Zoom: Silicon Valley's sexiest IPO

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For Yuan’s first entrepreneurial act, he burned down his neighbour’s cottage. The son of mining engineers in China’s eastern Shandong Province, as a fourth grader Yuan started collecting construction scraps to recycle the copper for cash. When the young hustler discovered that the facility needed only the metal, he tried to burn away the extra material in a chicken shack behind his neighbour’s house. To his horror, firefighters had to come put out the blaze. Yuan says with typical understatement, “My parents were really upset.”

At Shandong University of Science & Technology, Yuan studied applied mathematics and computer science and, at 22, got married while pursuing his master’s degree. Already convinced he’d start a company someday and fascinated by entrepreneurs like Bill Gates, he set his sights on the US tech boom. It ws easier said than done: After US Customs asked for an English-language version of his business card, it listed Yuan as a consultant, and he was misidentified as a part-time contractor. His visa was denied. For the next year and a half, the now-sceptical immigration services would deny him seven more times. But Yuan refused to give up. “I told myself, Okay, great. I’ll do all I can until you tell me that I can never come here anymore. Otherwise, I’m not going to stop.”

In the summer of 1997, Yuan joined two-year-old Webex in Milpitas, California. As a young employee, Yuan would routinely code all night on a Friday and then go play a pickup soccer game on no sleep on Saturday afternoon. Riding the exuberance of the dot-com bubble and with videoconferencing tools taking advantage of faster internet speeds, Webex went public in July of 2000 and was acquired by Cisco for $3.2 billion in 2007. Not long after, Cisco chose Yuan to lead Webex’s engineering group. But by 2010 he was unhappy. The problem, according to Yuan: The service simply wasn’t very good. Every time users logged on to a Webex conference, the company’s systems would have to identify which version of the product (iPhone, Android, PC or Mac) to run, which slowed things down. Too many people on the line would strain the connection, leading to choppy audio and video. And the service lacked modern features like screen-sharing for mobile.

“Someday someone is going to build something on the cloud, and it’s going to kill me,” Yuan told Bill Tai, a venture investor who became one of the first backers of Zoom. After a year of pestering his bosses to let him rebuild Webex, Yuan gave up and decided to leave Cisco in 2011. “Cisco was more focussed on social networking, trying to make an enterprise Facebook,” he says. “Cisco made a mistake. Three years after I left, they realised what I said was right.”

The biggest hurdle was convincing his wife, who saw him throwing away a lucrative job managing 800 people: “I told her, ‘I know it’s a long journey and very hard, but if I don’t try it, I’ll regret it.’”

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First Yuan asked friends, including fellow investors in a consumer video app called Tango, to write him $250,000 cheques so he could pay 30 engineers to work on a new idea: Create better technology for video communications, then figure out what app to build on top. Mostly because of their faith in Yuan, the investors, including former Webex CEO Subrah Iyar, gave him $3 million for his startup, which was then called Saasbee. “Everyone in venture capital thought it was a terrible idea,” says Jim Scheinman of Maven Ventures, who as one of the company’s first backers came up with the name Zoom.

Within months, Yuan realised he wanted to target the videoconferencing business again. The VCs had reason to be sceptical. With Microsoft owning Skype, Google in the market via Hangouts and Cisco still leading in market share, videoconferencing had entrenched incumbents; there were also multiple startups, including the well-funded BlueJeans Network. “It would require flawless execution to win,” says one investor who passed on Zoom. Even at Qualcomm Ventures, which led Zoom’s $6 million Series A investment in 2013 alongside Yahoo co-founder Jerry Yang, there was “lots of internal debate”, says partner Quinn Li.

From rundown offices in Santa Clara, with an oft-broken elevator and a mission-crucial video camera perched atop a cheap fridge, Yuan and the US members of his team quietly worked on their product for nearly two years. When Zoom launched, it had several key differences from the crowd. Its lightweight Web client could figure out almost instantly what kind of device you were using, meaning Zoom didn’t need different versions for Mac or PC. It also provided a software layer that shielded any bugs that might be introduced when a browser like Chrome, Firefox or Safari pushed an update. Zoom could operate even at 40 percent data loss, so it would still work on a spotty or slow internet connection. And at $9.99 per host per month (now $14.99), it undercut its rivals. Zoom’s customer service chief, Jim Mercer, was working at competitor GoToMeeting when a colleague opened a Zoom account to see what the hype was about. “One click, we were in, and there were 25 feeds of participants at the same time,” he says. “We were like, ‘What is this voodoo? How are they doing it?’”

