SaaS Moats And Key Factors, With Industry Veteran Justen Stepka (Podcast Transcript)

Summary

• We continue to follow the software as a service sector and the impact of the work from home world, but this time with an outside perspective.
• Justen Stepka, a tech investor/founder/longtime product management, joined us to talk about his positions in Slack and Atlassian and what makes the companies stand out.
• He also shares his views on the work from home environment we're in and its potential knock-on effects, as well as what he's seeing in private markets.

Editors' Note: This is the transcript of the podcast we posted Friday. Please note that due to time and audio constraints, transcription may not be perfect. We encourage you to listen to the podcast, embedded below, if you need any clarification. We hope you enjoy.

Daniel Shvartsman: Welcome to The Razor’s Edge. Dan Shvartsman joined as always by Seeking Alpha author, Akram’s Razor. As you know, The Razor’s Edge features ideas Akram’s following personally in his investing on his Marketplace Service also called The Razor’s Edge. I bring a generalist stance and we kind of suss out the ideas, figure out what goes into them, what the research is, why Akram feel strongly or unsure about certain things from where I come out as well.

You can check out Akram’s Service, Akram’s Razor on Seeking Alpha’s Marketplace type in Razor or Akram or the The Razor’s Edge on any search bar on the site or go to seekingalpha.com/marketplace and you will find the services.

We’ll bring you a guest today onto the Podcast, Justen Stepka. Justin has spent over 15 years in the software-as-a-service space, the SaaS space, Co-Founder and Co-CEO of Enterprise Fund, a private equity firm focused on startups. He also worked at Docker (DOCKR) for four years. Prior to that, he founded Authentisoft, Internet security startup, then sold that on to Atlassian (NASDAQ:TEAM), where he went to work for nearly a decade.

On the last episode, Akram and I talked about the SaaS space with a focus on Slack (NYSE:WORK), Zoom (ZM), PagerDuty (NYSE:PD), as well as relative valuations in the space and just what’s going on overall. So we’re going to add another perspective today from somebody who has seen key players in the space from the inside and up close.

Before we began our usual disclaimer and disclosure, The Razor’s Edge is a podcast on Seeking Alpha’s the Investing Edge Channel. The views discussed belong to either Justen, Akram or me, respectfully. Nothing on this podcast should be taken as investment advice of any sort. We’ll disclose any positions in any stocks discussed at the end of the podcast upfront.

I’m long Google (GOOG), which often comes up, but none of the conventionally discussed SaaS names. Akram is a long PD, WORK, Facebook and Twilio, at least was last time, I guess, I should have double checked. Justen is a long Team, WORK and Amazon.

Listen to or subscribe to The Investing Edge on these podcast platforms:

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So, guys, good morning. How are you guys doing?

Justen Stepka: Good morning.

Akram’s Razor: Good morning. Good, good.

DS: So, Justen, let’s start with – we talked about Slack and Zoom last time. You were at Atlassian for a long time and still own shares. Obviously, we’re talking before the podcast quite bullish on the company. I think Atlassian and Slack especially have a lot of interesting overlaps. I know for us as a company, Atlassian is super well integrated into Slack with JIRA. I don’t think we have Trello integrated. But they’re both really workplace management products to a certain degree.

And so – and they competed with each other HipChat, which was something we joked about last time. We also used it at Seeking Alpha at some point. I’m curious what your – how do you view the way these companies stack up you own shares in both? So you like an Atlassian venture event invested in Slack themselves. But – how do you make the – this competitive positioning or the relative positioning of these companies?

JS: Yes. I mean, as you said, I’m very bullish on Atlassian and I’m equally as bullish on Slack. You guys touched on it a little bit in your last call or podcast in terms of the integration play that both of these companies have. And I agree with that quite a bit. And the reason that I like that sort of moat that these companies have is, because once those integrations or workflows are part of your business processes, they just simply don’t get [indiscernible].

And through that thesis you guys laid out on the last call, maybe a week or two ago Atlassian acquired, I’m not really sure how to say it, it’s like HALP, but it’s – they switched the bow like every other tech companies HALP. And so, I mean, they’re going all in on that strategy that you guys laid out where you build this marketplace, you build these integrations. And once these things are in place and people want to change something, it just becomes too hard in order to rip out the electrical wiring in the walls basically.

And so when I look at these two companies, and I look at the leadership of these companies, and I look at the spend on R&D that they do, which is well above almost every other company in their group, I just think that there’s just so few companies out there, like these two companies that are going to have tremendous growth over the next coming years.

DS: The R&D things are interesting, because that was something like, Akram made the point that at – on one perspective, Zoom, for example, is really on track, because they’re already profitable. On the other hand, when you look, that’s partly, because they’ve got a engineering team in China. They don’t have to spend as much relatively on R&D.

When you talk about high R&D as an essentially building a moat, you’ve sort of seen it from the inside with Atlassian, obviously. But how do you as an independent investor now determine that that’s actually going to good use, like how do you see that, that plays out and that it’s adding to the wiring in the walls that makes it so hard to rip out these companies and gives them protection from other players coming in?

JS: Well, I mean, in the case of Atlassian, I was there for a long time. And one of the things that you just have to have in order for a company to be good as leadership, and I’m very familiar with Mike’s position like the Co-CEO of Atlassian, that every dollar spent on R&D is a benefit for their customers and they take care of their customers and it’s going to take care of the stock price.

Whereas later in my career, I worked at Docker, I watched R&D get starved. And not appropriately investing in the R&D sitting there watching it and doing it, you can see the value difference in terms of what the customers get. And so it just become part of the way in – with how I evaluate these companies. And so when you do that, the customer benefits, and, as I said, or as Mike said, when the customer benefits the stock price.

