The Unhappy Middle of the Gig Economy

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An eclectically decorated Uber ride in San Francisco. Credit: Travis Wise via Flickr/CC BY 2.0

Uber, Lyft, Postmates and Deliveroo. Words that are now part of our everyday lexicon.

We can’t deny that the gig economy has changed the world. In fact, I find it hard to remember when I didn’t see hundreds of delivery scooters zipping around the city near our office. Nor do I easily recall when it was unusual to see somebody happily getting into an unmarked car driven by someone they didn’t know. From Brighton to London to San Francisco, our cities are bisected twenty-four hours a day by the journeys of bicycle couriers, delivery mopeds and taxi drivers.

I previously wrote that the explosion of the gig economy over the last decade has been primarily fueled by the money of venture capitalists (VCs) and the software written by skilled and highly compensated software engineers. There is a notable dichotomy between the job security and income of those that are creating this new economy and that of the gig workers that are generating the revenue, one delivery and cab ride at a time.

In the race to rapidly grow and float the companies that supply gig work, huge net losses are generated, signifying high risk for future investors and workers. The gig economy platforms such as Lyft and Uber, in their sprint for market dominance, dramatically undercut traditional companies such as local taxi and courier firms.

However, this furious competition is excellent for the consumer, who gets cheaper, faster and more technologically advanced services. It also creates new unicorns that grow and become immensely valuable for their founders and staff. The VCs and investors that propelled their growth get significant return on their money.

But what becomes of the human beings that generate revenue by driving and biking day and night, come rain or shine? Are the workers an afterthought in this economy? One could argue that the drawbacks of gig work far outweigh the benefits. There is no job security. There is the stress of unpredictable income. There is a reliance on algorithms to get work. Ratings systems cast their judgement.

If labor laws change and these companies cannot operate like they currently do, or if cities and countries ban them altogether, gig workers may quickly find themselves out of a job with no safety net. Comparatively, the VCs expose themselves to little risk through their diverse portfolios. The software engineers can easily find high paying jobs elsewhere in today’s buoyant job market.

The winners at both ends of the socioeconomic spectrum

We all know that gig workers want better conditions. There have been protests and strikes around the world for many years. A common – and privileged – response to complaints from gig workers over their conditions is that if they didn’t like their jobs, then nobody is forcing them to do them. However, this misses important nuances about the diverse demographic that deliver your food and drive you to the airport.

We should partition those that are working in the gig economy into groups based on their motivation. A 2015 analysis published by Uber’s Head of Policy Research found that 51% of drivers work 1-15 hours a week, 30% work 16-34 hours, 12% work 35-49 hours and 7% work more than 50 hours. It could therefore be observed that a comparably small proportion of Uber drivers are responsible for a majority of rides.

Given that a worker chooses how many hours to drive, we can interpret that choice as an indicator of their needs. Considering the gig economy more broadly than cabs and deliveries, the Pew Research Center reported that 56% of surveyed workers were financially reliant on gig work versus 42% that could live comfortably without the income. Given that 57 million people in the U.S. alone are taking part in the gig economy, 23 million people are using it to earn supplemental income are clearly reaping the reward from the existence of additional, flexible work at the press of a button.

Additionally, there have been studies that show that, for some, gig work can be much better than the available alternatives. A 2018 study of Uber drivers in the United Kingdom showed that the vast majority of the UK’s drivers are male immigrants primarily drawn from the bottom half of the London income distribution. Most of these workers moved into the gig economy from permanent part- or full-time jobs and reported higher life satisfaction. Although the drivers are still in a lower income bracket, many are earning more money through Uber than they were before and were able to do so on their terms. A similar U.S-based study in 2017 reported that driving for Uber gave flexibility unmatched by other working arrangements and often greater pay.

One could posit that these two groups are at the higher end and lower end of the income distribution respectively. Those that are non-reliant and use it for supplemental income are comparatively well-off. Those that find it offers better flexibility and pay than other alternatives are presumably in a lower socioeconomic bracket and have less specialized and transferable skills, meaning that gig work is the best overall option for their income and happiness.

