollars in annual revenue.

Second, there's a lot of room to upsell. That $6.67-per-month fee is a low price for business software. The company's pricing page signals that it expects it will be able to charge 10 times as much for an "enterprise" version of Slack that integrates with companies' existing IT systems.

So imagine that a few years from now, Slack has 10 million paying users (about 6 percent of the US workforce) and generates an average of $10 per month of revenue from each. Suppose also that the company has a 50 percent profit margin (that's high for most companies, but it doesn't cost very much to run an online service). At a price-to-earnings ratio of 15 — typical for a mature technology stock — this company would be worth $9 billion. So if you think Slack can maintain its current momentum for a few more years, $2.8 billion is a bargain. And Slack could easily attract more than 10 million users and generate more than $10 per user.

People are still in the habit of thinking of the internet as a bleeding-edge technology with an unproven ability to support profitable businesses. But it's long past that point. The internet has become a central part of hundreds of millions of people's personal and professional lives. People should stop being surprised when a company that makes millions of internet users more productive is valued at billions of dollars.

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