AR: So the interesting thing there, Justen, which is actually, I hadn’t even thought of it this way. Zoom CEO, his entire literally, ethos is customer happiness. When I think about it, because you just made a good point in terms of investing in the R&D. Like I’ve been on, I don’t know how many Zoom calls in the last three months.

I – like I haven’t created a Zoom account. I don’t have any stickiness to the application. Daniel is recording the podcasts on Zoom. People just send me a link, like let’s just say, well, you just got a link or an invite. I know it’s there. I don’t know where it is. It’s somewhere in the computer. Like, it’s just – it takes care of business in the background.

Now that’s amazing from a user interface standpoint, and like a simplicity and like frictionless and all that. But when you come back to it from like a stickiness element, is that something that is a bit of a problem, or do you even know it’s there? Are you actually a customer? Because this has been a big debate.

When Zoom reports June 2, and you and I have talked about this, the range of expectations and what are they monetizing? How much existing customers? What’s the meeting participant? If I’m on it five times, no one really knows what’s translating into bottom line for Zoom.

And we got into that on our podcast and we actually be interesting to hear your opinion, because you are making a point on R&D. And I – when I looked at Zoom last year, and when I bought Zoom at the end of last year, November or whatever, ahead of their earnings at Q3 thinking that maybe we’d get a guide – the early guide for fiscal 2021.

A lot of my thinking was still grounded in that environment of Slack got teams on its ass, the market hates that. Zoom is – no one is sitting here saying WebEx, but WebEx, Zoom is making money. Zoom has got much higher ROI. Zoom’s margins are this and Zoom’s margins were like, that like that kicker versus a Slack who is spending on R&D.

But then when I started looking at these from the work that I did in January in terms of Uber switching, what I was doing in terms of looking into PagerDuty, Apple going all in and the implementation guy pointing out that they want to integrate it with Slack to use it for like on the go, on the fly, customer support and stuff like this. That’s when you look at it and you say, “All right, well, wait, maybe Zoom is just underinvested and there’s zero mode.” Relatively speaking, yes, from a marketing standpoint, and I think it was you who made that comment, about the Zoom marketing?

JS: I did. Yes.

AR: What do you have to say about all this?

JS: I – look, I think stickiness matters for sure. Churn rate is a variable that is very closely monitored, at least, any – on any product that I’ve worked on, and as well as Net Promoter Score, NPS. And the thing about it as if you lose 1% of your customers every year, you’re going to lose 10% and you got to make those customers up.

And so, in the case of Slack and Atlassian, all things aside people making fun of JIRA and not liking it. When you look at the customer numbers of these companies, and you look at the retention rate of these companies, they just continue to go up. So that – I mean, they are very sticky. And you can see that sort of play out with Slack versus Teams. Teams, it’s just been given away.

Microsoft has these. I mean, we work with them quite extensively at Docker. They’re just giving credits away in order to convince people to move to the cloud. I mean, they are absolutely trying to transition their business model. I mean, if you look at the last earning call, it was 52% growth for them. And part of that play for them is giving away teams, they need that sneakiness and they need people to like it.

I do a bit of volunteering for young people that are trying to break into the tech industry. And I’ve talked to them about what tools they use and what are their workflows like and questions like that. I mean, they can’t stand keeps. I mean, there’s a guy at PayPal (PYPL) that I work with, they have Slack and they have Teams and the company has gravitated towards slack.

And so, I think the stickiness of that particular product is going to be around for a long time. And I would agree with your thesis on the last call where it is extremely undervalued on a P/E ratio going forward against the other cloud players.

DS: What – what’s interesting about that is also the fact that we talked about R&D dollars. And I mean, I pulled it up, Microsoft spends something, I’m not doing all the math in my head, but something – almost 40 times or probably 40 times what Slack does in R&D. And obviously, Microsoft has tons of other product lines.

But I’m curious with this – the interesting thing and we talked about this last time with Akram’s article from last summer. But once upon a time in tech is about eventually these companies start bumping into each other and then also if they’re attractive enough, a big player comes in? And so we’re seeing that obviously with Zoom. Everybody is now saying, “Oh, yes, here’s you want video, here as video conferencing, we can do that too.”

How do you like – and I’m actually not aware of who, if any of the bigger players are targeting Team. But Team, Atlassian has targeted at various times you mentioned Slack. We also – Akram’s talked a lot about PagerDuty, and what the Opsgenie purchase and how that hasn’t played out yet?

What do you see happening or what do you see as far as an upstart that actually ends up becoming sort of an incumbent? What makes the difference? Why is it that [indiscernible] upstarts are able to keep their competitive advantage against some of these bigger names, which in theory could blow them out of the water with spend, with reach, with everything else?

JS: Yes. I – there’s one – well, the first thing I would say about Slack and Zoom versus Google offering video and Google gave up on video. I mean, it’s made a return, obviously, because it’s something everybody needs right now. But that’s the work for Slack. They only do [indiscernible]. That’s their focus. That’s what they’re going to be good at. They are determined to know their customer more. They’re determined to figure out what is the best way or the best product that they can deliver for their customers.

Microsoft, to point of their R&D is, however, many times bigger than Slack. I mean, that’s spread across so many different product lines. And inside of that company, they will have prioritized the ones that they think make the most sense, and that’s where the real energy and thought processes are going go to.

Now, in terms of companies are up and coming in competitive, you can look at a company like Trello. Trello, in my opinion, was the biggest existential threat to Atlassian in the history of the company. Atlassian went out and bought it. You can talk about that there’s Asana and other things like that out there, but I just don’t think that people really want to use that product the way that they want to use Trello. And when you see something like that, you’re going have to out R&D them, or you’re going have to acquire.

AR: So like in Atlassian’s case, Trello, Confluence big success, right? But they did try to compete against Slack. I think that – I think from your standpoint, actually, it’s really interesting in the sense that, Atlassian tried to compete against Slack and we talked about HipChat. And they…

JS: I can tell you why on that, actually.