The unhappy middle

Anti-ridesharing protests in Portland, 2015. Credit: Aaron Parecki via Flickr/CC BY 2.0

But, regardless of those that benefit from being able to open an app, jump in their vehicle and immediately earn money, the rapid global proliferation of gig work has created widespread friction and controversy. From protests to sexual harassment to mental health issues to suicides, rarely a week has gone by without a media furore. Although our groups above may report some satisfaction with their arrangement, there are clearly many problems, and workers are starting to take action.

The reality of gig economy conditions – often giving workers less rights, equality and pay – has inspired grassroots action through organizations such as the Independent Workers Union of Great Britain (IWGB). Their stance on the gig economy is that it bogusly classes individuals as “independent contractors” in order to deprive them of employment rights. Local branches of the IWGB, such as the Bristol Couriers Network have organized targeted strikes against particular gig economy platforms such as Deliveroo, demanding minimum payment guarantees and a recruitment freeze to ensure that there is enough work for couriers to have a dependable income.

There is a parallel with the controversy over so-called zero-hours contracts in the UK. Also known as casual contracts, the employee is on call to work when the company needs them. They do not necessarily have to be given any work by the company, and do not have to work when asked. On the surface, this seems like a similar situation to those that are doing gig work: it is flexible work that is there for them to take or leave.

However, the Trades Union Congress argues that these contracts exploit workers, stating that the flexibility that they offer is only good for employers and not for the employees. Increasingly unstable economic conditions have seen workplaces replace traditional full-time or part-time staff with zero-hours contracts meaning that staff cannot guarantee their income. It is reported that 2.4% of the working population in the UK are working zero-hours contracts, but two-thirds of them would prefer fixed hours.

According to the UK Government, zero-hours contracts, despite offering unpredictable hours and therefore unpredictable income, do have to ensure that the National Minimum Wage is paid and that workers are entitled to statutory annual leave. In comparison, one could reason that gig work is even less secure, given that there is no guarantee of any income due to the casual nature of the arrangement, and that the pool of available work is regulated by two uncontrollable forces: the amount of demand for the services and the number of other workers competing for jobs at any particular time.

Have we seen this before?

There have been numerous times in history in which workers were flocking to jobs with poor conditions. One notable period was the Industrial Revolution. “Employers could set wages as low as they wanted because people were willing to work as long as they got paid,” notes Ankur Poddar. Poor conditions for workers led to backlash, protests and attempts at unionization.

“Labor Unions formed because workers finally wanted to put a stop to long hours with little pay. They demanded more pay and fairer treatment. They did not want children to work in factories because of the danger involved. Labor unions organized strikes and protests. However, as more immigrants came to the United States, more workers became available. These workers were willing to work, even if others were not because of unfair treatment. This lessened the effect of the labor unions since businesses had no shortage of workers. This is why most labor unions were unsuccessful.”

Does that sound familiar? Perhaps we find ourselves in another transformational period for our economy and the nature of work. The conditions during the Industrial Revolution gave birth to labor laws that underpin traditional employment today. The series of Factory Acts passed in the 1800s in the UK limited the minimum age of workers, the maximum amount of hours per day that they were legally allowed to work, and limited weekend working hours.

In Lee Fang’s article for The Intercept, he argues that the race for Lyft, Uber and their siblings to IPO is partly driven by investors and founders wanting to cash out at the highest possible valuation before labor laws catch up with them and break the model that has given them their multi billion dollar valuations. If Lyft really do lose $1.50 per ride, how much would they lose if they had to provide securities and benefits for their workers in line with those in permanent employment? In fact, when Uber filed for IPO this week their S-1 filing stated that “our business would be adversely affected if Drivers were classified as employees instead of independent contractors.”

The rise and fall of medallions

Licensed NYC yellow taxis. Credit: Jim Pennucci via Flickr/CC BY 2.0.

Despite our rebellious impulse to root for the underdog, our underdogs have now become the dominant players in the market. For all of our hatred of monopolies, the antiquated NYC taxi medallion system that Uber and Lyft has disrupted did hold a number of benefits for those that worked within it.

In 1937, NYC officials decided that owning or leasing a licensed taxi medallion – displayed on the hood of every working taxi – was legally required in order to operate as a driver in the city. The medallion system was installed in response to the chaotic unregulated taxi situation of the early 1930s. The city was flooded with cabs, congestion was rife, and driving was dangerous.

