The Four-Way Fit — Chapter 23: Hot Public Company
By: Tom Mohr
Tags: Zoom, Business, IPO, Startup

If your business has become a public company, you have entered an elite group. As of 2019, of the 31.7M businesses operating in the US, just 4,300 were publicly listed. In 2020, just 407 went public in the US. Public company status is rarefied air indeed.

As the senior executive or CEO of a public company, you operate under the bright light of continuous scrutiny. Your financial performance is shared with the world every quarter. Everything you say and do must be done the right way so as to stay compliant with securities law. Despite the many demands of public company life, it’s on you to continuously build company value and to strengthen your competitive moat. To lead a public company is a heavy burden.

Yet for the fast-growing enterprise, public company status offers many benefits. If your company can deliver strong quarterly results, the public markets reward you with an outsized company valuation — especially if the path to future growth seems clear. Access to both debt and equity financing will be easier than before, in much bigger check sizes, on more favorable terms.

But these benefits can only come if you build a company that can dominate a very large market, delivering strong unit economics and sustainable competitive advantage. Investors will bid up the stock price, betting that the net present value of your future cash flows will support the valuation. Once your IPO is behind you, you enter this final stage of company-building: the “Hot Public Company” stage. In this stage, your mission is to elevate performance to the point that you accelerate past all others in your chosen market, delivering such exciting results that you become a darling of Wall Street. But beware. Once you achieve this lofty goal, your job isn’t done — because now the goal becomes to stay there.

How can you become a hot public company? If you’re looking for a role model, it’s hard to find a better one than Zoom.

The Story of Zoom

Zoom was born out of an entrepreneur’s frustration, grew via vision and grit, and came of age due to a CEO’s relentless passion to deliver users a delightful product experience. Just eight years after the company’s inception, Zoom went IPO. It was an eye-popping success. By the end of its first day of trading on NASDAQ, on April 18, 2019, Zoom’s market capitalization stood at $16B (up 72% from its market opening). Eric Yuan, the company’s CEO, suddenly was worth $3.2B. As impressive as this was, it was just a harbinger of things to come. In the twenty-four months that followed that IPO day, the world came to Zoom’s doorstep — and Zoom welcomed the world in. By April 5, 2021, Zoom’s market cap had zoomed to $111B (a 7X rise in two years). Zoom is the archetypal Hot Public Company. Here’s their story.

Background

Three years before the dot com bust, in 1997, Eric Yuan joined WebEx as an engineer. He was a smart, hard worker; it was routine for him to code well into the night. Yuan had come from China, where he had received a degree in mathematics and computer science (in the late eighties, when videoconferencing was the stuff of Dick Tracy cartoons). His girlfriend was at another college many hours away by train at the time, and as they tried to manage their long-distance relationship, Yuan would find himself dreaming of the day when he could connect and communicate via a live video feed. So joining WebEx was a way to further that long-ago dream.

By the time he joined WebEx, networks were being upgraded — enabling improved internet speeds. WebEx was able to leverage these advances to create a video conferencing experience that was best-in-class at the time. The company went public in 2000, and was acquired by Cisco in 2007.

Cisco recognized Yuan’s talent, giving him a series of promotions culminating in the Corporate VP Engineering role, where he led 800 engineers. But as Yuan delved into his work, his frustrations grew. Yuan had a passion for creating products customers loved. Despite 2 million customers who gave WebEx $800M in revenue, Yuan soon recognized that WebEx customers were far from happy. There were too many points of friction to get WebEx to work in the first place, and too many bugs in the user experience once it did. While WebEx was innovative in its file sharing features, its audio and video quality were choppy and connections often failed. Scheduling meetings was also cumbersome. WebEx would need a significant and expensive overhaul to become a product customers could love.

Unfortunately for Cisco, the leaders in charge at the time were unwilling to make the investments Yuan lobbied for. Despite paying $3.2B to acquire WebEx, Cisco resisted investing more cash to make WebEx great.