AR: Go ahead.

JS: So I brought in HipChat is the acquisition at Atlassian. Well, the one that’s first suggested it and a lot of other people worked on it. So I don’t want to say. When you build software, there’s just a certain number of things that you need. You need an Issue Tracker, you need to build server, you need to place to store your code, and you need a server. And one of the things that we needed was chat.

And the reason for this was traditionally Atlassian had put all of their development teams in a single location. And you just have these huge pods inside of various offices. And then you would just use that as a multiplier effect in order to get me done. It wasn’t – there was no fragmentation of the team members.

But when we acquired Bitbucket, we needed a chat tool, because the team that was managing was spread across two continents. And so we bought in HipChat, and that was very good product, but we started our R&D. And it was only until we realized that Slack, it was just growing so fast. And the number of people that were working on it are just vastly outnumber the number of people that were working on Atlassian goes back to my point on Microsoft internal prioritization.

We just – we underfunded it, and at some point, you have to look in the mirror and have a hard conversation with yourself. And I think that they did the right thing selling the IP to Slack. And obviously, they have a good relationship with Slack, because they acquired this company in their ecosystem and they’re honest with themselves about the direction at the [goal point] [ph].

DS: Is there anything – it’s interesting when you think about the three names you own, actually, because Amazon’s famous for AWS is based on their own server needs. And their third-party fulfillment is based on them figuring out how to do fulfillment like this sort of, I forget how basis is described as thinking about it. But essentially, if we serve ourselves, we can eventually or no, if we outsource it, it forces us to provide a good product, something like that.

Atlassian, you talk about the need, HipChat comes out of the need, an internal need to just communicate and then you see it’s more likely. I forget the exact origin story of Slack, but it had something to do with Stewart Butterfield, who was making a video game and you needed communication something. I could be confusing that with Flickr, because I heard the same podcast interview with him.

But there’s something about that internal necessity which you then export and that combines with the idea of also then when you don’t – when you have a competitor buying them out and having to integrate them, do you see any commonalities in those companies that is why it attracts you to those three? Is there anything worth – thinking about from the broader when you look at software companies as an investor?

JS: Yes. I mean, well, the reason I bought it, I mean, obviously, I’m – I really like AWS and continue to have fantastic growth. The reason I bought Amazon was I’m stuck in my house. I got really sick. I mean, I was in Southeast Asia for pretty much the whole first quarter. And then when I came back, it wasn’t good.

And I got locked up at home. And then you could just see, I self-quarantine myself and I just started ordering everything from Amazon. And then you can see like, San Francisco goes and it’s like one of the first places in order to institute quarantine. And so it just became obvious to me when I was going to the grocery store. It was crazy stressful.

All you want to do is get in and out as much as possible. People would do these like weird dances when they’d walk down the aisles without people and it was like, everybody is just going to switch to ordering. And so that’s the reason I bought that stock. I mean, I do like AWS quite a bit, and the 30% growth on that is fantastic.

To your second point, with the combination of R&D, these companies are also building products that they use. And so dogfooding is a incredibly important part of process building anything. And so Atlassian, Slack, PagerDuty, a lot of names that you guys talk about, they’re building the product for themselves and they’re at the tip of the spear in terms of digital conversion. And that’s what makes a lot of these names really attractive in my mind. I don’t own a lot of them. I try to only understand so many of them. That’s the reason I think that these companies are just so attractive.

DS: Yes, the dogfooding, that was the principle I was trying to get at. It’s just – it’s – I know I tend to be more of an investor just look at numbers and don’t – when I sometimes separate my business instincts from my investing instincts wrongly and it’s so interesting to see where that DNA plays out. Akram, you had brought up a few – you had brought up Okta in here as something that you wanted to touch on, how does that work? What did you want?

AR: Yes. I mean, we haven’t really got into it. Obviously, it’s a super hot stock. And, Justen, wants to adjust his background. It’s kind of an overlap there, right? So Single Sign-On is something that was essentially given away for free or by the giants as far as these big – really large enterprise software companies, I think, Microsoft does it, Google, et cetera. And Okta and their CEO, Todd – it’s Todd McKinnon?

JS: Yes, I think so.

AR: Anyway, like it’s – what’s the market cap now?

DS: It’s about $24 billion.

AR: $24 billion, okay. And it’s been like in that sweet spot in terms of stock performance in the last year, I mean, the whole sector obviously has been crazy. But like it’s really come into, let’s call it, we joke about it the cool guys table. We wouldn’t do the cool guys table. It’s ServiceNow, it’s Atlassian, it’s Okta, who else would we love in there.

DS: Slack is not in there, obviously, because it’s been plagued from day one. PagerDuty is not in there. Zoom, definitely in there. That’s more of kind of like the aspirational guy right now. But Okta has been in there. And like, we really haven’t gotten much into it. So I’m just curious as to like, I don’t think we’ve touched on it much on our calls.

And I was actually curious, because no one would have thought to spend so much money marketing so aggressively to onboard. But it kind of does function like an integration platform, right, like people are reading their business at work reports to go through that when they highlighted opportunity, the most recent one that is pointing out Zoom and all the endpoint and firewall type stuff that people are using for work from home. So they have visibility, right, like, particularly if you go home and like you have all these apps, Single Sign-On is kind of relevant. So go ahead, Justen, what do you think?

JS: Well, I mean, one, I think it’s P/E ratio is just absolutely incredible. It was at 40 or something like that last time I looked. But the thing about Okta is, everybody has to have it and their total addressable market size is every single knowledge worker on the planet. Anybody that has a computer that has to go to work is there as a potential customer for them. And they haven’t even really scratched the surface on that.