The number of medallions was capped, which in addition to reducing congestion, meant that medallions became very valuable: in 2013 a medallion sold for $1.3 million at auction. Although a taxi driver’s income is moderate, the medallion system ensured that there was predictable income, since people in NYC always want cabs. Purchasing a medallion was an investment, much in the same way that owning a property is. Upon reaching retirement, selling a taxi medallion meant a secure future. However, the disruption to NYC taxis by Uber and Lyft – these legal but unregulated and uncapped taxi companies – has driven down the price of taxi medallions from the 2013 high of $1.3 million to a recent low of $160,000.

A regulated system, despite its flaws, did provide worker security. Now that taxi medallions are not as valuable as they were in the past, yellow cab drivers will have to work out whether in the long term it remains financially viable to keep it, or whether they would be better off driving in the gig economy. According to Uber, the median wage for an UberX driver working a 40 hour week in NYC is $90,766 a year compared to around $30,000 for a yellow cab driver. Assuming medallions continue to decrease in value, then there may be no choice but to switch.

Similar patterns are repeated the world over. The surge and disruption of gig economy work forces those that are currently working in traditional regulated industries to join it. In doing so they subject themselves to less protection from their employer and open themselves up to high risk if they are unable to keep working. If a medallion-holding taxi driver became too sick to continue working ten years ago, selling the medallion would be a reasonable way to exit with dignity. In the present day, our gig driver will have to hope they can find some other means of income.

The potential for a fairer future

Although the outlook of this article could be considered dreary, I believe that within all disruption and chaos comes opportunity. Indeed, there has been a tremendous amount of opportunity for new economies to be created, for companies to thrive, and for millions of workers around the world to find new ways of making an income for themselves and their families. No new and disruptive thing is ever entirely good, but it will, I believe, in the long term, be better for everyone involved; from the customer to the gig worker to the companies themselves.

The question is how we decide to arrive at this better future. Change in the past has come through legislation, such as the Factory Acts of the Industrial Revolution in the 1800s and the NYC taxi medallion system in the 1930s. We see similar legislative progress today, albeit at a pace that is probably too slow to make a meaningful difference. I believe that the creators of the gig economy platforms have a choice that can become a differentiator in how they grow their businesses over the next ten years: how can they use their position of power to become a force for good? Rather than relying on legislation to curb and cap them, why can they not lead the way with changes that benefit society?

Gig economy platforms are technology giants employing some of the world’s smartest people. They have global reach and vast, deep data sets describing the world’s lifestyle habits. Given that consumers are happy with the services provided, how can companies begin to turn their minds towards creating the best possible experience for their workers?

Within the last year, major gig economy platforms such as Deliveroo have implemented insurance for their riders. Other platforms are following suit. But I believe there are more fundamental changes that could help workers thrive and thus attract customers to the services that have worker wellbeing in mind.

The EU recently published guidelines on creating trustworthy and ethical artificial intelligence (AI) systems. These guidelines seek to ensure that systems support human agency and fundamental rights, that they are be used to enhance positive social change, to increase sustainability and ecological responsibility, and that they should consider the whole range of human abilities in order to ensure non-discrimination and fairness. Gig economy platforms seem rife with opportunities to use AI for good. They could create work that supports families whilst also giving workers a better, safer and more flexible working experience that they could get anywhere else.

Allowing workers to identify as full-time and reliant on their income versus being part-time and earning a supplement could bias gig distribution in favor of those who need the money whilst still supporting the needs of both groups of workers. Additionally, the geographical data available within the system could prevent bicycle couriers from having to ride punishing delivery routes uphill or having to carry challenging and dangerous loads. Instead of fueling a subprime auto loan market, ride-hailing companies could offer better incentives to full-time workers to fund purchasing their own car with competitive loans, or perhaps partner with existing car rental networks to allow people to drive without needing to use their own vehicle.

Why should we wait for legislation to make things better? We as technologists should be trying to address these societal problems ourselves. I’d pay more per ride to ensure that I was properly supporting drivers that are reliant on the income. I’d wait longer for my meal to ensure that an appropriately suitable rider and calm route is chosen. Let’s get to it.

Who Pays the Price for Selling $10 Bills for $5?

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Photo: Photos of Money/Flickr.