And so, in April 2011, Yuan quit. His time at WebEx and Cisco had, in effect, brought him through the Immerse and Ideate stage of company building. He now had a clear understanding of the market opportunity, customer needs and the issues the product would need to address to deliver a high quality user experience. This knowledge armed him with the Minimum Viable Concept he would need to start a new company. He knew the market was crowded with legacy players, but he also knew none of them were delivering a product that delighted customers. He was convinced he could create such a product. Now it was time to dive in — to begin the journey through the Initial Product Release stage. For this he would need a team. As he left Cisco, he took 40 engineers with him — most of them located in China, where great engineers cost less. By June he had raised a $3M seed round, and the work to build a best-in-class video conferencing product began in earnest.

Initially he called his company Saasbee.com:

But an early investor encouraged him to change the name, and Zoom.us was born. The first version of Zoom was released in August, 2012. Here’s the company landing page from that time:

Zoom was initially released as a web app that supported iOS. Hosts could invite up to 15 attendees. It ran well even on poor data connections, and its audio and video capabilities were better than anything available at the time. But its most distinguishing feature was its capacity to support a mobile experience. No competitors could offer that. Users came and stayed; it soon became clear the company had released a Minimum Viable Product.

Then in January 2013, Zoom released its 1.0 product. Now the maximum number of meeting attendees rose from 15 to 25. This more fulsome version of its first product release was met with delight by current users. The announcement coincided with its close of a $6M Series A financing, led by Qualcomm. Now Zoom could support 40 attendees, more than any competitor at the time. Now Zoom could support desktop, iOS or Android devices. The product’s image quality was outstanding, audio quality remained high and its screen-share feature was solid. At this time, the company rolled out its freemium business model, which is still in place to this day. Free meetings were capped at 20 minutes (for calls with more than two participants). If customers needed more, they would need to pay $9.99 per month per host — except for the education segment, where they charged just $0.99 per host.

With no marketing budget to speak of, the company began to catch on. Word traveled fast: a new video conferencing app was available that supported mobile and ran circles around the current industry leaders. Viral adoption propelled the company through its Minimum Viable Repeatability and Minimum Viable Traction stages, moving it briskly into the Minimum Viable Scaling stage. Zoom initially focused on individual users, plus the SMB and education markets — following a path similar to the one forged by Steve Jobs at Apple in its early years. The product was a winner; the growth trajectory took on an ever more viral curve. By June of 2013, just two years after its founding, the Zoom platform had already hosted over 400,000 meetings with over 1 million participants in thousands of cities around the world.

In September, the company raised a Series B financing. The growth curve continued to steepen; in 12 months the company had grown its users by 650% and its business customers by 350%. During this time, it expanded its focus into health care and other verticals — indicative of entering the Minimum Viable Expansion stage. Customers began to arrive from a wide array of markets and verticals, all seeking the new best-in-class remote video collaboration tools Zoom could now offer.

But its expansion was not just fueled by the addition of new segments. During the period from 2014 to 2016, Zoom also began to expand its product line. In April 2014 it launched Zoom Presence, which enabled Zoom to interoperate with the legacy video conferencing hardware many enterprises had built into their meeting rooms.

In essence, Zoom became a platform enabling enterprises to flexibly configure video conferencing solutions using whatever hardware they happened to own.

This move widened the door into the enterprise market. In August 2014, Zoom launched Zoom Webinar, further widening the company’s appeal for enterprise customers. In 2015 Zoom Presence was renamed Zoom Rooms. By this point it had become clear that the most important segment for Zoom would be global enterprise customers. This insight informed the product roadmap.

Yuan remained intensely focused on the user experience. He knew that the delivery of a superior video conferencing experience was complicated by a whole host of product dependencies — on networks, devices, enterprise security filters and due to their integration with other platforms — such as Salesforce, Linked In and so forth. Yet his commitment to creating customer delight was inextinguishable. He routinely reached out to customers who were considering leaving the product, seeking specifics on their concerns so that he could fix the problems. New features, such as video breakout rooms and customizable backgrounds, came directly from this customer-centric focus.