And as more and more tools are brought in to companies and definitely as the integration play there like on Slack and Atlassian. You need a way in order to provision and deprovision users when you are in the IT team at any company. And that’s a big part of onboarding and closing out any of the sort of accompany. So their potential upside is very, very high.

AR: So do you see them as like, do you see, let’s say, for example, our Slack and Okta, potential competitors down the road?

JS: I don’t think so. They’re just so different. I mean, I don’t want to say never say never. And certainly, every business needs to figure out how to have multiple channels of revenue. But chat and video seem more married than security. They just seem like very different channels to me.

AR: The one thing that it would seem that they had done particularly right, which I think, Todd, does highlight a few times over the years, but I’ve seen him speak is be Switzerland. They’re not owned by, let’s call them one of the big three or four. And then the neutrality, because again, that goes back to like a Slack, for example, like neutrality is a big deal. When you do – when you’re sitting and you’re connecting a lot of things that, like you’re winning out in terms of the potential addressable market for them?

JS: Well, I couldn’t possibly agree more on the neutrality component. Let’s say, Microsoft or Google or AWS, and they will and they do have security services. You already have and everything is going to be on one of these three cloud providers and they’re not playing nice with each other.

And so what if I modify my license agreement, so that you can’t use a particular product on a different platform, or if I refuse to build an integration or something like that, that alone as part of the buying due diligence process that you would do in choosing something is going to be so integrated into your business processes, you would go through the – you would have to identify that in the risk analysis, introducing a security vendor. And so that’s another reason that I think that Okta has such a defensible position or so.

AR: So I guess, the next question is, why don’t you own it?

JS: People ask me that all the time, especially because they sold off the stuff to Atlassian. And it just seemed so expensive. And my – I buy a lot of stuff on margin and thank you Jay Powell Fed interest rates are at zero basically. I don’t like to buy these things. I don’t like to buy these things unless they’re on sale and it’s way not on sale right now.

AR: Fair enough. That’s a perfectly honest and spot on answer.

DS: How do you think about, because they’re all, I mean, even PagerDuty, I guess is, for example, close to a value multiple relative to these others. It’s still pricey from…

AR: Let’s be clear, three years ago, PagerDuty’s multiple was what an expensive stock was.

DS: That’s – and that’s what I’m getting. I’m still – I still invest in furniture companies or something. So I’m in another – so I’m curious when you look at…

AR: You’re in Camping Worldwide (CWH), that thing has crushed it.

DS: I'm in Thor (THOR), but – which is yes, like vitally something that works. It makes me feel. I’ve got a tiny telecom stock that isn’t actually like up 35% this year. So I’ve got a – I’ve gotten lucky a couple of places, but it’s still – that company I just met, Alaska Communications (ALSK). It’s like five or six times EV EBITDA. And we’re talking about Slack as attractive. And I don’t have the number in front of me, but it’s still…

AR: About 25 times the EV to sales.

DS: So I guess, the first question is that, that is like how do you – when you say something is on sale, like how are you – we don’t need to go into specific multiples. But how do you think about that? Do you look at end states or do you look at Akram looks at relative valuation a lot, or is that what you’re looking at Justen? Or how do you think about what a sale constitutes in this space?

JS: Yes, I mean just to answer your first question, why don’t I own it? I did own it. Yes, I owned a lot of it in January, but I exited most of my positions at the end of February, when I got sick, and I was down on it, to be honest. And then when I reentered the market positions that I have probably around a month ago, I just chose different positions. I think PagerDuty is quite attractive.

Can you just refresh me, what was your second question?

DS: Well, just how do you think about…

JS: Oh, this on sale, on sale, yes, right.

DS: Yes, yes.

JS: So on your last Podcast, you guys talked about how companies come up with metrics in order to define their customer user base. One of the metrics that I really like that Atlassian does that I pay very close attention to and Slack as well as they published their customer numbers in every quarterly report. And I know what those companies churn rates like, because work there and they’re low, very low churn rate.

And so when I look at that, I just – I see that these companies are going to have tremendous growth. And you enter these periods where take last summer, where people just rotate out and don’t care about tech. Everybody is interested in tech right now, because everybody has to have it in order to work remote. And so tech stocks are popular.

There’s going be a day, maybe when we all are allowed to go back to the office, do whatever we got to do, these things are going to come down. And I basically have alerts set up and I – when they get below 20% off their top, I buy. And I just – I have the confidence to do that, because I know how well these companies are run.

I see their R&D. I talked to their customers. I talked to the people that work at these companies, their happy employees. And so if you like the product, you like the stock. If the employees are happy, customer numbers are going up. There’s a bright future for these people.

DS: So maybe the follow-up to that brings to mind is long-term, how many of these companies do you think can sort of stay independent and stay strong? Because I think what you’re describing is, there’s an advantage in investing in R&D and sticking to what you do. That’s the advantage versus the majors.

But you mentioned Okta, for example, trading at a crazy multiple. How much room is there to – even if you talk about every and every knowledge worker as a potential customer service and you say that security is distinct from chat and video, for example? But like, how many different spaces are there before they start eating each other’s lunch? Is that still just the fact that the legacy enterprise software companies have so much left to be taken from them? Or how do you think about the blue space or the green space or whatever?

JS: I mean, the green spaces is any company that’s cloud first. If you listen to the Microsoft earnings call is a great example. And you guys talked about the word accelerate. But when Satya Nadella said, he said something like no material impact to our business, if anything accelerated the digital transformation.

AR: Oh, we made how many minutes? 38 minutes to accelerate it, pretty good.

JS: So these cloud companies that are cloud first and integrate with each other and have stickiness and our customers like them, I like those. I mean, it’s a pretty simple investment thesis. And I only need to know a few of them. There’s this great question where Warren Buffett gets asked and only stocks he owns and he says one. And I feel the same way like if I can understand a couple of these companies really, really well, then I can go very heavy into those positions.