So how about this: you and me are going to have a competition to see who is the best salesperson. The winner takes home their day’s revenue in cash. Sound good?

OK, you’re in. That’s great. First off, we each need to pick an item to sell. It can be anything you want. Then we are going to go out on the streets and offload as many of them as we can.

Here’s the thing: I guarantee that I am going to win. Why? Because I am selling $10 bills for just $5. I hit the street and after some initial disbelief, I start selling. Word gets out and people are flocking to me in droves. I sell out before I’ve caught my breath.

Let’s see how I did. Units shipped? 10,000. Revenue? $50,000. That’ll do nicely, thank you! But what about profit? Oh, I made a loss of -$50,000. Hmm. But does it matter? My revenue and growth are wonderful, and my happy customers keep coming back again and again.

Something doesn’t seem quite right, does it? Well, despite the absurdity of this situation, it isn’t too far from the truth for the world of tech unicorns.

Who cares about profit?

Growth is everything in the world of tech startups. The industry’s obsession with lists of the fastest growing companies, such as the Deloitte UK Fast 50 and the Forbes Fast Tech 25, paint success as a hockey stick growth curve combined with equally skyrocketing revenue, regardless of the route in which those companies take to get there.

As I’ve written about previously, the pressure to hit these expectations can lead to bad behavior, such as the proliferation of a growth-or-die mindset: some companies strive for growth at the cost of good business practices, the mental and physical health of their employees, and can have a negative impact on society and the planet.

But even if a hyper-growth unicorn has succeeded whilst doing everything right for their employees, there is one key thing that is often an issue. It happened to me above: in my competition-winning sale of $10 bills for $5, I made a loss of $50,000. If you asked many people – especially those not used to analyzing the world of Software-as-a-Service (SaaS) companies – as to whether a business making a significant and increasing net loss was a good thing, I’m sure that they would say that it isn’t.

Yet look at some of the recent filings for the initial public offerings (IPOs) for tech unicorns:

  • Pinterest, who filed on March 22nd, made $755M in revenue in fiscal year 2018 but a net loss of $63M.
  • PagerDuty, who filed on March 16th, made $79.6M revenue in fiscal year 2018, but a net loss of $38.1M.
  • Lyft, who filed on March 1st, made $2.2B revenue in fiscal year 2019, but a net loss of $911.3M.

In fact, Lyft made the largest ever recorded net loss for a company going public. This raises some questions: what does success mean for start-ups? After all, the companies that ring the NASDAQ bell get the global news headlines and the glittering cascades of ticker tape. Companies that our industry and media celebrate as successful are rarely making a profit, unless they happen to be miracle workers like Zoom.

As Bloomberg reports, Uber lost $1.8 billion in 2018 against $11.4 billion in revenue, and Chinese ride-hailing firm Didi Chuxing lost 4 billion yuan ($585 million) in the first half of last year. WeWork lost a staggering $1.93 billion in 2018 against $1.82 billion in revenue.

These companies are not yet public. But when unicorns do float on the stock market it’s not clear if a path to profit is necessary. As Matt Levine writes, one could argue that tech IPOs are being designed in such a way to protect unicorns from needing to go into the black. More companies than ever are offering non-voting stock to the public, such as Snap in 2017 and Lyft recently following suit.

What this means is that startup founders can still retain control of their companies, and make declarations that said company is less about making a profit and “more about some grand mission”. But what kind of grand mission involves losing huge amounts of money indefinitely?

A race to the bottom for those at the top

Photo: Stock Catalog/Flickr.

I once read a tongue-in-cheek description of San Francisco as “an assisted-living community for tech workers in their thirties”. This snide jab pokes fun at the wave of Silicon Valley startups creating services and products for a stereotypical technology worker in the city. Nowhere to park your car? Uber and Lyft can get you around. Too busy working to cook and do grocery shopping? Postmates can deliver your lunch and dinner. Living in an apartment too small for a laundry room? Rinse can do your washing.

These kinds of startups are not simply selling software. They are leveraging software to scale a traditional service economy. Companies such as Uber, Lyft, Postmates and Rinse use their apps to consolidate what would traditionally be plethora of local businesses serving a local area into a singly held global operation.