By February 2015 the company was ready to take in more cash. It raised a $30M C round, led by Emergence Capital Partners. For Yuan, the focus of spending remained on the product. He knew that a great product could become its own revenue engine, with rising word-of-mouth recommendations driving viral growth. Yuan resolved that Zoom would grow primarily via the product itself. Every step of the user experience from initial landing page arrival through to a paid subscription event and beyond would be repeatedly tested, iterated and optimized. With a great product, a cost-efficient product-led growth strategy became both viable and profitable.

The pace of product enhancements and new product launches continued to increase, as did Zoom’s user and customer counts. Zoom 1.0 gave way to Zoom 2.0, and then 3.0. Each release was packed with enhancements, all designed to further increase user delight. By 2016 revenue growth was 300%. In January 2017, Zoom 4.0 was released. At around the same time, the company announced a $100M Series D financing round led by Sequoia Capital. By this point, the company had clearly entered the Minimum Viable IPO Path stage. As Sequoia’s Carl Eschenbach said:

“Zoom has cracked the code for delivering effortless collaboration by providing the first product built from scratch with video in mind. They’re the only enterprise startup that combines Apple-level NPS with Slack-like usage and Facebook-caliber monetization. No other company nails all three. It’s not hard to believe that in 10 years every conference room will be connected by Zoom.” (SOURCE: As quoted in “How Zoom Became the Best Web-Conferencing Product in the World in Less Than 10 Years”, by Hiten Shah on the Nira.com blog)

By the end of 2017, Zoom counted 65,000 companies around the world as customers. 90% of the top universities in the US used Zoom. From inception through 2017, Zoom welcomed 40 million people as Zoom meeting attendees and hosts.

By now enterprise Zoom users were becoming a community. The enterprise market had become the top priority market for Zoom, and the company needed to raise the sophistication of its revenue engine. So Zoom launched its first user conference, Zoomtopia, in September. It was an opportunity to strengthen outreach into F2000 enterprise customers, one of many steps it took to increase the maturity of its revenue engine.

By mid-2018, the company had committed to the IPO path. It was a time of impressive growth and continued product releases. A wide variety of user configuration features were introduced during this time. The maximum number of meeting attendees was expanded and new AI capabilities were released — such as automated transcript writing. In 2019, Zoom Phone joined Zoom Video, Zoom Rooms, Zoom Webinar and Zoom Chat in the product lineup. Zoom Phone could replace PBX phone systems without requiring numbers to be ported over, or service contracts to be canceled. TO be able to upgrade enterprise telephony without the disruption of new equipment or changes to numbers was huge. And the analytic capabilities offered with Zoom Phone were impressive.

Now enterprises could benefit from a comprehensive suite of secure communications solutions (from phone to video conferencing) for all of the most common remote communications use cases (individual, small group, large internal meeting, large customer webinar, etc.) using any device (BYOD, company phones, legacy company video conferencing hardware, etc.), supported by a land-and-expand business model.

The product progress, along with an ever-more-sophisticated revenue engine, propelled the company forward — culminating in its impressive IPO in April, 2019. Revenues were now at $331M, up 118%. The customer count stood at 50,000, including big names such as WalMart, Capital One and Uber. It was, at the time, the most valuable IPO of the year. The opening-day valuation of $16B was fueled in no small part by the fact that it was profitable — a rarity in tech companies at IPO.

On the day of the IPO, Yuan famously compared it to a high school graduation party. “It’s a big deal at the time, but there is a lot of work to do after the party is over… No one wants to be the person who peaked in high school!”, he said. (SOURCE: “Zoom CEO says IPO is like a high school graduation: Lots of work ahead yet” by Cromwell Schubarth in Bizjournal.com, April 18, 2019) And so he and the top team got to work to plan the next stage of company growth.