AR: I mean, you’ve also been – we didn’t get into this, because he doesn’t own it now. But he’s – we’ve talked about many times, which he is just waiting for it to get cheaper one day, again, I assume is ServiceNow?

JS: Yes, I like that one, too. That one, I mean, you got Bill McDermott run that thing. I mean, that guy has laid out an incredible vision for where he wants to take it. He is magnetic personality. So as long as he is at the helm of that company, I believe him when he says he is going to get that company to $10 billion in sales. And everybody needs ITSM. In a way to your point Daniel, it does compete with Atlassian. But there are a lot of knowledge workers out there. And so there’s plenty for everybody to eat.

DS: So where – you’re describing a sort of really focused concentration, which I always admire. I can’t – I struggle. Both of you guys have a lot of confidence in your positions. Me, maybe because I don’t have the time to really dive into the details, I tend to prefer a little bit more diversification. But where are you looking right now for what next to watch for or where else?

I mean, you’ve mentioned a couple of verticals, whether it’s ServiceNow, Okta or whatever else. But where are other spaces that you’re thinking about learning more about? Or are you more focused on continuing to understand what you own right now?

JS: There are two companies that I would like to acquire positions in and they’re private companies. I’ve tried to do several brokered secondary market transition or purchases. One is called segment. It’s a company. But it’s still – it’s basically data streaming is the thesis I do. Every company is generating global amounts of data. And they want to be able to tap into this data. They want to be able to route this data. They want to aggravate it. You want to visualize this data.

There’s two sort of customers, in my opinion. There’s companies that are too small to run the infrastructure on their own and they need something that is very easy to set up. And then you’ve got one – other ones that need to collect, like GE, where they want to collect all of the engine data from a plane and shove it into a database and make design decisions and repair decisions and things like that.

For smaller customers, it’s like, hey, I want to track my customer across all my websites, things like that. So these data streaming companies are very attractive to me. So segment is one. That’s for the sort of small-cap company and below. And then the other one is Confluent. Confluent is started by some employees that came out of LinkedIn. And they wrote some open source software and then they basically packaged it up and they started selling it to companies like GE in order to monitor engines, and every company in the future is going to need this technology.

And so I would love, I mean, I’ve tried many times. One time shares came for sale and I was in a pub in Sydney earlier this year, and it was a very – it was a seven figure amount of shares that came available. I couldn’t get a hold of my business partner. He was – there was like a health thing that was going on in hours and no shares gone in hours, just hours.

AR: What about the hottest thing that was funny someone today [indiscernible] and he’s really smart investor out of the UK. And he was like asking me about, it was on a call and they were discussing Snowflake. And when he asked me about it, he was like, “What do you think about Snowflake?” I was like Ballon d’Or, The Lord of the Rings, land across the sea. I mean, well, I mean, like that is – and we talk about hot private companies touched by The Hand of God, everybody talks about Snowflake. Any thoughts on that one?

JS: Yes. I mean, I didn’t get a chance to really touch it very much when I was at Docker. The data analytics team reported into me and I remember it was always on the backlog and I think they started on this as I was transitioning out of Docker or semi-retiring. The engineers just love this product and they just thought it was the Golden Calf.

And so I hear great things about it. But I don’t have any experience with it. And so it’s hard for me to say how great it is. In general, I would say, one thing about databases is, they’ve just gotten so specialized over the last decade. And there’s going to be a winner in every category of specialization.

AR: Okay. Daniel, any other questions along those lines? Oh, we didn’t talk about Twilio (TWLO). By the way, in the news today up 7% this morning, my buddy Captain Twilio has been blowing me up all day, because they’re going to be doing the contact tracing in New York City. What do you have to say about that one? I mean, obviously, that one had a huge move and it’s prompted a lot of my thinking around Slack rerating. Twilio was in the doghouse?

JS: Yes, I owned a lot of Twilio and very bittersweet to see that thing go. So I sold it at a loss and it just rockets. They’ve got great leadership. They’ve got a long-term vision. They’ve got a great boss. But I know quite a few people that work at that company and they’re very, very happy working there.

DS: On the – I guess, the only other thing I was curious about since you brought up and you focus on the private market – your private equity with Enterprise Fund. Are you seeing – I see reports, mostly headlines, I don’t go into too many of the reports, may information are from similar publications about, this is a pretty disruptive time it seems like for at least earlier on VC and that sort of thing.

But are you seeing, I mean, that this – what you just described is still very companies that are at least still in high demand in the segment and Confluent. Are you seeing anything different in the space as you look at in the private market as compared to the public market, where SaaS is still super hot? Or is it mirroring the private market?

JS: Well, I mean, we don’t get to see as much as the other people do. So just for the listeners, another guy at Atlassian, we basically, we run a syndicate fund. And when we find deals, we pull together people that used to work at Atlassian, or were part of the Atlassian partner network.

And so the companies that we look at are very, very specialized in terms of playing sort of his diagonal, sort of cast actors to Atlassian. We did two deals. It was hard to raise. We did them over the last few months. And people got very reluctant who were very bullish six months ago, for obvious reasons with COVID.

But the one thing I would say, I see a lot of AI companies. Everybody is trying to figure out how to apply artificial, mostly machine learning to business processes, or enable companies to have tools in order to invest in their own experiments applying machine learning in order to improve the business.

AR: Justen, long it’s going be very happy to hear that in video, the unstoppable force?

JS: They had great earnings yesterday.

AR: I mean, that’s just – that’s like the new bluest of blue chips these days. So funny considering the history of it. Personally, I’ve been on both sides of it. And now I mean, they’re doing great. He’s just – he’s a character. There’s not much else to say how I think you can be more charismatic and more confident and excited as an owner, CEO, Founder, and that guy.

