Yammer is Not Just Facebook for Enterprises: A Deep Dive with CEO David Sacks

10/13/11Follow @wroush

It took enterprise social networking startup Yammer 18 months to gain its first million users, nine months to add its second million, and only six months to add its third million. At that rate of increase, according to my calculations, the startup will have 20 million users by late 2012, and 7 billion by 2014.

Okay, I’m joking about the 7 billion part—there aren’t quite that many people yet on Earth, and not even Facebook has figured out how to serve people who don’t yet have computers or smartphones. But considering how many people do work in wired, knowledge-based enterprises around the world—about 500 million—”the addressable market is enormous,” says Yammer co-founder and CEO David Sacks. “We are in 160 countries, and we are just getting started.”

If you aren’t an employee at one of the 100,000 businesses using Yammer, the freemium Web-based platform will look familiar to you anyway, as the central news feed—where employees can post status updates, links, videos, photos, documents, and other materials—is unapologetically modeled after the same feature at Facebook. Yammer is hardly the only imitator out there; Podio, Jive Software, SuccessFactor’s Jam, Salesforce.com’s Chatter, and other enterprise social networking entrants take the same approach. Here, as in other areas of enterprise software being transformed by the “consumerization” wave, the goal is to help employees feel at home, not to make them learn yet another new user interface. But one big difference, as Sacks explains, is that each instance of Yammer is private to a specific company, meaning that only people with a corporate e-mail address can log on.

The core insight at the San Francisco-based startup—the first to bring a social networking product to businesses, back in 2008—is that the Facebook-style news feed is a great medium for collaboration inside a company, as long as what happens in the network stays in the network. For a boatload of reasons, from protecting confidential information to complying with regulatory requirements, “internal and external networks should be completely separate,” says Sacks, who got his start in business as chief operating officer at PayPal. “You can toggle between them, but content can’t bleed from one to the other. We think it’s very important to be clear about where content lives.”

Yammer has 200 employees and recently raised $17 million in a Series D venture round led by Chamath Palihapitiya, a former Facebooker with a new venture fund called the Social+Capital Partnership. Previous investors Charles River Ventures, Emergence Capital, and US Venture Partners also participated in the round, bringing Yammer’s total venture pot since its founding to $57 million. The company has had a big year—embarking on a major integration with financial management software provider NetSuite; introducing new applications for desktop PCs, iOS devices, and Android devices; landing big customers like Ford, Shell, and 7-Eleven; and extending its platform to work with applications from Microsoft and Salesforce.com.

So I thought it was about time to sit down with Sacks for the trademark Xconomy interview, delving into how the idea for Yammer evolved, why the company went with a freemium business model, and how Sacks plans to keep the company on top in the enterprise social networking business, which is an increasingly competitive one. You probably didn’t know that Yammer is a spinoff of Los Angeles-based genealogy site Geni, or that Sacks took a spin in Hollywood, financing and producing the 2005 satire Thank You for Smoking, starring Aaron Eckhart. But as I learned, there are many sides to Sacks, who’s both understated and as intense as you might expect of a PayPal alum; both self-effacing and prone to cutting remarks. For example, he says it would be easier for growing companies to find software engineering talent in Silicon Valley if “fewer stupid ideas were getting funded.” Here’s a trimmed-down version of our conversation.

Xconomy: You were at PayPal in the early days. Can you talk a little about your history as an entrepreneur before that, and the steps that led to Yammer?

David Sacks: The short answer is there was not very much history. I had been an undergraduate at Stanford and knew Peter Thiel. I was 27 when I joined PayPal as the chief operating officer, and I was 30 when we sold it to eBay. So it was not like I had a tremendous amount of experience.

Subsequently to PayPal, I created another company called Geni, and we spun Yammer out of that. Yammer was invented as a tool inside of Geni. We started using it to post status updates to each other. We always thought it had the potential to be a separate company, but we basically built it for ourselves. We decided to spin it out in 2008. We launched the product that September at TechCrunch 50, and it won that event. Now it’s three years later. Geni is in Los Angeles, and we founded Yammer in L.A. also, but we moved the company up to San Francisco about two years ago, the reason being that it’s so much easier to scale a company in the Bay Area.

X: Geni is a genealogy site. Did you feel like enterprise social networking was a better bet?

DS: No, Geni is still doing great. They’re creating a family tree of the world; it’s a unique, crowdsourced approach to doing genealogy. When we first started, the idea was to create a family social network, layered on top of this growing family tree. But by 2007 it was pretty clear to me that Facebook was going to eat the family social networking space. So Geni started focusing more on genealogy than on generalized social networking, and we took the social networking part of the team and put them on corporate social networking, and that became Yammer. It’s not that I’m less interested in what Geni is doing, but the person running the company now understands genealogy much better than I ever could.

X: Inside Geni, how were you using the tools that became Yammer?

DS: The way the product started was as a real-time feed of what everyone was working on. And then that grew into conversations. People could ask questions. If you needed help, but you didn’t know exactly who to go to, you could just post it to the feed for everyone to see it, and whoever is online and willing to give you their attention can respond. If someone was going down a path that pertained to your work, you could engage them on it. Managers had more visibility into what everyone was doing.