By completing the IPO stage, Zoom progressed to the final company-building stage: Hot Public Company. This is the stage that never ends. In it, a company must complete five steps, again and again. Here are the steps:

Heads Up: Update The Four-Way Fit Spreadsheet

As you enter a new company-building stage as a fast-scaling company, the first step is always to complete the Four-Way Fit spreadsheet. This gets you out of the weeds. You need a holistic current-state view of your enterprise, so you can identify strengths and weaknesses, reimagine what needs to be accomplished next and hypothesize how to get there. When you complete the spreadsheet, you end up with a set of claims that you have documented in the domains of Market, Product, Model and Team that, if proven true, will help you achieve the goal of that stage.

The Hot Public Company stage is different from previous stages. It does have a goal — to be recognized by investors as a hot public company. But unlike the previous stages, this is the stage you never want to exit. Once you complete its five steps, your job is to return to the first step again and progress through it and the other steps, in an endless recursive cycle. That’s how you maintain the kind of performance investors will consider “hot”.

Much to his surprise, Yuan and his top team went through this recursive cycle at least twice in the twenty-four months post IPO. Why so fast? Because when COVID hit, every plan and every project needed to be completely reevaluated.

By February 2020, news of a contagious virus emerging out of China had begun to change the world as we knew it. By March, people all around the globe were sheltering in place, masking up and distancing themselves from others. Direct human interaction — that basic building block in creating human community — suddenly became dangerous. In a flash, the entire world needed a new way to maintain connection and communications.

It was the perfect storm of challenge and opportunity for Zoom. In an instant, Zoom’s addressable market transformed. Zoom was no longer just for enterprise, mid-market and SMB companies in defined top priority verticals. Now a significant percentage of all humans on the planet wanted Zoom, if for nothing more than to socially engage with socially distanced friends and relatives. Zoom was used for birthday parties, funerals and Bar Mitzvahs. Telemedicine exploded. Universities, schools, government agencies and even courts adopted Zoom for remote work. Recognizing the need, Zoom offered its platform for free for K-12 education in many countries. For the enterprise, Zoom leaped from its status as a secondary communications modality to become the primary communications modality.

Suddenly Zoom was mission critical. As such, its every feature was put under the microscope. This explosive convergence of rising user demand and rising quality expectations tested the Zoom platform like never before. Wikipedia describes it this way:

“By February 2020, Zoom had gained 2.22 million users in 2020 — more users than it amassed in the entirety of 2019. On one day in March 2020, the Zoom app was downloaded 2.13 million times. Daily meeting participants rose from about 10 million in December 2019 to more than 300 million daily meeting participants in April 2020.” (SOURCE: Wikipedia)

Zoom’s new mission-critical role for the world’s enterprises was evident in the numbers. In 2020 the company boasted over 370,000 customers with more than 10 employees, up 458% from the prior year. The explosive adoption of Zoom worldwide propelled the stock to new highs (by June the company was worth $67B and by October it was worth more than ExxonMobil — $140B).

But underneath the hood a host of new challenges were brewing. A system hack in July 2019 exploited Zoom’s OS X mode, taking advantage of a vulnerability tied to Zoom’s practice of installing a local web server on every user’s machine. Through this hack, users could be tricked into joining a Zoom meeting, thereby unknowingly activating their video feed. In March 2020, New York State launched an inquiry into Zoom’s privacy and security practices, resolved only when Zoom agreed to work on them. That same month an expose revealed that the Zoom iOS app was sending data to Facebook, regardless of whether a Facebook account was being used with Zoom. The very next month, it was discovered that user names and email addresses were being sent by Zoom to LinkedIn, allowing users to access LinkedIn profile data about other users without consent. Then in May, the FTC attacked Zoom’s privacy practices, focusing on their encryption claims and methods. During this same period it was found that certain data routed through China through vulnerable software, exposing users and the Zoom platform to other security and privacy risks. Furthermore, concerns grew that Zoom’s substantial research and development presence in China could open it to pressure.

In fact, such a situation did arise. An executive based in China disrupted Zoom meetings devoted to discussing the Tiananmen Square uprising. This event prompted the US Department of Justice to issue a criminal charge against this Zoom employee, who was fired by the company. Worse, other bad actors began to exploit other security vulnerabilities. Some gained access to user video cameras without permission. Others engaged in zoombombing, in which a Zoom meeting is interrupted by an uninvited bad actor, often sharing lewd or other inappropriate materials on the call. Hackers put 500,000 Zoom usernames and passwords up for sale on the dark web.

