Icarus
Marc Benihoff was so close.
At the end of 2021 Salesforce’s market cap approached $300B — a number that may have elevated him to a rarified air in the cultural zeitgeist that only a small group of tech leaders (i.e. Jobs, Gates, Bezos) occupy. Given his insistence that Salesforce Tower needed to be the tallest in San Francisco, it’s clear satisfying this part of his ego is very important, if completely self-serving.
SFDC was no doubt one of the pandemic winners, benefitting immensely from rapidly expanding sales forces at VC-backed tech companies. Each new sales person hired meant a new license purchased. And a lot of hiring resulted in a lot of growth.
This significant revenue growth combined with trillions of dollars being funneled to blue-chip technology stocks resulted in a massive stockpile of cash for Benihoff to play with between 2020 and 2022. Providing him an opportunity to take big risks and make bold bets, that if successful would have surely elevated Salesforce to a $500B+ market cap — an exclusive club that only few tech companies (Meta, Apple, Amazon, Alphabet and Microsoft) have reached.
With this in his sights, Benihoff swung for the fences, acquiring Slack for $28B — about 10% of the entire company’s value at the time. Certainly a buzzy company and headline grabbing acquisition, but highly speculative as its business fundamentals would suggest something far, far below that price tag.
The party for SFDC didn’t last, however, and over the course of 2022 revenue growth slowed to a crawl. And with all the big tech stocks instituting massive layoffs during H2 2022, Salesforce’s 10% reduction seems like just a drop in the bucket — right?
Wrong. With Elliot Management (along with a few other activist investors) taking a big stake in Salesforce, it suggests the company is in real trouble.
By the time 2023 is over, Salesforce’s decline will look a lot more like Peloton’s and less like the 10–20% cuts at Microsoft, Netflix, Meta, Alphabet, etc. Those companies simply over-hired during COVID to keep up with growth, and their reductions put them back to pre-pandemic trajectories.
The CEOs of Salesforce and Peloton, however, made massive strategic blunders with the expectation that pandemic-adjusted behaviors would continue forever.
In Salesforce’s case, the acquisition of a commoditized product at an insane premium is just one of many bad decisions made during the 2020 version of Tulip Mania.
I’ve used Slack, Teams and GChat. There is no difference in any of the solutions except that Teams and GChat are free when you buy Microsoft Office and Google Suites — and it’s really difficult to compete with free even if your UX is slightly cooler.
The more egregious issue, however, is that Salesforce’s core product, while robust, is shitty. It’s clunky, very difficult to implement without professional services and requires hiring an internal team solely dedicated to managing the platform.
The platform is very expensive, but it pales in comparison to the cost of services and team salaries required to ensure it functions properly. A lot of that extra revenue goes to Salesforce, and customers have to do it because they’ve historically had no choice.
And as we enter a world where product-led growth (“PLG”) and the consumerization of enterprise software increasingly becomes the expectation and the norm, these hefty requirements will not be tolerated. If SFDC does not make significant changes to the ease-of-use in their platform, they will be vulnerable to a formidable disruptor and experience significant churn. And the activist vultures know it.
My prediction is that by the end of 2023 Salesforce will see a 40%+ RIF, a divestiture of one or more product lines (e.g. Tableau or Einstein) to Private Equity to help the balance sheet and help them refocus on their core product, and a CEO replacement — someone with a CFO background à la Barry Mccarthy at Peloton.
