Got some questions about the (semi) big news about Slack getting a new investment. The catchy headlines say that Slack is “now worth over $5 billion”. Of course, with snazzy numbers like that, more than a few readers are wondering if investing in a Slack IPO is a good move.
How Much Is Slack Really Worth?
First off, let’s back up and do a reality check. Slack is not “worth” $5 billion now. It’s latest funding gives it a valuation of $5 billion, but that isn’t the same thing.
Let’s say I have a company. We’ll use my freelance writing business of ArcticLlama. Now, I don’t have any funding, but if I did, it would work something like this.
An investor offers me $1 million for 10% of ArcticLlama. I say yes.
So, if the 10% of the company is worth $1 million, then mathematically, the whole company is worth $10 million. That is what a valuation is.
This does not mean anyone would actually give me $10 million for the company, just like there isn’t likely anyone out there willing to pay $5 billion for Slack right now either.
This is kind of a game, and it’s sort of an inside joke. I could also sell .0001% of ArcticLlama to someone for $100. According to the rules of valuation, that would technically make ArcticLlama worth $100 million. Ridiculous, right?
Reality and Private Companies
While companies are private, the public really isn’t entitled to much information about their finances, and most companies use that to their advantage.
What we do know about Slack is that they have a total of $790 million in funding. That means, $790 million real dollars have actually been invested in the company. The rest is all paper value based solely on the last investment of $250 million. Not one of the breathless articles repeating the company’s press release mentions the companies revenues or, heaven forbid, profit/loss.
Slack says it won’t be spending the money, but rather is holding on to it as a “war chest.” No word on why the company needs a war chest, of course. In 2015, the company’s CEO said it had a cushion of $300 million in the bank. I guess that cushion is a lot smaller now. Must have been some war to spend that money on along the way.
Time to look into Credit Karma credit monitoring?
Slack is most likely still losing money, or maybe just barely breaking even. That means the additional money raised is there should the company need to expand, or maybe just to keep the doors open.
The truth is that Slack is not long for this world as an independent company, and funding rounds like today only serve to push up the eventual buyout value that Microsoft will probably end up paying once it finally concludes that it never really found any way to squeeze much value from buying Skype. At that point, Microsoft’s desire to be a player in corporate communications will help turn all of the previous investments in money-losing Slack into profitable investments.
This so-called “exit” will be an admission that all previous investments were wasted and that the company was never going to make any money, and would eventually have gone bankrupt, but to a company like Microsoft with a big balance sheet, a shiny name and a few extra users is worth writing a big check, so everybody wins. Not Microsoft’s shareholders, of course, but that will be blended away into quarterly earnings and eventual write-downs of “goodwill” so that nobody really notices.
And then, on to the next “unicorn.”