On top of this avalanche of challenges, the explosive user growth finally crossed a tipping point, bringing the platform to its knees (temporarily). On August 24, 2020 Zoom experienced hours of widespread outages.

These events required a comprehensive reset. As Yuan took stock in the Summer and early Fall of 2020, it was clear that Zoom had entered a new reality filled with both challenge and opportunity. To successfully address the challenges and seize the opportunity, a new “head up” review would be required.

Market

The Market domain is made up of three subdomains: market viability, market segmentation and gaping problems / screaming needs. For Zoom, the seismic event called COVID shifted all three in a positive direction. As to market viability, the Zoom addressable market exploded in depth and breadth. High-quality, low-cost remote video communication was now no longer a luxury — it was a necessity. As to market segmentation, this need did not just exist inside enterprises and educational institutions and health care systems; it existed everywhere — including with individual consumers. As to problems and needs, the problems were more gaping and the needs more screaming than ever before — by an order of magnitude.

But the problem wasn’t just a need for quality video communications. Trust was the other imperative. Enterprises needed confidence that communications would be secure, user information would be private, the platform would be stable and dependable and Zoom would be a high-integrity actor.

Having said that, the marketplace was recognizing Zoom’s competitive advantages. Here is the 2020 Gartner Magic Quadrant for the Meeting Solutions category:

(SOURCE: “Zoom a Leader in 2020 Gartner Magic Quadrant for Meeting Solutions & UCaaS, Worldwide” in Zoom blog, November 18, 2020)

Product

The Product domain is composed of three subdomains: product features, product dependencies and value proposition. As to product features, the barrage of security, privacy and platform stability issues that hit the company in the first three quarters of 2020 was a huge wakeup call. Yuan knew he would need to mobilize the company to attack these issues fast, or run the risk of permanent brand damage. As to product dependencies, it was clear that the path to best-in-class security, privacy and platform stability would require the help of a wide range of partners, from AWS to AT&T to LinkedIn and Slack to its independent contractors in China. And as to its value proposition, Zoom continued to position itself as a unified communications platform. But now it was clear that “trust” would need to be embedded in the value proposition.

The company’s product roadmap, with its continuous improvement pathways for every product line ( Zoom Video, Zoom Rooms, Zoom Webinar, Zoom Chat and Zoom Phone), remained relevant — but now security, privacy and stability would take precedence.

Model

There are five subdomains within the Model domain: pricing, unit economics, customer acquisition method, cash flow and competitive moat. By Fall of 2020, it was clear that the first four of these subdomains were proving out much better than planned. The pricing scheme was acceptable to customers. The company’s unit economics were superior, propelled by strong retention and low customer acquisition costs. The customer acquisition method was still evolving. Digital customer acquisition was performing exceptionally well, and the maturity of the enterprise marketing and sales motions was rising. And due to the company’s SaaS attributes and strong customer retention numbers, cash flows were superb.

Now the key was to build up sustainable competitive advantage. Yuan wanted to ensure that once COVID began to recede, Zoom would remain as the dominant leader at the heart of communications worldwide. His journey to the Hot Public Company stage had indeed been a ten-year journey towards rising strategic power, as shown below:

Let’s briefly touch on each of the seven pathways of competitive advantage.