All of this is fantastic news for the customer; the typically well-paid, white-collar worker who gets the benefit of high tech, efficient, convenient services. These apps are often involved in a race to the bottom through fierce competition. Joe Bloggs, your stereotypical software engineer, is swimming amongst free ride coupons for Uber and free delivery codes for Postmates. But who is really paying the price for this?

The cost of developing good software is not cheap, especially if your software is being developed by a San Francisco based company. The city has the highest average salary for software engineers in the world, with an average starting salary of $91,738. However, wages rise dramatically at well-funded startups in order to attract the best talent, especially since the average rent of a one-bedroom apartment in the city is $3,360, and the high cost of groceries. A software engineer with a few years of experience could be earning over $200,000 taking vesting stock into account.

This leads into a somewhat paradoxical situation: if the cost of developing software is so high, and the services that are being offered are so reasonably priced, who is funding it? Who is losing out as a result?

The race for market domination

The initial question of who is funding growth is typically straight forward: it’s venture capital (VC) firms. This isn’t surprising knowledge by any means: most hyper growth technology companies since the dot-com boom have expanded rapidly by taking on millions of dollars in VC cash in return for equity in their companies.

These investments unlock hiring, opening offices in new locations, large R&D projects and acquisitions of other companies. They are the nitrous oxide injection into the engine. In the race to be the most dominant player in the market, hence securing the best possible valuation for an exit, speed is key.

So what drives the best valuation for the exit of a SaaS company? Typically, some of the most important metrics are as follows:

  • Revenue: The amount of money made through sales.
  • Revenue growth: How much that revenue has increased year on year.
  • Net retention rate: The percentage of customers who stay with the service rather than cancelling.
  • Total addressable market: The size of the market that is out there for the business, i.e. the revenue opportunity for the future.

If we recall my fantastically silly business selling $10 bills for $5, one could argue that I would be doing very well measured by these metrics. After all, who doesn’t want free money? However, I would clearly be in unrecoverable debt after a very short space of time, but I would dominate the market, unless someone sells $10 bills for less.

In the case of real hyper growth companies, VC firms place a bet that if companies are able to grow quickly and become the most dominant force in the market, even if operating at a heavy loss, then eventually that rapid growth will lead to monopoly profits. However, it can often be unclear how a company will become profitable and how long it will take to get there.

Matt Levine writes that one way of viewing the investment of large sums of money into loss making companies selling desirable products at far below cost price is that the VC firms are essentially subsidizing consumer’s lifestyles. That free ride coupon is less thanks to your friend who gave it to you, but more thanks to the deep pockets of SoftBank, Tencent Holdings or Benchmark Capital.

Of course there is risk in this approach: if I have my silly business selling $10 bills at a loss, then eventually I will go bankrupt, and that’s my fault. If I sell access to my subscription software and raise VC money so I can sell it at a loss to capture market share, then eventually I’ll need to stop raising money and start increasing prices or efficiency so I can claw back losses and start making a profit. If that fails, then I lose and the VCs lose.

But what does losing mean to us? Well, for the VCs, it isn’t too much of a big deal. Usually only a small handful of their portfolio companies need to exit well for them to successfully grow their investment funds. Maybe my failure is a drop in the ocean to them. And what about my own failure? Hurt pride aside, the experience was good, and as long as I didn’t get myself into personal debt then there is a whole world of high tech jobs looking to snap up an ambitious ex-founder.

Who are the real losers?

Photo: Berliners on Bicycles/Flickr.

But the startups that were mentioned earlier in the article – Uber, Lyft and Postmates to name but a few – represent companies that have a gig economy at the core of their business. The gig economy describes employment through the “gigs” that a worker does, rather than being given a regular wage. Uber and Lyft drivers get paid per ride and work as much or as little as they like. Cycle couriers such as those that work for Deliveroo in the UK get paid per delivery, similar to Postmates.

When we look at the effect of a VC-subsidized economy, the consumer wins by getting a better service at a lower price. The companies win by growing at an accelerated rate and capturing market share, and the VCs give themselves a better chance at getting a return on their investment. However, the subsidization of services in the gig economy often hits the workers directly.