X: It sounds like classic dogfooding.

DS: I don’t think we could have spun out Yammer as a separate product if we did not ourselves live it as a product. We dogfooded it for about six months before we ever launched it. So it had a degree of policy control built in that some of our competitors still don’t have. Even today, the dogfooding aspect makes it very rewarding to work on Yammer, because we are on the tool all day, every day. The sales guys can sell it more easily because they are using it and understanding how it creates value. Likewise for customer support, product development, and engineering.

It’s really fun to work on a product that you actually use all day. I think this is true to a much greater degree with Yammer than any other product I’ve worked on. With PayPal, I used it, but realistically, once a month. We’d have to find excuses to use it, like splitting a dinner bill. It’s a very valuable product, but it’s not something you’re constantly using. With Geni, I got to the point of saturation where my family tree was known and fleshed out, and there wasn’t as much for me to do. But with Yammer we never stop using it.

X: You’ve got 200 employees. Do you really try to follow everything that’s going on at Yammer on Yammer?

DS: Until we had about 100 employees, I prided myself on reading every Yammer conversation, and then I just gave up, because there was too much information. I now rely partly on people to “@” mention me when there’s something they feel I should see. The other thing is that groups are becoming an increasingly important part of the product; as your organization scales, you can divide into groups, and Yammer automatically figures out what are the top groups you work with. I can drill into the sales, design, product management, or marketing groups and see what’s happening in those groups.

X: You’ve obviously borrowed a lot of conventions from Facebook and Twitter, such as the “@” mention.

DS: The user interface is Facebook-like, but customized for a business purpose. There are alerts, notifications, private messages. There’s a feed of the groups you’re in and the people and topics you’re following. You can post documents to the feed-files, images, videos, polls, events, ideas, links, questions. But there are no ads, which creates more real estate for sidebar modules.

So for anybody who has used Facebook or Twitter, this will seem familiar. But the key thing is that your Yammer network is completely self-contained to your company. It’s enterprise software—it’s not a public social network.

X: Just for the sake of argument, what’s stopping companies from using Facebook itself for the things you’re talking about—perhaps by creating private groups?

DS: The requirements between public social networking and internal networking are very different. Every business should have a presence on Facebook; you would be crazy not to. But the purpose of that presence is brand marketing and creating a public face, just like you would create a website so that the world can discover your products. That’s a very different use case from private, internal social networking for collaboration. Companies want to be able to own their own internal collaboration, and Facebook is not something they can own in the same way. I see them as solving very different types of problems, even though they are using some of the same concepts.

X: You spoke about document sharing within the Yammer feed. That leads me to ask about the differences between Yammer and some of the document sharing startups we hear a lot about today, like Dropbox and Box.net.

DS: We are not trying to be anyone’s personal hard drive. That’s the big difference. If you look at Dropbox or Box.net, they ideally would like to have all of your documents. We are not trying to be a complete content management system. We are trying to be a content sharing system.

To give you an analogy, your photo collection probably lives in iPhoto. But if you want to share photos you’ll do it on Facebook. Your personal photo repository will have the canonical, high-resolution collection, but you put them on Facebook because it’s easier to share. That’s what Yammer is trying to do with files. We’re not trying to replace your company file directory, but we’re going to make it really easy to share files with the relevant people inside your company.

But our plan is to integrate with those content management systems—we already have a pretty deep SharePoint integration and we are talking with Box.net about integration with them as well. We already have an app that runs on Box.net, and the next thing would be to have it go the other way around, and have a Box.net app that runs on Yammer.

X: A lot of companies besides Yammer are paying attention to the Facebook example. Box.net has been building some social features into their service. And of course, Salesforce.com has Chatter, the social networking feed built into its sales automation system. If all of these other enterprise applications are building in their own collaboration tools, where does that leave Yammer?

DS: Here’s the way we think that should work. Every vertical enterprise tool, whether it’s Box.net or Salesforce.com or whatever, they are all moving to a model where they have profiles and activity feeds. We don’t think it makes sense to build a separate social network into every one of those tools. That was the old recipe. Having dozens of social networks within your company would defeat the point. We have created an activity stream API [application programming interface] where all of these sites can publish their activity to our site—sort of the way Zynga publishes your FarmVille scores to your Facebook wall. Box has activity stories in its own app, but they should also syndicate that to Yammer. So Yammer becomes the superset of all your activity streams. Our activity stream API is open and based on the OpenGraph standard that Facebook created; we have extended that for the enterprise, and we think the whole industry should move toward this.

X: Why should the whole industry move toward Yammer’s API, rather than some competitor’s?

DS: We were the first to launch. We have the most users and companies using the platform, by far. We’ve had more time to interact with the marketplace, and I think we understand what the market wants. We feel like we’re the leader in the space. Also, we have this freemium model, where any employee can sign up and start using it and invite their coworkers, whereas with a lot of our enterprise competitors, you have to buy the product to start using it.