After raising another $6.5 million from Li Ka-shing’s Horizons Ventures, Zoom raised a $30 million round from Emergence Capital in 2015 (Li, Hong Kong’s richest person, remains a frequent user of the tool, a rep says). Soon after, Zoom began to target larger corporate clients. Yuan stunned partners at Emergence when he showed up for his pitch meeting and promptly insisted every investor download the Zoom app and join him for a live videoconference of the presentation, partner Santi Subotovsky says. Yuan shocked them again when, approached by large corporations that year, he warned these potential customers that Zoom’s features might not be ready for their business. But after scooping up many of the fast-growing companies in its backyard in Silicon Valley, like Box, Slack and Uber, Zoom broke out of tech in 2016 and now manages accounts such as Gap Inc. and Williams-Sonoma.

At Phoenix Children’s Hospital, staff attend meetings, host surgical case conferences and work with patients over Zoom. Annoyed with a more complicated predecessor, Phoenix Children’s tested Zoom for nearly four years and now has 464 staffers registered on it. For kids who are facing long stays, the hospital has provided them Zoom accounts and iPads to meet with each other in virtual support groups and help them attend school without immunological risk. “Being out of school for too long, it can lead to them not graduating,” says Rachel Dunagan, an A/V tech at the hospital. “With Zoom, they can be live in the room, interacting with the lesson and their class.”

By the time Sequoia backed Zoom in a $115 million Series D round in early 2017, valuing the company at $1 billion, the famed venture firm had been fighting to get a piece of it for more than two years. “We were going through all the due diligence, and I remember saying there have to be a thousand Eric Yuans in the world, because everyone we spoke to, they knew Eric, big or small,” Sequoia partner Carl Eschenbach says.

Yuan’s secret for being everywhere: Zoom, of course. His habit of taking the most important meetings virtually started because of basketball. A diehard NBA fan since moving to the US, first of the Lakers’ Kobe Bryant for his work ethic and then of his local Golden State Warriors, Yuan made a point of attending all of his three kids’ basketball games and gymnastics meets. One unique Zoom feature is a virtual background the user can change to show a logo or image, disguising where they really are. Last summer, his eldest son, now a graduating high school senior who set the local league record for three-point shots, had a tournament in Los Angeles. “I set the background as the Santa Barbara beach, and they all thought I’m there. After the meeting, I swipe,” revealing a sweaty high school gym. “And they all say, ‘What?’ ”

Yuan’s love of basketball led him to make room for a celebrity investor from his beloved Warriors last year, but it was Andre Iguodala, a veteran role player, not a star like Steph Curry or Kevin Durant. “We had a great conversation on how my game relates to his business, doing the little things right,” Iguodala says. The feeling, both say, is mutual: Respect for a professional who wins by putting team before ego.

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Two months before the IPO, Yuan walks through the sales and engineering departments of Zoom’s newer San Jose headquarters. The elevators finally work in this one, but it’s still somewhat dingy: Yuan decided he wanted a space close to the Caltrain and leased it pre-furnished to save on costs. It’s the Chinese New Year, and Yuan hands out little red envelopes to any employee who looks up, calling out most by name. “Don’t open this,” he tells one group with the smirk of a dad teasing his kids. “After we leave, then you open them. It’s a lot of money!” For Zoom’s 1,700 staffers today, many of whom became multimillionaires in Zoom’s IPO, the payoff is a gag: One crisp, “lucky” $2 bill.

Yuan’s public-facing thriftiness serves a secondary message: What matters at Zoom is the product, not the perks. He shares his office with his product chief and old friend Oded Gal, a fellow Webex veteran he hired away from BlueJeans Network three years ago. But you’ll seldom find Yuan there. A few times a year, the CEO takes sits at a temporary desk with a team he wants to focus on. Yuan’s been with the engineers since Zoom announced a voice product in October, now called Zoom Phone. It’s one of several major product lines Zoom has touted in recent months, alongside an update to its conference room bundle called Zoom Rooms. Though an increasing number of Zoom’s users log in via smartphone—one out of six today, Yuan says—many big firms still depend on hardwired conference rooms. Zoom provides the software; partners like Dell, Logitech and Polycom supply the TVs, cameras and speakers. It’s a move Yuan thinks is strategic to winning over large customers whose CEOs spend lots of time in virtual meetings.

