Apress Startup Week: How to Grow Profitably

by Peter S. Cohan

It used to be that investors were happy for startups to lose money as long as they were growing fast enough. That was true until WeWork imploded in November 2019 – with its value dropping from $47 billion last January to $7 billion. Since then investors are demanding that startups master the art of profitable growth.

My latest book, Scaling Your Startup, shows how.  Read on for a case study of a startup that followed my prescriptions and has since enjoyed a successful IPO. As I wrote in my book, too many startups skip the second stage of scaling -- building a scalable business model. They go from the first stage -- winning the first customers -- to the third -- sprinting to liquidity.

The company in question is Zoom Video, a videoconferencing platform provider. Zoom did not skip building a scalable business model because it figured out how to get more efficient at key processes like selling, marketing, service, and product development as it got bigger.

This shows up in its numbers -- for instance, Zoom was not only growing fast but profitable. Its revenues doubled to $331 million in the year ending January 2019 during which it earned net income of $7.6 million, according to its prospectus.

Its costs were dropping as it grew and customers loved its service. How so? In the year ending January 2017, operating expense to sales was 79% -- the same as in January 2019. Meanwhile, Zoom's gross margin increased from 79% to 82%.

At the same time, it has made its product more valuable to customers -- yielding a net promoter score of over 70 in 2018, according to Zoom's IPO prospectus. Zoom does not always add the features that customers want -- but it does listen and execute when it sees a significant market opportunity.

CEO Eric Yuan really cares about Zoom's customers and the ones I've spoken to really appreciate it.

Yuan was lead engineer at WebEx which was acquired by Cisco where he became a VP of Engineering. As he told me, he got so frustrated that he left to start a new company, Zoom, that would solve all the customer problems that he believed Cisco had caused -- and strove to win back those customers with a better value proposition.

Yuan left Beijing in 1997 to be the founding engineer of WebEx. Cisco Systems bought the video conferencing company in 2007 for $3.2 billion and Yuan stuck around Cisco as a VP in its Collaborative Systems group.

In 2011, Yuan left to start Zoom. FORBES reported that Zoom grew 300% in 2016 and raised $100 million in January 2017 at a $1 billion valuation.

Yuan was not happy with the way Cisco was managing WebEx when he left in 2011. As he said, "I was paid very well as a VP at Cisco. But WebEx was my baby. In 2010 and 2011, I did not see happy customers. I was very embarrassed that I spent so much time on the technology. Why are the customers not happy?"

He could not convince Cisco management to fix the problems. As Yuan explained, "Cisco would not change its collaboration strategy. I said I had a different view and left Cisco. 35 to 40 WebEx engineers left with me. Six years later we are doing well with 750,000 customers [up 67% from 450,000 in January 2017]. We are growing thanks to our simplicity, quality, features and price and we have a very high net promoter score of 69."

In February 2019, I spoke with a former Cisco customer who switched to Zoom and he revealed what look to me to be Zoom's considerable competitive advantages -- Zoom understands what this customer wants and its technology and customer service satisfy them better than competitors' do.

How so? BAYADA Home Healthcare -- a 28,000 employee, 32,000 client in-home health care service provider switched to Zoom from Cisco and Skype. As BAYADA application manager Dennis Vallone explained in a February 2019 interview, [Cisco and Skype] have been relentlessly trying to win us back since we switched to Zoom five years ago. We use video and collaboration tools for remote physician check-ins. We need high quality, reliable video in all locations -- not just the ones with high bandwidth. Zoom was the only one that could deliver that. Zoom was easier to use, cloud-based, did not require a hardware investment, and its pricing model -- a freemium pricing model when we signed on -- made it convenient to try without an investment.”

Zoom went public with a scalable business model and its shareholders are reaping the rewards. Should you be doing the same?

About the Author

Peter S. Cohan is Lecturer of Strategy at Babson College. He teaches strategy and entrepreneurship to undergraduate and MBA students at Babson College. He is the founding principal of Peter S. Cohan & Associates, a management consulting and venture capital firm. He has completed over 150 growth strategy consulting projects for global technology companies and invested in seven startups—three of which were sold for over $2 billion. Peter has written 13 books and writes columns on entrepreneurship for Forbes, Inc, and The Worcester Telegram & Gazette. Prior to starting his firm, he worked as a case team leader for Harvard Business School professor Michael Porter’s consulting firm and taught at MIT, Stanford, and the University of Hong Kong. Peter earned an MBA from Wharton, did graduate work in computer science at MIT, and holds a BS degree in Electrical Engineering from Swarthmore College.

This article was contributed by Peter S. Cohan, co-author of Scaling Your Startup.