I did want to ask you, though, so like in terms of perspective, in terms of flipping from the inside to the outside, do you feel like there’s any blind spots you have? Because I will say that, in my ears, talking to people, when you’re doing – when you’re crossing over, people be like, “Oh, how do you do this?” I’m like, “Listen, I talk to people in the industry and I formulate an opinion.”

I talk to a perfect example, PagerDuty. A lot of my research in the beginning indicated, and my past experiences were like, this is going get crushed by Splunk and Atlassian. And the reason it hasn’t been crushed yet is, I don’t want to put my digital fire alarm in a poorly funded startup. That was part of a thesis and did some homework. And actually, you and I connected around that time, and we both talked about it and look, the short worked out great.

But you come back, like a year later and you’re like, this thing is sticky. And like, I’d heard a little bit of that from one or two people in the beginning. It was just like, why are we going spend here at $100 billion-plus enterprise software company like, we don’t need to spend time. This is integrated with like, 2,500 services, ripping it out to save 300 and we have better things to do. The one guy who told me was like he’s like, it’s literally the last thing we would look at replacing right now.

JS: Yes.

AR: So – but when I talk to people like that, and I’ve been doing this for over a decade in terms of like the level of fishing around in the industry, and it’s almost expert network conversations and trying to formulate an opinion by both weighing both sides, sometimes you flip and sometimes you don’t. I do wonder when I talk to a lot of these people, I’m like, how can these guys not see it? Like, why aren’t they looking at this? And forgetting whether they have the opportunity to invest.

But sometimes you talk to them and you’re like, they just have blinders on, because they don’t see it. The way people see it from the investment community. I look back at PagerDuty’s last earnings, and they sent like a thank you message to everyone on Zoom. Using Zoom would like the 100, what do you call it the tile pad screen. And then they get on the – they hosted earnings conference call with like a choppy connection on like a bad phone like it was like 1985. And I’m like, these people don’t get it.

Like, why am I a shareholder now? I need to go back to being short the stock. I mean, like, that that’s what you’re thinking at that time. So like to kind of get right to the point is just that, do you feel that you haven’t been on the inside, may have some blind spots coming to the outside?

JS: Well, I mean, I certainly feel like I’ve learned something everyday, that’s for sure. And I sit on these earning calls and it’s clear that I don’t understand the financial components, as well as these analysts that are at these calls – that are on these calls and they’re talking about take forward revenue.

And they obviously have very complicated spreadsheets, where they’re modeling out to girls in the company. And certainly, as an insider at the company, I was responsible for coming up with projections as well. If people are in finance, they’re doing it their whole careers, they probably have degrees in it. They certainly are better equipped than I am at this point. That’s for sure.

The way that I do my theses now is, as you know, it’s leadership. It’s our only customers. That’s what I look at. This company is being well run – is the product being improved and are the customers happy and that’s the way that I ran the products. In my experience when you focus on it with Apple regard and obviously, you have to keep the checkbook balance when you’re building these things. But if you’re doing that, you’re going to increase the value of the company.

So, as I transition out one of the things that I do worry about is to your point on Snowflake, I didn’t use it. And I’m not paying attention to the new products way that I was paying attention to the new products before. But the one thing that I do, where my partner Ben and I have an advantage in is, because we were operators.

People bring us in and then we get a chance to look at a lot of these up and coming companies and we see the ways that they’re doing business, the ways that they want to change the way that companies are being run and developed and the technologies that are applying. And so over 10 years as the knife gets dollar in terms of relevancy to be an operator, I’m hoping that the lens through the startups that we look at will be over back out.

AR: All right, that’s an excellent response. Anything else on your mind? What about work from home? I was having a conversation. I work from home yesterday with a friend. And it just, it got me depressed for one respect where I was just like, if these – if I was 20 years old, just coming out of college. And the one thing I wanted to do when I graduated was moved to New York City.

I wanted to live in the middle of the city. I didn’t care if 98% of my income was going to it, because I wanted to – I didn’t want to commute. I want to be able to walk out of my office and like go straight out that, like spend as little time as possible. And I think about – when you think about innovation and servicing customers and developing these companies, the social health factor in if you’re working and you’re motivated at one of these top companies, you were pointing out when you started at Atlassian and like how engineering was heavy on one end and not remote.

Unlike most tech, like a PagerDuty CEO will tell you, we were 40% remote before this. If you look at it now, you’re like are some of these companies if I want to work at Google or Facebook for some of these people, it’s like you’re a young guy. You want to meet girls. You want to make friends. You want it, like there’s a social element. Does – is there going to be a backlash in tech? Because we’ve seen stuff in the last like two days, where we started out with like, hey work from home was awesome.

Hey, these are the leaders of the tools to we got to a point in the last like week, where like we’ve got Tobi from Shopify tweeting with his face mask on that work from home is permanent and the digital transformation. You’ve got Jack Dorsey, Twitter what went first, then Square. You got Facebook Zuckerberg just yesterday talking about it like, tackle is like, this pandemic is bad wink, wink.

Like you look at it like, is there going to be a backlash potentially sometime a year from now it’s like I want to be in the office. The office isn’t my offsite. I would like to see some people. I would like to like – I would think about the amount of times I wasted when I first started working like, yes, let’s go to lunch.

JS: I mean, you get a lot out of that, by the way, going to lunch with your coworkers. I do think there’s going to be a lot of people that want to go back to the office. To your point in New York, I have an apartment in the city, but I’m not there now. And we got blue boxes that you have stand in as you go to the elevator, and sanitize your hands. And it’s one family in an elevator at a time. I mean, that’s incredibly fatigue.

I play a lot of ice hockey, it’s an outlet for me. And there’s guys that are chirping all the time on e-mail or at the game or whatever. There’s guys that just have fallen off the face of the map. So clearly, the mental health issue is a real issue. The sooner we can get people the safe ability to get out of their house and go do what they need to do, I think, they aren’t going walk back to the office.