As to cornered resources, Zoom possessed an engineering-driven, customer-centric culture and a CEO ranked by Glassdoor.com as the #1 CEO in the world in 2018, as rated by employees. As to counter-positioning, Zoom Video delivered a radically better communications experience at a significant cost advantage — pricing that substantially undercut competitors. As to switching costs, alternatives such as Google Meets and WebEx make it relatively easy for users to switch — a chink in Zoom’s competitive moat. As to network effects, these are less strong than one might think. Zoom certainly benefits from viral growth — but its network effects are less clear. The platform’s interoperability is a strength, but it weakens network effects because, for instance, in Zoom Rooms some enterprise users can connect via Zoom while others connect via competitive platforms. On the other hand, Zoom’s brand is now a powerful source of global advantage. Zoom has become a verb worldwide, joining a short list (Google, Xerox, Velcro, Photoshop, etc.). So too with systems power. First, the fact that the Zoom platform has encountered so few significant outages despite the meteoric rise in its use is quite impressive and speaks to the quality of its architecture and infrastructure. Furthermore, the pace of product enhancements is proof positive of sound, microservices architected systems under the hood. This is a massive competitive advantage versus competitors who lack such systems sophistication. As to scale economies, Zoom certainly has achieved a level of scale that yields significant cost and efficiency advantage.

Team

The Team domain includes three subdomains: Competencies, Structure / Roles / Objectives, and Culture. As to Competencies, at enterprise scale the most important top team thinking competency is systems thinking (elevating the resilience and agility of the enterprise), with strategic thinking (finding pathways to competitive advantage) coming in second. Design thinking and lean thinking remain important, so as to keep the voice of the customer at the center of smart, agile, continuous development.

Yuan had built a company with a strong customer-centric focus and an engineering mindset. His central focus from the beginning has been the product, and that continues to this day. Everything he has done — from the organization’s design, to recruiting and hiring decisions, to the values embedded in Zoom’s culture — is tuned to deliver a superior product that customers will love. This attentiveness to the details paid off in the crisis, as shown by the way the platform performed under the pressure of explosive demand.

Zoom’s culture is pivotal to its success. In it, the customer is central — but so too is the employee. Yuan has a deep commitment to transparency, and employee growth and well-being. His success in delivering on that commitment has been rewarded. Glassdoor reported that his employee favorability ratings made him the #1 best CEO in 2018, describing him as follows:

“Coming in at number one on the U.S. large employers list is Eric S. Yuan of Zoom Video Communications, with an employee approval rating of 99%. This is the first time Yuan has secured the number one spot, and the first year that Zoom has crossed the threshold from the U.S. small and medium list to the U.S. large list. Employees rave about the mission-driven culture that Yuan has fostered, as well as his transparent communication and focus on professional development, collaboration and employee well-being.” (SOURCE: “Glassdoor’s Top CEOs for 2018 Announced; Zoom CEO Eric S. Yuan Earns #1 Spot”, blog post by Glassdoor team on Glassdoor.com, June 19, 2018).

In 2019, Zoom placed second in Glassdoor’s “Best Places to Work” survey. It was further confirmation of the state of Zoom’s team from top to bottom. In mid-2020 Yuan created a new position, chief diversity officer, yet another sign of his commitment to equity and inclusion, and the success of all employees.

By January 2020, Zoom had 2500 employees, with slightly more than half of them in the US. 700 employees worked in China. New engineering hubs were announced later that year — research and development centers in Pittsburgh and Phoenix, announced in May; and a new engineering hub in Bangalore, announced in July.

Optimize Value and Competitive Advantage in the Core

To remain a hot public company, the enterprise must continue to build new value. Value has a half-life; if you’re not building it you’re falling behind. So too with the pathways to competitive advantage. Since today’s stock price is the investor’s informed guess as to the net present value of a company’s future cash flows, every step taken to strengthen a pathway to advantage increases enterprise value.

By mid-2020, it had become clear to Yuan and the rest of Zoom’s top team that security, privacy and platform stability would need to take precedence over all other product priorities. In April, Yuan froze the release of any new product features for 90 days so as to put everyone to work on the privacy and security gaps. In May, Zoom announced the acquisition of Keybase, a company focused on end-to-end encryption. That month it also published a document on its plans for end-to-end encryption, and encouraged peer review. By June it began offering end-to-end encryption to enterprise users, and by October it extended these capabilities to all free and paid users. In November, the company announced that the data of free users not living in China would not be routed through China — and that paid subscribers could choose which routing path by selecting amongst its data centers in Europe, Asia, North America and Latin America.

