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Zoom has been in news a lot lately. It has gone from being an enterprise solution to a household name pretty fast.
Its daily users have risen from 10mn to 300mn in the last 4 months. Its stock price has also risen significantly up.
While Zoom is growing exponentially (much like the number of corona cases), let’s dig a little bit deeper into what laid the foundation of such an overnight success. I am ignoring all the security issues Zoom has been bomb blasted with here.
Zoom and the Red Ocean Strategy
Zoom was founded in 2011 when Eric Yuan decided to quit WebEx after working there for 14 years. 10 years he spent at WebEx and subsequent 4 years at Cisco WebEx (after $3.2bn acquisition of WebEx by Cisco). WebEx was, in fact, one of the first SaaS (Software as a Service) companies ever. They had the SaaS model even before Salesforce, which many consider as the first SaaS company.
WebEx was a videoconferencing solutions company and Eric was one of its earliest employees (9th engineer). After working so long at the company, he wanted to build a new video conferencing solution for Cisco. He felt that there were a lot of legacy issues with the current solution and new-age customers had different needs.
Even though he was VP Engineering he could not build it inside the company. The Cisco leadership then felt that “it would cannibalize the existing market.” Wow! Talk about missing out on an amazing opportunity.
Eric went on to quit the company and raise a bunch of money. He decided to build a new video conferencing app in a market full of big incumbents. The list included big companies like Skype, GoToMeeting, WebEx as well as well-funded startups like BlueJeans.
This goes against a lot of startup advise. Conventional wisdom states that one should try to find a market with lesser incumbents or have a very differentiated/unique value proposition.
Zoom did none of that. Let’s try to understand why would he not adhere to conventional wisdom:
He had managed to raise $3mn from people who were willing to invest in him (as opposed to the business). A lot of the investors did not even know what Eric was working on. This would definitely have provided him with enough confidence/firepower to power through
When you look top-down on the video conferencing market, you do see a lot of competition. But whenever Eric talked to his customers, none of them were happy with their videoconferencing solution. Customers were deeply dissatisfied in spite of so many solutions. I can attest to that as well. Video conferencing never used to work seamlessly. But just because users are unhappy, does that mean a new startup can be built on top of that problem? What if it’s technically not feasible? If Google/Cisco of the world, with all their technical might, can’t solve this problem perfectly, how can a small startup do that? That’s what most of us would think. I believe what made Eric think otherwise would be the fact that he had already done that for 14 years. That too for one of the top companies in the space and from scratch.
I think another example of the same approach would be Superhuman. Almost everyone I know hates email but can’t do away with it (in spite of Slack). Even though there were a bunch of email clients already, both by big companies as well as startups, Superhuman founders thought they could solve this problem better than them.
Lesson here. Sometimes it’s a good idea to not be too bothered by competition. If the users still feel the problem, and you have the belief that you can solve it. It’s probably a better idea than most others (given it’s already validated that a problem exists). A lot of times, we try to solve problems that don’t even exist for a large userbase.
Zoom and its MVP
When Eric left WebEx and raised $3mn before even starting with Zoom, he also hired 40 of his ex-colleagues. All of them engineers.
Basically, from Day 0 he had a huge team of engineers. A lot of Silicon Valley products are built with “Move fast and iterate” philosophy, just like Reddit (which we covered in our last edition of Product Stories). Eric was from a different school of thought entirely.
He was in a building phase for about 2 years. He launched Zoom in 2013. Towards the end of these 2 years, he also had an engineering team of 130. That is a lot of engineers and a lot of time, especially in the startup world.
According to Eric, if you are building a completely innovative product like Uber or Airbnb, then the “move fast and iterate” model of building products makes sense. But if you are building a product that competes with a bunch of other products, you need to make sure that your product works (and is better than everything else out there).
A corollary of this (although it implies that one should build products with a more unique value proposition; the exact opposite of what Zoom did):
2 years is a large amount of time working on a product with no validation from outside. Eric himself agrees that he has had the urge to launch early many times but he had to fight that urge, to make sure that the product was right.