Now the flip side of that coin is my business partner. He said he moved all of this stuff out of our office in SF. And he said, he is not going back into an office until there’s a vaccine. So you got people like that, too.

AR: I mean, look, that’s fine. And I can completely 100% relate to that. The way I’m thinking about it more from the standpoint and I don’t know like, Daniel, also you can relate, like where it’s, look, at our age and I mean, particularly for you, like it – like, we’re past that, trying to figure out what you’re doing. Like you coming out of school, you’re seeking experiences. And I think a lot of these companies are defined by those young people.

Work from home when you’re over 40 like me, or whatnot like it’s not a big deal. You have your established friends. You’ve got your network – networking being such a big deal in the sense like, you’ve built it. You’ve been building it over 20 years or whatnot. But if you’re coming right out of school, you have it.

And like one of the most, I would say, ideal places you do it, whether it’s finance, you’re an investment banking analyst class, and you guys are hitting – you’re hitting the bars after work and whatever, that whole kind of culture, work hard, play hard, I think that gets tripped. But the offset to it, which is where like, I’m curious of your opinion is, there are huge benefits to tech. They can now access legitimately in a hardcore matter labor all over Planet Earth, particularly on engineering it.

JS: That’s a pretty big advantage. Yes. I mean, I think, everybody should go to the office when they can. I think there’s – they called FaceTime for a reason. Everybody needs it, it matters. And I agree with your sentiment on this potentially heavily impacts the careers of young people in terms of them building their network.

I think there was a Wall Street Journal Podcast maybe a week or two ago that said that people who are established in their career are fine, who have been working at places for a long time are fine. But new employees and young people aren’t able to cross pollinate, and that will have a drag coefficient on efficiency.

Now, Flipside is maybe you figure out that you can work remote. And there are a lot of companies that do. I like to work remote occasionally. I mean, if I needed to get something done, I would stay at home or I would find a place to go isolate myself. And if you can adopt those workflows and methodologies, maybe you can find an engineer in a different place that otherwise would be available to you, you can’t move to your city. So it all just depends on your culture and ways that you want to operate your business.

DS: Well, I – because I’ve been working for remotely since I joined Seeking Alpha, we were talking about this all before the call, Justen. But I think what’s interesting, there’s the cultural aspect of it, which I think it forces you when you work from home. First of all, work-wise you have to be more communicative. I have become partly, because I also work for an Israeli company. And that’s sort of the culture in Israel.

But I have become a lot more assertive during my time as a remote worker. And so I think there are certain ways that are interesting to compensate. And also, I think a lot, for example, somebody I’ve cited before on our podcast and while read Derek Thompson in The Atlantic. He wrote an article about how central work is in our lives. And so when you’re talking about that social networking, and I met my wife at my first professional job, really, so it’s not – we’re not saying I’m different in that way.

But like there’s not having the workplace forces you to then try to make cultural or social connections and other ways, which I think there. So I’m just interested in the mitigation. What I think from a business perspective is really interesting. And one of you hinted at this is, I think, if this trend persists, it’s super deflationary for the salaries in the industry.

I just think it all of a sudden maybe your best case is, it sort of levels out the playing field, so that the Bay Area is not or New York is not a premium. But you just, look, I think, for example, I probably don’t command the same salaries I would or I in a location and being able to leverage the local community. I think that’s something that’s interesting to watch.

I don’t know if that really shifts over into the bottom line or into the competitive status of these companies. But I do think that the companies may or may not be realizing somebody like Zuckerberg, especially maybe realizing, yes, if we work – if we hire remotely, we don’t have to be fighting for the end data analyst or the end developer in the Bay Area, and that all of a sudden, I think…

AR: 100%.

DS: …becomes very interesting?

JS: Yes, I mean, definitely your salary – I mean, there’s, I mean, they publish the salary index things, which I’m sure you’re all familiar with. And if you are not working in a day, what do you use much if you live in Minnesota, for example, where I’m from and same amount of money the engineers get paid between those two locations assessed.

But I do think that there is a tremendous advantage to clustering. And I think that I don’t particularly like the idea fully remote. So, I’m – yes, I’m just not for it, to be honest. And I think that when you can get in front of someone’s face and work with them closely into hallway conversations, those lunches that you go to, they’re long the happy hours that you do at the end of the night, a lot of great ideas are discussed then. And I think it’s important to get back to that.

AR: I mean, what good is being wealthy if you’re stuck on an island by yourself?

JS: Well, nobody want whatever the Tom Hanks movie is, he wasn’t wealthy on isle. He still didn’t like it.

AR: WILSON!

JS: Nobody wants to do that.

AR: We are the poster child’s for this and you’re on the West Coast. I’m on the East Coast and Daniel is in Europe. I mean, it’s – doesn’t get more spread out really that when you think about it. But I mean, look, there’s – it’s obviously something has been exposed here that I think commercial real estate, as has been shown to be almost a luxury product here.

I was actually chatting with someone where he was like he was having a back and forth with a friend with colleague/friend of his, and this guy was in software. And the other guy was in finance. They were debating the whole opening up thing and the commercial real estate finance person was like, “Aren’t you stressed out about the economy?” And I said, “Listen, I don’t think you understand my business. My business benefits from this.” Not that I want it, but like we almost create deflation and efficiency.

JS: You’re not making the rules, you’re just playing the game.

AR: Exactly.

DS: I do think it’s a – it’s – I think it does balance out. I’m bullish. I love cities and I’m bullish on cities in the long haul, and look like, I think in terms of the work environment, I think, this period will have opened the people’s eyes to the fact that work from home for a lot of knowledge work is doable. I think you’re right that there’s still value to face. I mean, I look forward to going to the office, I go to one of our offices maybe three or four times a year. And it’s – and then whenever I get to meet somebody who writes for the site in person, for whatever reason, our paths cross, like, that’s for sure, that’s a lot of fun and something to look forward, too.