According to Recode, gig economy workers are earning half of what they did 5 years ago. In summer 2018, Lyft were required by law to pay their drivers minimum wage in New York. Reviews on Glassdoor from Deliveroo drivers highlight a number of issues: workers reporting that they are paid under minimum wage, have no sick pay, have to pay for wear and tear on their vehicles, are not provided insurance by the company, and the list goes on. Similar feedback has been given for Uber, Lyft and Postmates.

One could argue that the gig economy is ideal for people who want casual, flexible part time work: students, retirees, or people who just want to earn a bit of extra money from time to time. However, this view is blinkered: in the UK, 6 million adults were reported to be working full time via gigs. Given that the barrier of entry to gig economy jobs is low – a worker typically just needs a vehicle – one could posit that a high proportion of the workers are those with the least transferable skills and ability to get secure salaried jobs.

This means their livelihood depends on gigs created by subsidized benefits to the customer, leaving them vulnerable. There is no guarantee of earnings. There is no predictable amount of income for a given day or week. Why should gig workers suffer in the quest for ever more market share and a bigger return for the VCs?

We know that the battle for market dominance requires rocket fuel. However, large cash injections are often not enough: instead, they are often coupled with the cost of the product being subsidized so that it really is a deal that is too good to be true for the consumer. For many startups, the subsidy to the customer manifests in net losses for the company and risks for the investors and founders. However given that most tech companies go public whilst making a loss, one could argue this isn’t even that big of a risk in today’s IPO market.

For companies that generate revenue through a gig economy, there is another party that will always lose: the worker. The moped driver who is trying his best to provide for his family, or the bicycle courier who is trying her best to save for college. When their income and rights are compared to those that fund and develop the software, they are truly a second-class citizen.

One could argue that gig economy companies are in a rush to go public before new labor laws are able to catch up with them. Drivers are not classed as employees as it could be “cost-prohibitive”. Instead, they are classified as independent contractors, which allows companies to avoid being bound to legislation requiring that they provide minimum wage, sick leave, health insurance and other benefits that salaried staff would expect. In March 2019, Uber settled a $20 million lawsuit over driver classification ahead of its planned IPO and Lyft filed a lawsuit against New York over the aforementioned minimum wage laws. They lost.

Those with the most to gain should have the most to lose

As traditional service economies get disrupted by technology-based startups, we need to keep the bigger picture in mind. For investors and founders the implications of losing the battle against competition aren’t fatal. There are always other companies to invest in and other jobs for founders to do. For consumers there is everything to gain through the flood of new technology-rich services at a bargain price. However, those in the middle – the gig workers delivering those services – are the ones that suffer.

We need to call for greater cooperation between governments and technology companies to ensure that those that work gigs for the benefit of the customer and the company’s rapid growth are not left to suffer as unequal. They too are part of our society and should have equal opportunities and rights. There is some progress in this area: this year, delivery company Hermes became the first UK-based company to provide trade union recognition for their gig economy workers. But there is a long way to go.

Workers providing these services have little protection . As Alexandrea Ravenelle writes, the gig economy leaves workers open to sexual harassment, and as other news outlets report, the stress of making money with little safety net can cause mental health issues, and in the extreme, can even lead to suicide.

Services should benefit society as well as generating revenue. Companies should have to have the wellbeing of their workers at the core of their business regardless of the importance of their role. We all have bills to pay and the hope of a better financial future.

Let’s ensure that disruptive, high growth, heavily subsidized services are for society’s gain, rather than for those with the most to gain.

Zoom: An IPO Done Right?

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Eric S. Yuan, CEO of Zoom. Photo with credit to Zoom.

On March 22nd 2019, Zoom filed their S-1, the registration form in anticipation of their initial public offering (IPO). An IPO is the first time that the shares of a company are able to be traded on a public stock market. This allows companies to raise more funding through selling its shares and also allows investors and option-holding employees to cash out.

More interestingly, since public companies have to report on their profit and loss, an S-1 filing is typically the first time that a private company exposes their internal workings to the rest of the world. Revenue, growth, number of employees, net loss, you name it: it’s in the document.

S-1 filings are often the subject of excitement and scrutiny on sites such as Hacker News, as keen members speculate and pick apart the inner workings of these so called unicorns: privately held startup companies with a valuation of $1 billion or more.

As the Zoom S-1 appeared online, many of us had to pick our jaws up off of the floor.

Who are they?

