Three lessons for tech startups from the rise of Zoom
Zoom, the videoconferencing firm, shows how more start-ups can take on the tech monopolies, says Matthew Lynn.
If videoconferencing company Zoom was in the FTSE, it would be one of the top ten companies, slightly behind Diageo and just ahead of BP. If it was in Germany’s DAX it would be in seventh place, and on France’s CAC 40 it would rank ninth. In the last week, Zoom has raced past $75bn in market value. From less than $70 at the start to the year, the shares are now worth more than $260 each. Despite the occasional wobble, it shows little sign of slowing down. By the end of the summer it might be worth more than $100bn.
The company has come from virtually nowhere to become one of the biggest tech brands in the world. The number of installed users on its platform has grown seven-fold since the pandemic started. Revenues are soaring. Its success is great for its shareholders, of course, as well as for the many millions of people who use it every day. But its sudden rise also has some important lessons for every kind of business, and for policymakers as well.
Three secrets of Zoom’s success
1. Start small
First, concentrate on small businesses initially. Zoom was founded in 2011 and showed relatively little promise in its early years. It struggled to raise capital, perhaps because investors could see that it would be in fierce competition with the biggest tech companies in the world. Google, Microsoft, Facebook and Apple all assumed that they would own videoconferencing – and they should have done. After all, Apple and Google make the dominant mobile phone operating systems, Microsoft controls desktops and Facebook owns online communication.
However, one of Zoom’s strategies was to go after freelancers and small companies first and build up from there. It couldn’t grab the huge accounts from multinational corporations to start with. But as the word gradually spread, and as existing Zoom users hopped from small companies to larger ones, the product’s reputation grew. Small businesses and freelancers are not lucrative to start with – but they are a great base to build from.
2. Make sure it works
Second, Zoom built its own technology and made sure it worked perfectly. As Steve Jobs once said, “simple is difficult”, and although that slogan might seem trivial, it is surprisingly often ignored especially in technology. As lots of people found during the pandemic, Zoom is fantastically simple to use. But there is plenty of technology behind that – for example, video quality adjusts automatically to bandwidth, so the image doesn’t suddenly cut out when the signal fades. If you make something easy to use then customers are a lot more likely to try it out – and will stick around once they find it’s reliable.
3. Get the price right
Finally, get the price right. Zoom is free to download, and there are no charges for the basic level. That tempts people in, after which there are paid-for options if you want a fuller service (which most professional users will do quite quickly, and that is where the real money is made). Music-streaming platform Spotify did something very similar with its free ad-funded service, which could then be converted into an ad-free paid-for subscription. It is a tricky model to get right, but when you do, it can be an incredibly powerful model. The trick is to work out what to offer for nothing, and then what services are compelling enough to get people to pay for them. If you can do that, a huge market opens up very quickly.
Competition beats regulation
Very few companies will be able to replicate the scale of Zoom’s success. Without the Covid-19 epidemic it would not have advanced nearly so far or so quickly, and that is certainly not something any of us would wish to repeat. Even so, there are obvious lessons in its rise for incumbent businesses, for investors looking for the next big break-out tech star – and also for regulators.
Monopolies are far less secure than they appear. We hear a lot about how Google, Facebook and Microsoft are way too powerful, and how they have to be regulated more closely, taxed more heavily, or even broken up, to curb their power. And yet, it turns out that they can still be outwitted by a much smaller company. They don’t have a lock on the market after all. We should spend less time trying to regulate or break up the tech giants. Instead, we should spend more time trying to encourage a few more Zooms to chip away at their market with better produ