Later, in August 2021, Zoom announced it would stop selling new and upgraded products directly to customers in mainland China. Zoom’s connections to China had become a risk to the business. But the focus on security, privacy and platform stability wasn’t the only priority. There was still a lot of fix, finish and fill work left to do with Zoom’s core product line: Zoom Video, Zoom Rooms, Zoom Webinar, Zoom Chat and Zoom Phone.

As to Zoom Video, a steady drumbeat of new features continued to roll out in the period after the IPO. Zoom established native integrations with key enterprise social and collaboration platforms such as Microsoft Teams, Salesforce, Slack and LinkedIn. Now Zoom meetings could be initiated inside of these platforms. And Zoom’s acquisition of Kites in June 2021 enabled language translation on video calls. Features such as improved admin tools and analytics helped spur enterprise adoption. The breakout room feature was also improved. As to Zoom Rooms, new updates included the ability to automatically count the number of people in a room, chat pane visibility and improvements with the touch capabilities. Kiosk Mode was launched in February 2021, enabling people visiting an office to check in with a receptionist virtually via the kiosk. As to Zoom Phone, its capability to provide contact center integration, global call routing and centralized administration wrapped inside a simple business model was proving compelling. New features such as automatic call reporting and shared voicemail were introduced, along with support for multiple lines. In January 2021, Zoom Phone crossed one million phone seats — a key growth milestone.

Discover New Value Breakthroughs via New Products and Business Models

To remain a hot public company, it’s not enough to build out the core. To continue to grow, your product footprint needs to grow. You need to find your way to new value breakthroughs. Furthermore, your business model needs to evolve — perhaps in terms of pricing, but more often in terms of the customer acquisition method and strengthening pathways towards sustainable competitive advantage.

In the decade after its inception, Zoom steadily expanded its product suite. Whereas once there was just Zoom Video, by 2020 there were five major product lines: Zoom Video, Zoom Rooms, Zoom Webinar, Zoom Chat and Zoom Phone. These extended the product footprint into a unified communication platform, one which enterprise-scale customers could trust. More recently it has launched a new product line, Zoom Home, with a hardware and software offering tailored to the home environment. It also has begun to release its own hardware products for Zoom Rooms, a new product extension. Another new product, released in late 2020, is OnZoom, a virtual event marketplace with an integrated payment system. Users can host and promote both free and paid events.

As to its customer acquisition methods, in 2020 Zoom launched its Master Agent program. With this program, sales channel partners gain access to sell their customers the entire Zoom product suite. Within two years the program effectively added 2,000 salespeople selling Zoom products — a brilliant business model innovation. Another innovation was the decision in March, 2021 to allow other companies to sell its videoconferencing technology as a white-label product — yet another way to increase the number of companies and salespeople selling Zoom.

To further strengthen its competitive advantage, Zoom will need to build stronger switching costs and network effects. Zoom Phone holds the promise of advancing switching costs. A phone system is not something the enterprise wants to change very often. So too with the company’s move into hardware-based products (for Zoom Rooms, Zoom Phone and, recently, Zoom Home). As to network effects, there is surely a significant opportunity to leverage all the data streaming from the system to provide the enterprise with optimization analytics. While data network effects are less potent than some, they certainly can provide extra incentive to stay within the Zoom ecosystem. New technologies such augmented and virtual reality could eventually prove to deliver much more powerful network effects, since all users will need to use the technology in a given meeting in order to experience its full benefits.

Phase Out Post-Peak Products and Business Models

One of the greatest risks a hot public company can encounter is to rest on its laurels. As Clay Christensen articulated so compellingly in his book The Innovator’s Dilemma, large established companies are perpetually at risk of being disrupted from below by rising startups offering a pinpoint solution that delivers superior value for its tightly defined use cases at a lower cost. When Netflix introduced video by mail and cut out late fees, Blockbuster didn’t initially respond — because the company already had an established network of stores and late fees were key to the Blockbuster business model. But these failures to respond ultimately killed the company. That is why it’s so important to evolve out of post-peak products and inferior business models.