Few of the finer product features they wanted to nail before launching:
Maximum latency of 150ms even in choppy internet connections (150 milliseconds is the maximum latency before conversations feel unnatural)
Even in cases of up to 40% packet loss, Zoom should seem to work fine. They prioritize audio over video in order to do that. In a meeting, choppy video is fine but intermittent audio makes the meeting intolerable
No password and cross-device joining of the meeting (this was a big pain point with the current solutions of the time. Almost everyone required the new joinees to join via a password)
Security features built-in to set them up for going to enterprise customers later on
This worked fantastically for Eric but I am not sure if this is a lesson that is translatable to most other founders. Eric could do this because he had whole-heartedly believed in the problem and was playing the long-game. “Move fast and iterate” model is for times when you are not 100% sure whether you are working on “something people want”. In case you are not, it helps you to cut your losses and spend your time building something which people actually want.
During these 2 years’ time, he also planned a lot around the business model and the go-to-market which I will cover in the next edition of this mail. But one example of extreme meticulousness would be the freemium limit in Zoom.
Zoom one-to-one meeting are always free but for group meetings, it is limited to 40 minutes. 40 minutes is not just a random number. According to Eric and his WebEx experience, 45 minutes is the duration of most effective meetings and hence wanted to keep the free limit below that. Note that he did have to waste time doing A/B tests to figure out if this limit is the best for conversion or not. This enabled him to focus more on new features for the customers rather than optimizing this conversion funnel.
If you look at Zoom’s growth post-2013, it is nothing short of a dream. It’s not just because of the fact that they are customer-obsessed. A lot of founders are customer-obsessed but they don’t see the kind of dream success that Zoom sees. What you work on is sometimes much more important than who you are. Also, a lot of the foundation of that hypergrowth was built in those 2 years.
Lesson here. There is no one correct way of building products. It all depends. On the founder’s individual constraints as well as the market constraints.
SMB vs Enterprise
While Zoom did do some things that didn’t scale, a lot of things it did in its initial 2-year “product building phase” did end up scaling. One example of that would be their go-to-market strategy.
While Zoom (like most of their contemporaries) wanted to serve the enterprise market, Eric knew it would be a difficult battle to begin with (especially in a market filled with biggies). As a result, he started with a heavier focus on the freemium model, which is generally meant for SMB customers.
He figured he would start with the SMB market and simultaneously, keep on getting enterprise customers (where the sales cycles were much longer). Note that he never wanted to go to the consumer market as then he would have to rely on advertising as a business model; which according to him doesn’t make sense for a video call application. His freemium model (of keeping one-on-one chat completely free and a 40 max cap on group calls) provided him with enough leads to grow sustainably; while he kept going after the enterprise customers. In fact, his first paying customer was an enterprise customer (Stanford Continuing Studies) even though he started with more focus on SMB first.
Zoom also did a bunch of billboards and NBA ads later on when his focus shifted on the enterprise more. Eric believes that brand advertising is expensive but something one needs to do in order to shorten the sales cycle. If your company is something one has never heard of, it is very difficult to convince all the stakeholders involved in an enterprise sales deal.
This is the same strategy Slack followed. Provide a free product that works seamlessly, thereby providing with enough leads to you to build for the SMB market organically while you inorganically try and close enterprise deals. But there are very few problems that hit SMBs and enterprises alike. Zoom as well as Slack were lucky enough to find those.
Talking about early metrics of Zoom might be a moot point because they were so good from the start that it’s practically of no viable learning for others (at least the numbers disclosed publicly).
Metrics actively tracked by Eric during the initial days:
Daily number of meeting participants
Number of minutes
While 2 (or 3) are what can be constituted as North Star Metric, NPS Score is a good check metric to ensure growth doesn’t come at the cost of existing users. NPS score essentially is a measure of how much your existing users like your product.
After couple of years of launching the product, Zoom’s NPS was 68 (30 is the average SaaS NPS score and 40 is a good score). Major video conferencing products were at 20 at that time.
Zoom’s growth has always been fantastic. Probably one of the reasons why Eric does not pay much attention to it. They launched their product via a Wall Street Journal article and got 60k users in 1 day (this is even more than Instagram which got 25k users in a day on its launch).
Cumulative user growth since inception:
0.5 years: 500,000
1 year: 3,000,000
1.5 years: 6,000,000
2 years: 10,000,000
2.5 years: 40,000,000
Their total users grew 40% month on month since their inception. This is a phenomenal feat to achieve.
While there is very little visibility of Zoom’s revenue early on, it has grown from $61m to $331m in annual revenue in the past three years. 11% MoM growth rate in revenue in the last 3 years.
One negative data point we do have is that a few VCs passed on Zoom early on because they felt that it had higher than normal churn. Eric explains that it was because customers were changing their individual plans to company-wide plans but we would never know.