A Slack investor predicts that any productivity startup that doesn't become a 'daily use tool' won't have the 'engagement' to survive whatever comes next in the market

• Index Ventures partner Sarah Cannon said that enterprise and productivity startups may not be able to weather an upcoming economic downturn - despite the current hype around remote-work tools like Slack and Zoom.
• That's contrary to the view of many other VCs, who think that this is the time for productivity startups to shine.
• In a conversation with Business Insider, the Slack investor said the industry's momentum prior to office shutdowns will help keep some companies afloat, but ultimately only a handful will successfully navigate a prolonged economic downturn or recession.
• Even remote workers can only handle between five and 10 productivity apps to manage workflow, so there isn't room in the market for tens or hundreds of disparate apps, Cannon said.
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The venture capitalists that lived through market downturns in 2001 and 2008 have started dumping money into enterprise startups, and their relatively trustworthy revenue streams, in anticipation of yet another protracted down market and the uncertainty it brings.

But Index Ventures partner Sarah Cannon, a Slack investor and former board observer, cautions against relying solely on the recurring revenue of cloud software startups as a guarantee that the industry will do well this time around, as the economy heads towards what could very well be a recession.

She thinks there's still room in the market for smash hits like Zoom, the video conferencing company that's become ubiquitous for socially-distant yoga classes and corporate all-hands meetings alike, but investors have to be cautious to not simply flood the market and hope for the best.

For every Slack or Zoom, she suggests, there'll be a lot more business software tools that simply don't have what it takes to make it through unscathed. There's only so much time for so many videoconferencing, word processing, or email apps in the average person's day, so the bar for becoming indispensable will only get higher.

"It will crystallize who the leaders are, and some won't survive," Cannon said. "It's all about engagement. These are daily use tools, so those that have that engagement will have the money that comes with it. These are fundamentally profitable businesses. Given that all those winners will emerge and the others will probably perish, we will only have one of each."

The great unbundling

Part of what's driving investor interest in the space besides just profitability, Canon said, was the momentum behind productivity software companies, who have been "unbundling" of work tools and services traditionally offered by major players like Microsoft. Where Microsoft generally offers the Office suite as an all-or-nothing affair, customers now have the option to use Superhuman for email instead of Outlook, Slack for work chat instead of Microsoft Teams, or Notion instead of Word.

Cannon suggests that these kinds of companies are attractive to investors, in no small part, because you know what you're getting. The technologies and the market demand are both proven - something you can't always say about, for instance, self-driving car technology.

"As an investor, you are typically investing in things that don't exist yet, but that's not what it's like in productivity," Cannon said. "We are inclined to invest in the metaphor for something."

At the same time, though, Cannon warns that the average worker only has the tolerance for between 5 and 10 apps to use in their daily routine, meaning that there's really only room for one app to dominate in each category. Any app that can't win a slot in the workday won't be able to win out, she says.

The free tier is an asset and a liability

Many of the enterprise hits like Box and Google Suite were built on a so-called freemium model -- hook individual users on a free version of the tools to drive engagement, and then have the employees advocate for the higher-quality paid version to internal management. But according to Cannon, this is a tricky spot for productivity tools since there are so many free-to-use versions available.

"The risk in productivity is that there's a lot of engagement but not an incentive to pay for the tool or service," Cannon said. "And people have different preferences, so some will pick a tool they like but aren't willing to pay. Those will be hard to sustain in a sustained downturn."

Any app that already started building paid momentum by the end of 2019 is in a better spot today, Cannon says: If a company chose to pay for an app before the current boom in coronavirus-driven remote work, it's likely that they're continuing to do it now. On the flip side, however, under the current conditions of uncertainty, it'll be harder to get anybody to make the jump from unpaid to paid. Add in new remote working directives, and companies are under pressure to standardize as much as they possibly can.

"If you had a firm that was like 4% working from home for things like sick days or outside appointments before, I think the new steady state will look more like 10% or 20%," Cannon said. "Humans will innately want to be back in the office when they can, but there will be a lot of distributed teams after this is over."