What do Zoom actually do? Well, they pretty much do one thing really well: video communications. We’ve been using Zoom at Brandwatch for a few years now, and what others have reflected in the commentary around the filing is true: it does indeed just work. That’s true for video calls with two participants as much as it is for company meetings with hundreds of people dialing in.

Zoom was founded in 2011 by Eric S. Yuan. Previously, Yuan was a founding engineer at WebEx, a video communications company that was acquired by Cisco in 2007. After the acquisition, he felt that the only way to address a number of fundamental issues with the product was to rewrite it from the ground up. Cisco leadership didn’t listen, and the rest is history.

Video communications were, and are, a passion of Yuan’s. As a young man, he used to live 10 hours by train from his girlfriend in mainland China, and would wonder whether there could be an easier way for humans to have meaningful connections remotely.

After realizing he couldn’t make the product he was so passionate about at Cisco, he decided to go it alone and founded Zoom. A number of ex-WebEx engineers decided to join him, and within two years they released their first version of the product. They now have 1,702 employees globally.

Usually we are used to unicorn growth coming at a cost, whether that be high financial risk through large raises, toxic culture or complete dilution of company mission and values. As an outsider looking in, it seems that Zoom hasn’t compromised on any of those fronts.

Let’s dig in a little deeper at some of the interesting and unusual things that we’ve learned from Zoom’s filing, and see why it has attracted a lot of commentary and excitement. Is it truly an IPO done right?

They’re profitable

When the filing was posted online, I did what I usually do: scroll right on down to the second page where a high level summary of the financial data is written.

Our revenue was $60.8 million, $151.5 million and $330.5 million for the fiscal years ended January 31, 2017, 2018 and 2019, respectively, representing annual revenue growth of 149% and 118% in fiscal 2018 and fiscal 2019, respectively.

Wow! But here’s the pinch: those excellent revenues and growth are usually fueled by throwing petroleum on to the fire and running at a significant loss. So, on to the next sentence:

We had a net loss of $0.0 million and $3.8 million for the fiscal years ended January 31, 2017 and 2018, respectively, and net income of $7.6 million for the fiscal year ended January 31, 2019.

…they’re profitable?

Silicon Valley is all about growing or dying. If you’ve got an idea that looks like it’s working out, you soak the company and kerosene and set it on fire: hire like crazy; code like mad; sell, sell, sell. If you don’t, you lose. There’s often one chance to become the dominant company in the market, and you don’t want to concede that chance to someone else who can grow quicker than you, no matter what.

What this typically means is that companies that are teeing up to float on the public markets are operating at a heavy net loss: they are choosing to spend more up front for growth in the hope that it pays off in the future.

Just look at some recent S-1 filings:

  • Pinterest, who filed on March 22nd, the same day as Zoom, made $755M in revenue in fiscal year 2018 but a net loss of $63M.
  • PagerDuty, who filed on March 16th, made $79.6M revenue in fiscal year 2018, but a net loss of $38.1M.
  • Lyft, who filed on March 1st, made $2.2B revenue in fiscal year 2019, but a net loss of $911.3M.

Running at a net loss is often a necessary evil to enable the kind of growth required to get a shot at an IPO, which is why each S-1 form often contains a telling phrase:

“We have a history of net losses and we may not be able to achieve or maintain profitability in the future”

That doesn’t sound too promising, however it’s standard fare in technology company filings. You pretty much gloss over it. However, that phrase was nowhere to be seen in the filing from Zoom. They’re in the black. Comfortably.

The web interface is a second class citizen

If you’ve ever used Zoom, you’ll have noticed that in order to join a video call, you are asked to download the native application. And I’m not just talking about a mobile application; I’m talking about a desktop application. Yes, that’s annoying. And yes, most SaaS companies that have floated let you access their service via the browser, as it is the easiest barrier to entry for most users, and also makes the development process simpler: engineers are only building for one platform.

But not Zoom. Instead, you have to do the annoying thing and install their application, or if you’re at work, have your IT team install it: an even higher barrier to entry. Zoom do offer a web interface, but it has extremely limited functionality, and that’s a conscious choice.

