How Does Slack Work and Make Money?

Simply put, Slack leads the market for enterprise communication software. As the startup matured since its launch in August of 2013, it’s become much more than that. Slack aims to integrate everything you need at the office onto one single platform, by becoming a platform for the creation of new software. If this seems over your head, you’re not alone — Slack uses advanced technology to create a simplified interface for users and it seems to be working.

Although no easy task, Slack has expanded its robust platform by investing in startups to make apps on their platform and by teaming up with third-party providers. Venture capitalists full-heartedly supported Slack from the beginning, generating a hype that attracted even more investment. The company has been backed by a majority of the top VC firms and angels, although in June, 2017, Bloomberg reported that Amazon.com Inc. (AMZN) inquired about a potential takeover with a price tag of $9 billion.

In July 2018, Facebook Inc. (FB) acquired email messaging developer Redkix. The Israeli company developed an email platform that serves as an enterprise application to streamline an organization's email chat. Redkix announced that it will become part of Workplace, Facebook's enterprise endeavor. Workplace was launched in 2015 and currently encompasses 30,000 organizations.

On July 27, 2018, Slack agreed to buy the IP to Stride and HipChat from Atlassian. Terms of the deal were not disclosed. The deal is expected to help Slack take on Microsoft Corp.'s (MSFT) Microsoft Teams. Part of the deal includes Atlassian making a "small but symbolically important investment in Slack," according to a  tweet from CEO Stewart Butterfield. Bloomberg reported that Slack will also make payments of an undisclosed amount to Atlassian over the next three years.

Slack was co-founded by CEO Stewart Butterfield, Eric Costello, Cal Henderson and Serguei Mourachov, and launched in August of 2013. As a platform for desk worker collaboration, it seemed to gain traction effortlessly. In April, just a few months after launch, Slack raised $42.8 million and reached a valuation of $250 million. Venture capitalists heard the buzz and saw the adoption of the software at their portfolio companies. Butterfield’s history of successful entrepreneurship, which includes co-founding Flickr, which was sold to Yahoo (NASDAQ: YHOO) in 2005, further helped Slack receive upwards to 10 funding offers weekly.

Slack is the epitome of the tech unicorn. In six months, the computer software company raked in another $120 million in funding and reached a valuation of $1.12 billion, placing it among the numerous tech unicorns of today’s market. (For related reading, see: Tech World Sees Number of Unicorns Boom)

Just four months later, from October of 2014 to April of 2015, Slack doubled in valuation, up to $2.8 billion dollars after a funding round in which it received another $160 million.

Slack provides an instantaneous, integrative platform for group collaboration to over eight million daily users. Slack quickly gained momentum, and has about 800 employees as per 2017 estimates. The company reports that over 70,000 paying companies use Slack. In total, 500,00 organizations use the application.

With 8 million daily users, Forbes estimates the company’s fair value to be over $8 billion. With the attractive label of a multi-billion dollar company, Slack also has the competitive edge in gaining big hires and making deals with partners.

Ultimately, Slack seems to work for just about any workplace team. “With 5,000 people working at the lab, and multiple tools used by various teams, Slack’s flexibility allows NASA JPL to access almost everything from one platform,” states Slack’s homepage. A few other notable customers include The New York Times, Airbnb, Samsung and Harvard University.

It turns out Slack figured out a way to spend its fundraising money. In December, 2015, Slack announced it would invest $80 million in startups building software for the company. The capital came from unused funding from previous rounds, and new capital from six of Slack’s investors such as Andreessen Horowitz, Accel Partners and Social Capital. 

Apart from providing a chat room for office teams, Slack has become more of an operating system for the workplace. Just like Facebook is the foundation for many consumer logins, Slack’s chat interface will be the basis for digital services and apps used at work.

Along with this comes a Slack App Directory of apps that integrate with Slack. Over 600 apps categorize into design, marketing, management, developer tools, etc., users can install. This tactic gives Slack the competitive advantage against imitators who can copy the basic communication platform but do not have the capability to support a software ecosystem.

Slack also teams up with other collaboration platforms, such as Trello, an app for product management and Github, a code hosting service. A relationship with Skype makes it fast and simple for users to integrate Skype via Slack’s platform.

Slack advertises that it is completely free to use for as long as and with as many people as you want. So how does it make money? Better yet, how does it save money from lucrative funding rounds?

A percentage of users — about 1.5 million out of 5 million — pay premiums for special features. Such features include access to an unlimited communication history, support, statistics, and more. With no apparent plans to run ads in the near future, Slack relies on a simple business model, charging monthly fees listed on its pricing page from $6.67 to $12.50 pre-tax. It also has a new enterprise package coming soon.

To the benefit of the users, customers only get charged per workers actively using the software, not "per seat" like the majority of enterprise software in the past. The quality product is paying off. 

Slack hit the ground running as the leader of enterprise chat platforms. In less than a year, it joined the tech unicorns as the youngest in the lot. Some years later, it has funneled in investments leading to a most recent $5 billion valuation with over 8 million daily active users — not to mention drawn the attention from giants like Amazon. Slack generates revenue from premium users, all while burning a relatively small amount of capital.