How to Invest in a B2B Unicorn: A Look at Zoom's Origins & First Investors

Bill Tai, Zoom angel investor and noted kiteboarding venture capitalist, discusses the company's origins and how he decided to back founder and CEO Eric Yuan before the company was even formed.

This article was previously published by HBS (here).

Wall Street is buzzing about today's Uber IPO as well as the recent IPOs of Lyft and Pinterest. But for B2B and enterprise-focused executives, the Silicon Valley success story of Zoom Video, with its market cap now exceeding $18 billion, may prove just as telling.

In fact, the 2011 origins of the company were quite inauspicious.

After the successful Zoom IPO last month, venture capitalist Bill Tai reflected on how he met Zoom founder and CEO Eric Yuan and became the first investor to commit to backing the founder, even before the company’s launch.

“We both were involved in the seeds of Tango and Treasure Data,” says Tai. “Eric was an advisor on video quality to Tango, where I was the first investor. He also came into the seed round of Treasure Data, where I was also the first investor, co-founder, and Chairman.”

After Tai committed to back Eric, angel investor and onetime Cisco executive Dan Scheinman pulled together the seed round with Bill's investment included.

As an early-stage and seed investor, Tai is used to being first. He’s the founding Chairman of Treasure Data and first outside investor and board member of Bitfury. He also is among the earliest investors in Blockseer, Canva, Color Genomics, Wish.com, Tweetdeck,About.me, Scribd, Voxer, and Tango. Tai established the Silicon Valley office for Charles River Ventures, served as Partner at IVP, and was Founding Chairman of IPInfusion and founding CEO of iAsiaWorks.

As a renowned sports and kiteboarding/snowkiting enthusiast (as well as co-founder of 501(c)(3) ACTAI Global (formerly known as ‘MaiTai Global’), Tai is also used to being bold. One article refers to him as the “Kite Guy,” and another calls him “one of Silicon Valley’s most ardent kiteboarders.” Is it any surprise his Twitter handle is @KiteVC?

 Zoom’s Founder Turns to @KiteVC

The inclination to be first and bold served Tai well when Chinese immigrant Yuan, who headed up the Webex engineering team at Cisco, decided to leave the Fortune 100 company to launch his own cloud-based start-up in 2011. As described in Forbes, Yuan said to Tai, “Someday someone is going to build something on the cloud, and it’s going to kill me.”

Yuan decided that he wanted to be the one to build that “something.”

Tai was the first to agree to back him in his quest. The company’s seed round, structured by Scheinman, came together with additional support of Eric’s former co-workers from WebEx and fellow investors in Tango who combined to invest $3 million in the start-up, originally called “Saasbee.”

“We Were Skeptical … Red Flags Galore”

Almost every institutional investor who considered Zoom in 2011–2012 passed on investing. “Everyone in venture capital thought it was a terrible idea,” says Jim Scheinman of Maven Ventures, who met Eric through his cousin Dan.

Why was the original idea met with so much cynicism?

"Most investors incorrectly thought that the existing products like Skype, Webex and others were solving this problem," Jim Scheinman adds.

Counterpart Ventures Partner and former Qualcomm Ventures Partner Patrick Eggen elaborates on investors' conventional wisdom: “At the time, video conference software was dominated by tech behemoths like Cisco, Google and Microsoft to name a few,” Eggen writes. “We were skeptical to say the least. A new video conferencing entrant at this stage? No commercial data points, massively saturated market, limited funding to enter the SME space … and founder with no CEO experience. Red flags galore.”

But Tai and Scheinman persisted.

“Bill praises this obscure video conference product and makes a bold contrarian claim about its future,” says Eggen. “If Zoom receives the proper funding, this overlooked start-up will unleash a far superior product on the market and steal share from the incumbents.”

Tai and Dan Scheinman helped catalyze additional funding from Jerry Yang's venture fund. Tai’s early commitment and conviction also proved pivotal with Eggen and Qualcomm’s Early Stage Fund team (including Sachin Deshpande, Nagraj Kashyap, and Houman Haghighi), who ended up leading Zoom’s Series A round, thanks in no small part to Tai’s evangelism.

By 2015, with a compelling product and market traction, the company would raise over $40 million—and eventually much more. But in 2012, VC interest was tepid. What potential did Tai first see in Eric Yuan’s idea and pitch that so many others did not?

Tai publicized one of his early Zoom evangelism emails from 2012, similar to one that Eggen received. He then discussed the Zoom example with me, addressing his top tech seed investing takeaways.

Tai’s key points include:

The Importance of the CEO and Team

In his November 2012 email, Tai’s first key was Yuan and his team. Team is always important to VCs, but Tai particularly emphasized the product focus and skills of the Zoom team. He writes, “I think this is a high-quality team, high-quality product core to iterate around.”

Eggen also focused on team—Yuan but also the talent he assembled—as keys to his team’s investment decision. “The fact that 30 WebEx engineers followed [Yuan] to pursue this vision was further validation,” Eggen writes.

Investor Takeaway #1: For an early-stage company in a competitive segment, a good team is not good enough. “Without a great team, you have nothing,” says.

The Importance of a Big Market

In 2012, Tai specifically discussed market size by looking at the annual revenues of established, non-cloud-based competitors, writing, “The market is big enough to build a decent revenue stream. … Webex does $800M annually and GoToMeeting is $600Mish and there are others [with] revenue … like Skype. So I can see Zoom steadily growing to become a 10s then 100’s of [millions of dollars in] business over time.”

Tai was right. Zoom will surpass $300 million in revenues this year.

Investor Takeaway #2: “A really big hit can only happen in a BIG revenue market,” says Tai.

Look for a Disruptive Technology Shift and Don’t (Always) Fear Competition

Yuan and Tai recognized the impending technology shift, which Tai describes in 2012: “The transition from ‘enterprise [software] client’ to ‘cloud and mobile’ is enough to open an opportunity for a new leader to emerge.”

So, even though the 2012 video-conferencing market featured large, established competitors (e.g., Cisco, Microsoft), this shift to cloud and mobile would disrupt the market, leading to a big opportunity for a new entrant, like Zoom.

Investor Takeaway #3: “Don’t (always) be afraid of competition or a crowded segment,” says Tai. “A disruptive technology shift can enable a new leader.”

Bill Tai (@KiteVC): “Confidence makes a huge difference”

Have Confidence and CONVICTION

What is Tai’s most important lesson for both early-stage investors and entrepreneurs in their quest to build the next Zoom?

“You have to have CONVICTION,” he writes in all caps. “In the early stages, there is little to go on, and sometimes the early data is negative. So confidence makes a huge difference in getting capital.”

Since they first began discussing an investment in a fledgling cloud-based video conference platform back in 2011, confidence and CONVICTION have clearly served both Tai and Yuan quite well.