Yet, the annoyance of having to install an application doesn’t matter at all if the service is of excellent quality. And it is. We have held Zoom meetings with hundreds of people dialing in, and the quality of the calls has only ever suffered when we have had problems with our Wi-Fi. We’ve never had any issues from Zoom: it’s impressively reliable. The screen sharing functionality is excellent, allowing our engineers to do remote pair programming sessions with their colleagues on the other side of the world.

I presume that the reason Zoom rely on their users downloading native applications is that it gives their engineers more control over the experience of the service: it can exploit, or avoid, particular quirks with each operating system, and the native applications can be built in such a way that take full advantage of whichever proprietary communications protocols that they have invented.

And although downloading and installing software is annoying, and especially painful in a heavily administered workplace, jumping through the hoops is acceptable because when compared to the utter pain of poor quality video conferencing, it’s barely any hassle at all.

They heavily use data centers

One of the bullet points in the summary of risks in the S-1 is as follows:

Interruptions, delays or outages in service from our co-located data centers and a variety of other factors would impair the delivery of our services, require us to issue credits or pay penalties and harm our business…

Oh, that’s interesting. Co-located data centers? Does this imply that Zoom isn’t completely running in the cloud like a majority of SaaS companies?

Scrolling down further, we see the following:

We currently serve our users from 13 co-located data centers in Australia, Brazil, Canada, China, Germany, India, Japan, the Netherlands and the United States. We also utilize Amazon Web Services and Microsoft Azure for the hosting of certain critical aspects of our business.

Wow, Zoom have physical hardware in 13 data centers around the globe! One could consider this is an “old school” way of running infrastructure when compared to how easy the cloud providers make it to scale and replicate services globally at the click of a button. However, in the same way that delivering their service via native applications gives them greater control over the user experience, not relying on cloud providers to obfuscate important low level details such as networking and bandwidth ensures an excellent level of service to the customer.

They make back what it costs to acquire a customer in less than a year

In Alex Clayton’s excellent breakdown of the Zoom S-1 filing he shows how incredibly efficient Zoom’s customer acquisition is when compared to other companies:

Graph courtesy of Alex Clayton. The y-axis is the number of months that it takes to earn back the investment required to acquire a new customer.

It only takes 9 months for a customer to make the company profit. This almost unheard of in SaaS. Usually first year renewals are critical, as customer churn means net loss. But not Zoom. Every twelve month contract signed is money in the bank.

Their staff are happy

Yuan describes his role as “keeping his customers and employees happy every day.” That certainly seems to be true, since Zoom reported a 72 net promoter score in 2017, and they won an Employee’s Choice Award on Glassdoor in 2018.

Zoom have previously written about their internal Happiness Crew, that take a holistic approach to employee engagement. This ranges from holding office events to organizing volunteering efforts for charities.

Yuan noted that in his past, even though WebEx had achieved success on paper, it had come at the cost of morale.

“…even with 14 years of hard work on [the product], I did not see a single happy customer. Every day, I was not happy. My engineers, they were not happy. Every day, it just felt like ‘Oh my God, what happened?'”

Zoom’s culture and hiring is similarly built around trusted interpersonal relationships. It was previously reported that 65% of new hires had come from internal referrals. Yuan even stated that at the beginning of Zoom, he rarely interviewed anyone: the idea was that if he trusts you, he’ll also trust your friends.

This hiring ethos has gone in a different direction to what would be expected from most Silicon Valley companies, with Zoom preferring to hire for potential and trustworthiness rather than track record. Yuan states that their employees can grow with the company as it itself grows, and everyone can learn the same working philosophy together.

Ding ding ding

The impressiveness of Zoom’s S-1 is less because they’re growing faster than other technology companies. It is inspiring because they’ve legitimately chosen to do business in the best way for both their staff and their customers. The financial success is secondary to this mission, yet it is proof that it can follow a great product and culture. Staff and their families win as well as the users.

Zoom have a simple product that does one thing exceptionally well. But simple is never easy. Putting the user experience first forces some tough engineering choices. They use native applications because it gives the best user experience. They use co-located data centers because they give the best reliability of service.

I think that we have a lot to learn from Zoom. Maybe focussing on building a great product and company is enough, after all. We don’t need to be on fire, or in massive debt, burned out, stressed, or ethically questionable to float. Maybe it can be simple as a video call.

Best of luck when the bell rings, Zoomers. Y’all deserve it.