Zoom initially offered certain security features only to enterprise customers, but quickly realized that they would need to make these features available to everyone so as not to suffer significant brand damage. When a data privacy issue arose with its LinkedIn Sales Navigator integration, it disabled the entire partnership.

Elevate All Systems to Increase Customer Value and Market Impact

At enterprise scale, a company is a complex system. That’s the reason systems thinking is such a critical top team competency at this stage. There are two types of systems that leaders need to optimize: operating systems, such as the revenue engine, the product development engine, the corporate development engine, the accounting engine and the human resources engine; and meta systems — such as company culture and governance.

Zoom has built an impressive board. It features a healthy mix of investors and independent board members. Amongst the independents board member backgrounds include big tech, the military, education, finance and government. Such members as Janet Napolitano, former president of University of California and former secretary of homeland security; Jonathan Chadwick, former CFO of VMWare; and Kimberly Hammonds, former COO of Deutsche Bank and former CIO of Boeing make for an impressive roster.

As to the Zoom management team, seven of the seventeen top executives boast deep technical backgrounds — a reflection of Zoom’s engineering culture.

The Zoom top team understands that with its new global visibility comes great scrutiny. In the face of the security and privacy issues that arose in 2019 and 2020, Yuan committed to provide transparency reports sharing both status and progress in these areas. The first of these was issued in December 2020.

With respect to its corporate development engine, Zoom has made significant acquisitions and other investments. An interesting one is the creation of a $100M funding arm to fund Zoom app developers. This proactive step to stimulate the growth of the Zoom app ecosystem is emblematic of a company committed to remaining a hot public company.

Summary

Zoom’s 2021 revenues were $2.7B, and net income was $672M (its fiscal year ends January 31). Q1 2022 was up 191% year over year at $956M, pointing towards an annual revenue run rate of $3.8B for the most recent reported quarter as of this writing. Zoom continues to be a hyper growth company — in other words, a hot public company. How did Yuan get there? Because he built a superior product. He focused relentlessly on the customer. He discerned their gaping problems and screaming needs, and set to work to bust through the huge boulders standing in the way of product delight. Everything he did was pointed towards that goal: the company culture he created, its engineering mindset, the company’s organization design and its hiring decisions. Though he never chased revenue growth and profitability (he chased customer happiness), he achieved it. You can learn a lot from that — if you focus on the customer and the product, the rest takes care of itself.

For all its advantages, Zoom still has much work to do. It needs to further strengthen its pathways to sustainable competitive advantage, especially in terms of its switching costs and network effects. It has only begun its global expansion; only 18% of revenues come from outside the US. It still needs to figure out how it will grapple with China, balancing its risks with its opportunities. It still has much work to do in the security and privacy domains so as to consolidate enterprise trust, especially relative to competitors such as Cisco, Microsoft and Google. But Yuan and the top team at Zoom seem to be ready to take on the challenge.

Zoom’s story is a living affirmation of the central principles of the Four-Way Fit model. Zoom began on the right foot because Yuan and his founding team had immersed in and ideated about the problem of video communications for years. He knew what the customer sought, he knew how far short the available options fell, and he knew all of the technical challenges that would need to be overcome to deliver customer delight. He worked methodically through the first phase of company-building to achieve an initial value breakthrough, and then he shifted into a continuous cycle of value optimization while carving out and methodically strengthening pathways to sustainable competitive advantage.

To do this, at every company-building stage he went through the “heads up” / “heads down” cycle. Stage by stage, he and his top team first stepped back to look holistically at the business in the four domains of Market, Product, Model and Team. Each time they set the next desired value inflection point and built a plan to get there (“heads up”). Then they acted on the settled assumptions in that plan, while testing any unproven claims (“heads down”). Yuan built a top team that had the right mix of “thinking competencies”: design thinking (customer-centric, outside-in); lean thinking (agile, test/iterate/optimize); strategic thinking (strengthening the seven pathways to sustainable competitive advantage); and systems thinking (seeing the enterprise as a socio-technical system, domain-driven organization design, engineering mindset).

Zoom is the ideal archetype of the Four-Way Fit Model in action.

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