Though Zoom isn’t making hardware, its bundle smacks of the stuff sold by Yuan’s ex-employer, Cisco. There’s some irony to that, as last year Cisco shook up its Webex unit—it now looks more like Zoom. It reorganized under a new leader, Microsoft veteran Sri Srinivasan. His mission is to revitalise Cisco’s collaboration products, with videoconferencing one of several factors. And he’s happy to throw some shade. “Zoom is apples and oranges,” Srinivasan says, and offers “fledgling” solutions beyond its core desktop-to-desktop video tools. “They’ve done a pretty good job in their own right, with a bunch of borrowed resources from Webex.”

Zoom management waves at employees tuning into Times Square on the morning of its April IPO
Image: Kena Betancur/Getty Images

A revitalised Cisco—as well as Google, Microsoft and even potentially Apple and Amazon—threatens Zoom just as it did in its early days. While Zoom has claimed to work with at least 90 of the Cloud 100—Forbes’ exclusive ranking of the top private cloud companies—some corporations, like Sony, have resisted the move to Zoom as too complicated to set up at large scale. At GM and Verizon, for instance, teams use multiple solutions that don’t include Zoom. Others, like Ford, use Zoom, but only for a handful of people. Even at Qualcomm, which owns a piece of the company, you’ll find Cisco and Microsoft. “People just have a solution they already pay for,” Qualcomm Ventures’ Li says.

As Zoom adds features and larger accounts, with some companies simultaneously hosting thousands of people across multiple chats, the company will need to be careful not to cut corners and damage the product. In January, Zoom suffered a high-profile service outage, which it blamed on Amazon Web Services, but all people saw was that Zoom’s app didn’t work. “It’s like a restaurant,” Yuan says about a similar glitch with a third-party vendor. “When a customer walks into a restaurant, until they leave, the entire experience needs to be great. You can’t blame anything on anyone else.”

But, of course, it can cut both ways. When Facebook went down in March, the New Zealand House of Representatives streamed its committee meetings over Zoom instead of Facebook Live. And in its regulatory filing with the SEC before going public, Zoom noted that more than half the 500 largest companies in America had at least one paid seat on Zoom but few had signed large contracts, suggesting an avenue for significant sales down the road.

Then there’s the international market, where Zoom did just 18 percent of its business in its last fiscal. Expansion into markets with the most demand for Zoom—the UK, Japan, France, Germany and Australia—presents a ­natural future angle of attack. Zoom is furthest along in Canada and is studying it for its next phase of growth. And after Yuan, ever thrifty, spurned the chance to buy the Zoom.com address in the company’s early days, opting for the cheaper Zoom.us, Zoom quietly acquired it last year for $2 million, a domain that could prove valuable in disassociating the company from the US in touchy overseas ­markets.

China remains a wild card. Zoom has more than 500 engineers there, rare for a US company. But China is an unproven market for the enterprise business, Yuan says. Still, its employee foothold in the country and Yuan’s personal connections could help Zoom make the jump.

If Zoom hopes to become as big as Cisco someday—the San Jose company booked $49 billion in sales last fiscal, and its stock is trading near a 20-year high, generating a market capitalisation of about $250 billion—it will likely need to offer far more than video.

One likely area for a bigger push is data. Zoom already connects customers to other services to record and transcribe its conference calls and help sales reps flag patterns of interaction that might suggest a deal is close, from an ideal time to chat or the duration of a call. Similar tools could help marketers, product developers and customer service reps learn from their Zoom meetings in future, too. And Zoom has powerful friends for that push. Atlassian and Salesforce are two enterprise software leaders that have invested directly, and others, like LinkedIn, have made Zoom a preferred partner.

In the meantime, don’t expect Yuan to let his newfound billionaire status go to his head. He may drive a Tesla, but only because he sees the company as a lot like Zoom—it’s designed differently and it’s faster under the hood (plus Tesla is a customer, too). Back in his cubicle the Monday after the IPO, he’ll keep trawling the Zoom Twitter account for customer testimonials to retweet. And he’ll expect employees, who turned out around the world for the IPO ceremony to wave to their boss over a live feed in Times Square using—what else?—Zoom to follow his lead. A mentor once told Yuan the IPO would be like graduating from high school. “You go celebrate one day, and that’s it,” Yuan says. “You don’t want high school to be the peak of your performance, right?”