And so, I do think that balances out. But it is – we’re still – we’re to what, 2.5 months into this really and everybody is very prone to extrapolating. And I’m still without getting into the weeds bullish that in the medium-term, we’ll get a vaccine and life will – the economy, obviously, there’s a lot going on there. But I do think life will return.

But yes, it’ll be interesting to see on the margin where the change is common what that means for these companies, both from their – in our operations and from their total available market and all that stuff are addressable market?

JS: Well, I mean, you guys kind of comment on commercial real estate. And I’ll say this, we rent office space Ben and I, and Ben has given up on it. He is not coming back until there’s a vaccine, but we rent from Wework (WE). We’ve been – we’ve got our own private office that we work, and…

AR: Who is that? What’s Wework, that business model?

JS: Yes. And they, by the way, Wework as a fantastic product. I will say this. I was working at home for like a year without it and then Ben insisted we get the office and we got it. And it – I mean, it was fantastic to be able to go to work. They have amazing reception folks and a team that take care of you. They want your name. Your preferences.

They – they’ll get you the type of beer that you want for a happy hour on Friday like, I mean, they are – they’ve got the experience nailed like a hotel. I love. They’ve got kombucha. It’s – there’s fruit-infused water. There – it’s just a fantastic product. But I haven’t been there, and I’m not getting that product. Why am I paying that bill?

And the way that I’ve been thinking about it and Ben wants to abandon it. And I just thought the way I’ve approached it is, I think, we can renegotiate right now. And our lease is up in September and I’m like we’re supposed to go month-to-month in our – we got a prorated rate for a year in order to go into one of their new offices.

I was reduced rate, but then at the end of the first year kicks up to a much higher rate. I want to say, it was like 25%, 30% discount. I’m just like, I think, we can get a locked in rate that’s even lower than we’re at now. I think we should negotiate. I was like, we’re not getting full value on payments.

So why should we even make payment? And so I think we’re making every payment. But like, how many other people are doing this? A lot? I bet a lot of them are doing that. And so I think the commercial real estate sector is going to become turbulent.

AR: I concur. There’s a rule of law element to it, at the end of the day. I mean, I was talking to a friend and just from an education standpoint, medical school and what they’re paying for rent and she wants to hold on to her apartment and no visibility into what happens in New York in the fall. And it’s like, “Look, can you answer this question?”

If school resumes onsite come September, do you want this apartment? Yes, my apartment rocks. I don’t want to go up. And what am I going to go up move get my stuff out. I like abandon it, throw it. I have to put it in storage. But at the same time, you’re paying $3,000 a month for an empty apartment. I’m like, ‘Well, like, what’s your landlord say?” He’s like, “Well, I haven’t talked to him like we’ll approach him.”

I’d be like, “Listen, cut me a break, I’ll extend the lease go on these circumstances.” I think people have to consider like the flexibility – but like the people who are just collecting rents and thinking that nothing is going happen and want to be hard assets about it, I don’t think that’s going to work out for them.

JS: Yes, I think, there’s definitely going to be a deflationary component on this sector of the market. And we can look at the stock price of Dow Jones and NASDAQ into an all-time high, but it’s not real estate and it’s not banks, that’s for sure.

AR: Without question?

JS: And so I – to friend, you got to have those tough conversations with people. They’re not fun. But the sooner you get in front of them, the better off you are.

AR: Yes. I was like, “What are you going do? Are you going pay rent for the next four months and not be there?” But I mean, she did make some good points. I mean, as far as like, what – do I take my stuff out? Do I go up there? How am I going do it? Like store it, et cetera?

JS: Yes. I mean, in the – all the way back to the [indiscernible], I can’t wait to go back. I really look forward to that day.

AR: All right. And on that note, Daniel, anything else?

DS: No, I think that’s a good note to end on. So, obviously, as we discussed these collaboration tools are going to be there either way, but yes, it’s just a weird time we’re in and totally interesting to see when we – how long it takes us to get back to that and what changes stick. So, Justen, thanks a lot for coming on this a lot of fun.

JS: Yes.

DS: Good to get out of perspective here.

JS: Yes. Thank you, guys, for having us.

AR: Yes, maybe next time we come back, we can discuss PagerDuty and maybe post earnings find out and we know Mr. Atlassian competition over there, but…

JS: Yes, I’d love, too.

DS: Yes. Thank you. Thank you. Thank you.

JS: Yes. Thank you, guys.

DS: Just before we wrap, Akram any other positions that we’ve discussed that didn’t come up in the open.

AR: I don’t think we discussed it. Oh, I said I saw it. yes. I’ve long Twitter, again. Well, let’s not even bother discussing why.

JS: Yes, because it’s like crack right now. All you can do is [Multiple Speakers]

AR: Suck me back in. It’s just when I thought I was out.

DS: All right.

AR: I mean, I can’t – I cannot. I mean like and maybe we’ll bring you up for this, because Daniel and I are talking about it. But the Joe Rogan signs this deal. John Krasinski sold the show in five minutes. It’s like content, content, content. What is Mr. Jack Dorsey doing with – in terms of exclusivity? I mean, he is taking nine minute ice baths and hanging out with Kanye, like, how – why doesn’t Twitter have a premium product?

JS: Now you just answered your own question, because he is not focused.

DS: All right. I’m going to jump in, because if we get it onto Twitter, we could be here for hours. All right. Thanks so much, guys. Good stuff and best of luck to you, Justen, and I hope you get back to the office soon.

JS: Thank you.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Daniel Shvartsman is long GOOG, THO, and ALSK. Akram's Razor is long TWTR, PD, FB, WORK, and TWLO. Justen Stepka is long TEAM, AMZN, and WORK. Nothing on this podcast should be taken as investment advice.