Reflecting on the Zoom investment: Getting it Right & Wrong

Written by Patrick Eggen, Founding General Partner, Counterpart Ventures

This post is backdated, it was originally published on LinkedIn on April 26 2019 here.

Venture math is simple. If you want to win really big in venture, you need to be right when everyone else is wrong. Typically, the best early stage deals involve the most polarizing internal debates. Last week’s booming Zoom IPO was no exception. I, along with Sachin Deshpande, Nagraj Kashyap and Houman Haghighi was fortunate to lead Zoom’s Series A out of my Early Stage Fund at QCOM Ventures. Without one of us involved, the deal probably doesn’t get done. Ventures is a team game, you win and lose together.

But even though we funded one of the most iconic enterprise SaaS venture-backed companies in the last decade, some of our early assumptions were flawed. With that said, all credit goes to the utter genius and humility of Eric Yuan, probably the most humble entrepreneur I have encountered. But best to unpack the story.

Let’s rewind. It is August 2012. A fortuitous email lands in our mailbox. Bill Tai, prolific seed investor, pens a bullish thesis in green-laden font. Bill praises this obscure video conference product and makes a bold contrarian claim about its future. If Zoom receives the proper funding, this overlooked start-up will unleash a far superior product on the market and steal share from the incumbents. At the time, video conference software was dominated by tech behemoths like Cisco, Google and Microsoft to name a few. We were skeptical to say the least. A new video conferencing entrant at this stage? No commercial data points, massively saturated market, limited funding to enter the SME space (ughh) and founder with no CEO experience. Red flags galore. Many investors turned down meeting Eric. Despite Bill’s unwavering conviction, a polite pass was the rationale response. Often the best early stage investments are often unfundable. But in retrospect, they look like easy calls.

Enter Eric Yuan. We were immediately galvanized by his energy and enthusiasm. Ask anyone who has met Eric. He is probably one of the most likeable people you will meet in the Valley. It is no surprise that Zoom’s culture is so highly recognized these days.

What got us across the line? Answer is simple. Eric’s maniacal obsession to build the best video-conferencing product on the planet, without exception. The fact that 30 WebEx engineers followed him to pursue this vision was further validation. We also had to remind ourselves that no market is ever done. Eric’s journey is a testament to this contrarian philosophy.

While we got it right, humbling exercise to revisit how we really thought about the opportunity in 2012. Sure we could lean back now and tout ourselves as clairvoyant investors, but where did we fumble?

Flash back to our Fall 2012 pre-Series A process and here are just a few anecdotes:

1. We were obsessed with a direct start-up competitor called FuzeBox, whom threw boatloads of marketing dollars behind an inferior product. We thought Zoom needed to blindly follow this strategy. Founder Lesson: Avoid reactive strategy and stay the course. Eric never flinched as the Fuzebox playbook was a distraction. Eric played the long game. Build a far superior product and users will come.
2. We had significant concerns about the team’s lack of business acumen and marketing chops. We completely underestimated the “bottoms-up” viral marketing potential and juicy scalable economics of Zoom’s business model. Founder Lesson: Zoom’s astonishing capital efficiency was a critical value driver. Eric was patient, methodical and refused to make premature investments when his product was not ready for prime-time. His team would be heads down for another year. Today this is very counter-intuitive thinking: Capital efficiency is king. Treat your capital as precious.
3. We scoffed at the initial pricing guidance: $15–18M pre-money range??? I thought it was a nosebleed valuation given Zoom’s current stage. Almost a showstopper for us but we ultimately compromised. In retrospect, what an embarrassingly low discount. Investor lesson: While entry price is very important for early stage investing, optimizing valuation is a slippery slope.
4. Even though we were right early on, we hesitated at the rim and didn’t “double-down” more aggressively in later rounds. Investor lesson: The best early stage capital is patient, sticky capital and when you have a winner — really lean in.

What is the takeaway? Yes, we provided critical capital infusion to Zoom when they absolutely needed it. But all credit goes to Eric and team. This simply underscores the genius, humility and flawless execution of Eric and team. They did things their way. We were simply along for the ride. Now I am more self-aware when I take a meeting with a founder. I mean this both as a responsibility of investors as well an excellent trait for founders to embrace. More miles on the odometer will do that to you.

Fast forward today. Eric only looks ahead and still maniacally focused on creating the world’s best enterprise communication platform. Eric remains both humble and hungry. Post IPO, Eric compared this seminal event to high school graduation. Who wants to peak in high school he asked? As mutual basketball fanatics, Eric once made a similar hoops comparison to me. He compared Zoom to a player climbing the ranks from high school ball, to Division I, to the NBA and ultimately an All-Star at the highest level. Even at this point he still probably admits that Zoom hasn’t made the NBA. As a Philly hoops guy myself, continue to trust the process, Eric.