3 the explanation why almost every VC investor passed on Zoom

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3 the explanation why almost every VC investor passed on Zoom

Startups can learn a lot about fundraising from the mistakes made around Zoom We now live in a Zoom world.

Since founding the now-iconic video-conferencing firm in 2011, Eric Yuan has elevated Zoom to one of the successful SaaS businesses in the latest history. With 400,000 paying customers, $600+ million in quarterly revenue, and a market cap north of $100 billion, Zoom is ubiquitous in post-pandemic 2020.

But when Yuan was raising his Series A round back in 2012, dozens of institutional venture capital corporations — including these targeted on early-stage, cloud, and mobile deals — passed on Zoom. Why, and what can buyers and entrepreneurs be taught from these reasons?

Zoom’s early days

Yuan left his job at Cisco’s Webex to launch Zoom in 2011 as “Saasbee.” After the launch, he raised $3 million in seed funding from Bill Tai, TEEC Angel Fund (now known as TSVC), Subrah Iyar, Matt Ocko, and Jim and Dan Scheinman.

In December 2012, newly-renamed Zoom finally managed to shut a $6 million Series A round from Yahoo founder Jerry Yang and the strategic venture fund Qualcomm Ventures, along with Iyar, Ocko, and Scheinman.

But over the course of that yr, each other VC agency Yuan approached handed. In hindsight, why did so many buyers miss out on the one best-performing SaaS firm in the past decade?

Motive #1: Misunderstanding the video conferencing market

Venture capital buyers search for distinctive methods to exploit untapped market alternatives. On this case, buyers assumed the teleconferencing market was crowded and nicely served by corporations large (Microsoft, Google, and Cisco) and small (GoToMeeting, BlueJeans, Join. me, and FuzeBox).

“At the time, Zoom was simply an idea in a seemingly very competitive video conferencing house and most buyers incorrectly thought that the present products like Skype, Webex, and others have been fixing this problem,” Jim Scheinman wrote.

The main investor concern stemmed from a perception that this market was mature, rather than ripe for disruption — as Yuan defined to anyone who would listen.

“Most VCs is not going to give the time of day to corporations they understand to be entering mature markets,” Invoice Tai explained to me once I asked him through an email.

Based mostly on his 14+ years at Webex, however, and after rising its income from $0 to $800+ million, Yuan knew there was a massive latent alternative. The market wanted “a brand new product to attach individuals head to head throughout the globe built for the new cell cloud ecosystem,” according to Scheinman.

So, how did this particular opportunity go unrecognized by well-informed VCs in 2012?

As Invoice Tai defined to me, “VCs did perceive that the cloud may make issues a bit extra environment friendly however may not see that it’d change issues SO a lot that it may create a tipping level to unify this explicit market.” Certainly, just about everybody underestimated the tipping-point impact and drastic market implications of Zoom’s strategy.

Reason #2: Overlooking the power of Zoom’s bottom-up model

One of many causes behind Zoom’s explosive progress — each before and especially after COVID-19 — is its viral, bottom-up enterprise model, following within the footsteps of the thriving consumerization of the enterprise pattern. The ability of this mannequin was, truly, well-known in 2012, with the momentum of corporations like Dropbox, Yammer, SurveyMonkey, and Cloudflare.

Regardless of these apparent successes, VCs struggled to see Zoom as a viable participant, largely as a result of “the video conferencing market was seen as ossified,” in line with Tai. In his view, different bottom-up corporations like Dropbox and Yammer gained credibility as early entrants that had a shot at defining a new market to develop into the major player of their respective rising segments.

But Tai explains why VCs struggled to attach the dots from this enterprise consumerization theme to Zoom.

“There was large doubt that there could be enough worth creation, even when it labored. Many assumed Zoom would by no means be capable of getting clients to pay sufficient within the face of free merchandise from Microsoft and Google to create an organization helpful sufficient to [justify] bringing a brand new cloud-based product to market.”

Former Qualcomm Ventures associate Patrick Eggen concurs although it didn’t stop them from main Zoom’s Sequence A spherical: “We had important issues about the crew’s lack of enterprise acumen and marketing chops,” he writes. “We utterly underestimated the ‘bottom-up’ viral marketing potential and juicy scalable economics of Zoom’s enterprise model.”

This misread of the company’s true potential — together with anxieties about how Zoom would dislodge the entrenched incumbents — was sufficient to dissuade buyers.

Cause #3: Underestimating Eric Yuan and his team

Reflecting on his initial VC fundraising challenges, Yuan recalls, “[When I left Cisco], I assumed, ‘I was part of Webex’s success story. [Now] I’ll construct a new resolution. For sure, I’ll discuss to VCs, and so they all will invest.’ I was very wrong.”

By all accounts, Yuan has at all times been a skillful, product-obsessed chief “who wished to build an iconic firm with a particular culture, and who put together an ideal early crew,” writes Scheinman.

Again in 2012, however, Yuan was unknown.

He was “humble and hungry,” Eggen remembers. “We were immediately galvanized by his vitality and enthusiasm… [and his] maniacal obsession to build the best video-conferencing product on the planet.”

What made Yuan along with his team of engineers and product managers stand out to Tai, Scheinman, and Eggen was each the breadth and depth of their skills and capabilities.

“It was clear to me in 2012 that Eric and his crew have been nice at supply, and iterating quick and fixing points as quickly as they have been recognized,” Tai instructed me. “Additionally, that they had capabilities up and down the stack — soup to nuts from infrastructure within the cloud, to internet interfaces, all the best way all the way down to machine stage software.”

These seem like the ideal traits an investor would search for — each then and now. So why were they missed by VCs on the time? “It’s simple for someone to show Eric down because his English wasn’t perfect, he wasn’t in his 20s or 30s, and he wasn’t a CEO earlier than,” Eggen told Business Insider.

Moreover, these buyers were merely not digging previous questions about the story and market opportunity to fully admire the strengths of Yuan’s crew and their visionary product. “The VC group was so negative on the market dynamics that they never even bothered to get to know the team,” explains Tai.

Continued success eventually leads to significant funding

It wasn’t until over two years later — after increasing its business customer base to 65,000 and reaching 40+ million meeting contributors representing 1 billion meeting minutes — that Zoom was able to close its first significant venture capital spherical.

4 intense years after founding, Yuan closed a $30 million Series C round led by Emergence Capital in February 2015, with different VCs (including Sequoia Capital) ultimately investing as nicely. Ever since, Zoom’s growth has been straight up and to the right, which actually resonates with all investors.

Zoom is the fastest rising video conferencing solution ever and is now considered the definitive market chief. For Yuan, his team, and a small group of early investors who made profitable bets on this onetime underdog, the result is fairly rewarding — in more ways than one.

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