I also think we have learned how to distribute millions of messages in real time across many different platforms—this is the same scaling challenge that Twitter has. The way that translates is that Yammer just feels better to use than our competitors. They’ve got their feeds too, but they can be a little clunky or slow. I don’t even think any of our competitors are sufficiently used to push them to make their products more scalable, but we have over 3 million verified corporate users.

X: When I talk to my colleagues at Xconomy about adopting a tool like Yammer, the feeling is often that we already have e-mail and Twitter and RSS, and that Yammer would be just one more stream we’d have to keep up with all day. Do you think Yammer replaces any of these other tools, or is it possible that it just adds to the information overload?

DS: I think it displaces rather than replaces other tools. We’ve had customers report to us that their e-mail load goes down by about a third when they start using Yammer. We get a lot of conversations out of your inbox and into a much better place for having many-to-many conversations.

As an example, last week I met with SuperValu. It’s a Fortune 100 company with 5,000 grocery stories across the country. The CEO was very interested in Yammer, and originally thought that he would use it to talk to his executive team. It turned out that e-mail was good enough for that. But then what happened was the store managers from the 5,000 stories got on the tool and started exchanging ideas with each other. Three hundred of the stores are in college towns, and they started talking about what they should stock for back-to-school time. Now the COO has visibility into what’s happening in the stores on a daily basis. There is enormous business value on all levels from that. But none of these things is necessarily replacing an older way of doing things.

X: Right—so your Yammer feed is one more thing that you have to keep track of, which, from one point of view, could make your job harder.

DS: I don’t think it makes it harder to do your job. It makes it easier, because you are more connected to the information in your company. You have a better idea of what your coworkers are working on. It helps you avoid duplication and get your questions answered.

We find that Yammer reduces the sense of employee frustration. Deloitte Digital found that staff turnover was 2 percent per year among active Yammer users, compared to 20 percent generally. That’s pretty staggering, and the reason is that these employees feel more connected to their coworkers and to the company’s mission, and when that happens, they don’t want to leave. It’s the employees who feel isolated, and can’t find things, who are going to be less productive and are going to leave.

X: Let’s talk about your freemium business model. The way your pricing scheme works, it’s possible for a whole company to use Yammer without paying anything. How can you afford to offer that?

DS: It’s free for everyone to sign up. We want employees to try it and prove the value before we ask their companies to pay. This is a pretty radical idea in the world of enterprise software, but it’s pretty commonplace with consumer websites. We wanted to cut through this traditional process of software having to be sold before it can be tried and used. That’s why we do it.

X: How do you draw the line between the free and paid features?

DS: It’s based on functionality. What you get when you upgrade are a bunch of administrative features. You get things like Active Directory integration, SharePoint integration, moderation and control features. You can customize which applications are being used in the network. That, in a nutshell, is how we sell it to companies. We will bring the fact to their attention that a lot of their employees are already using it, and ask if they want these extra control features.

It feels like a good way for a brand-new category of enterprise software to prove itself. It would be infinitely harder if we had to go out knocking on people’s doors.

X: What are the potential exit scenarios for Yammer’s investors? An acquisition? Or can you see going public someday—that is, if you have the stomach for the chaos in the public markets?

DS: I think our goal would be an IPO at some point, but I’m not ready to put a time frame on it. I do think that what’s happening in the public markets won’t ultimately affect us very much. I feel like we are building a great business that is going to be important for the next 20 years, so what happens this month in the markets isn’t important.

I’m actually kind of rooting for a double-dip recession, because it’s gotten way too hard in Silicon Valley to recruit people. The demand for software developers in Silicon Valley is just insatiable. If all of the unemployed people around the country were software engineers, they would all have jobs. What we really have in this country is a skills problem, not a jobs problem. And the reason people don’t have the right skills is because we have an education problem. And the reason we have an education problem is deeply cultural, so it’s hard to fix.

X: Wait—I’m not clear on how a double-dip recession would make recruiting easier.

DS: One thing that tends to happen is that there has always been this trickle-down from what is happening in the public markets to the venture funding scene here—which doesn’t make sense, since Silicon Valley produces great companies even under bad macroeconomic conditions. We built PayPal during a major recession. But regardless, the spigot for funding tends to fluctuate depending on what’s happening in the public markets. So in that sense, if it were becoming a lot harder to finance starts and fewer stupid ideas were getting funded, that would alleviate the jobs crunch in software engineering.

X: What’s your most important priority for the next 12 months?

DS: The two big themes we’re stressing are integration internally and externally. It’s very important that Yammer integrate with all of the other business tools we talked about. Otherwise you will see this fragmentation, where every line-of-business app has its own social network. That means [focusing on] the activity stream API, the Sharepoint and Active Directory integration. Developing all those products has been very time consuming, but it’s a big focus for us.

The other theme is external integration. The idea of internal social networking is just now becoming mainstream; three years ago people were doubtful about whether the idea would work, and now everybody is realizing that every company is going to have its own social network. I think where we’re going next is this idea of private, external networks for B2B communication.

Wade Roush is a contributing editor at Xconomy. Follow @wroush

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