Why Yammer Said Yes to Microsoft: Q&A with Co-founder David Sacks

I’ve been meaning to catch up with David Sacks, the co-founder and CEO of Yammer, for a while now, and we actually had a meeting on the books for June 6 at the company’s SoMa headquarters. That meeting got canceled, for reasons that went totally unexplained at the time. But it turns out that the excuse was a pretty good one: Sacks was deep in deal talks that day with Microsoft, which announced its acquisition of the enterprise social networking startup for $1.2 billion less than three weeks later.

I finally snagged a new meeting with Sacks yesterday, and there was obviously a lot to talk about, like how Sacks expects Yammer’s technology to contribute to the big reboot seemingly underway at Microsoft. More than simply changing its logo, Microsoft is in the process of “consumerizing” many of its enterprise applications, ramping up its efforts in cloud storage and services, launching a line of tablets to compete with the iPad, and overhauling Windows itself.

Sacks says the Redmond giant was attracted to Yammer partly because it’s the leading company applying social-networking concepts spawned in the consumer world to business. There are a lot of obvious places where Yammer’s systems can and will be integrated into Microsoft products such as Skype, SharePoint (the content management system), and Dynamics (the enterprise resource planning and customer relationship management system).

But Sacks, whose Silicon Valley experience stretches back to his days as chief operating officer of PayPal, says he’s also been told to keep navigating independently of the mother ship. That means Yammer will keep working with outside companies who want to make their own apps run on Yammer’s platform—such as Kanjoya, which earlier this month announced a sentiment analysis plugin that lets companies gauge their employees’ morale by monitoring the buzz on Yammer.

My conversation with Sacks, which is reproduced below in lightly edited form, also ranged to subjects such as Yammer’s impending move to the Central Market district of San Francisco; what Microsoft looks like from the inside; education and the talent crunch at tech companies; and precisely what he meant in a now-notorious Facebook post from August 17 where he said “Silicon Valley as we know it may be coming to an end.” Read on:

Xconomy: I was just in your lobby absorbing the buzz, and compared to the last time I visited Yammer’s offices, it seems like you’ve both expanded into more space and squeezed in more people.

David Sacks: We were the last man standing in this building [410 Townsend]—we outlasted both Zendesk and Eventbrite. In our original lease I had wisely inserted a right of first refusal on any new space in this building, and when Eventbrite moved out we got their space. When Zendesk realized they weren’t going to get that space, they moved out. But now we are out of space anyway, so we are moving into the Twitter building on Market Street.

X: Why did you stay here so long? Do you really like this building for some reason?

DS: It was just to avoid the disruption of moving. But I do like this building. It’s across the street from Caltrain. As soon as you move offices you have to make people rethink their commute, so moving is a hassle if you can avoid it. But the new office will be great. We’ll have 80,000 square feet, and importantly, everyone will be on one floor.

X: Were the tax incentives available to startups locating in the Central Market neighborhood a factor in your decision to move?

DS: I think they had an indirect effect in the sense that it was a catalyst for that area gentrifying a little bit. But I think we would have moved there even without the tax incentives. It’s a really good space. There aren’t that many places in the city that have 80,000 square feet on one floor.

I think [the incentives] got the ball rolling in that whole area and it really worked; I hope the city keeps going with it. I think it’s going to be a whole tech mecca. This building has been the epicenter for tech startups, but I think it’s going to move to that building, with us there, and Twitter, and One Kings Lane.

X: Okay, on to the big story. The Microsoft acquisition of Yammer raised a lot of eyebrows, not least because Yammer looked like the kind of company that could keep growing and stay independent for a long time. What were the arguments in your own mind for exiting now, versus staying independent longer?

DS: We didn’t go looking for this opportunity—Microsoft came to us. We weren’t shopping the company or anything like that. We were happily pursuing our path and Microsoft came to us, and we just realized that we could do a lot more together than we could separately.

Specifically, we thought a few things: One was that Microsoft can take us to another level of scale and reach. That is huge. And the second one, on a product level, is that we think there are a lot of exciting integration opportunities. The combination of those two things got us excited about getting off the independent track and partnering with them.

When you think about scale and reach, Microsoft has trusted relationships with virtually every large enterprise, and I think their field sales organization has something like 40,000 people in it. There are tremendous resources there to take us to the next level of distribution, much more quickly than we could on our own.

On the product side, there are great opportunities with Office, and Office 365 specifically, as well as SharePoint, Dynamics, and Skype. We already had a Dynamics interface and a SharePoint integration but I think we can do much more interesting things once we are able to work together more natively.

As I’ve said before, one way I look at it is, social networks need killer apps. We could try to build all of our own apps, but Microsoft has the number one office productivity app with Office, the number one content management system with SharePoint, the number one Web communications tool with Skype, the number one e-mail application with Outlook. The opportunity to integrate with these killer apps will, we think, make our social network much more useful.

The main news feed on Yammer

X: Are you saying that by joining Microsoft, you can get the lion’s share of the necessary integrations done faster?

DS: I don’t know about the lion’s share, but clearly where Yammer is going more generally is that we want to integrate with all of your enterprise apps.

I think there have been a few phases to this idea of enterprise social networking. In the first phase, when we launched it, everyone hated the idea. If you look at the analysts’ reports, they were all extremely dismissive. Everyone said, ‘How can social networking possibly be productive for business purposes?’ Our view on it was always that social networking is a communications tool like the telephone. Yes, people use it for personal communication, but you can also use it to call a business colleague.

Eventually, the market caught up with us, and now the analysts provide whole reports on the enterprise social networking space, and we are kind of institutionalized. Now the risk is that all the enterprise apps out there are trying to build half-baked social networks into their apps. With a lot of other players in the market, they are trying to do social, but they are not doing it very well.

X: You’re talking about Salesforce.com’s Chatter, for example.

DS: Well, I don’t want to be too harsh on them. But what’s clearly bad for customers is if you have a dozen different social networks in your company. Social networking has become so accepted that we are in danger of sprawl. So now what Yammer is doing is focusing on this problem of social networking sprawl. We have YamJam coming up on October 28, and you will see some announcements there. We want to be the tool that integrates with all of these apps, to solve the problem of having too many social networks in a company.

X: That’s a push you had begun well before the Microsoft acquisition.

DS: Right, so what Microsoft will enable us to do is accelerate this type of integration with some of these key apps that already exist in the enterprise. Once people see what we are able to do with Microsoft, I think it will be a model for what other companies can do with Yammer as well. We haven’t announced exactly how the integrations are going to work, but what I can tell you is that we are going to do them in a way that is sufficiently general so that the opportunity is there for other applications as well. We want Yammer to be a platform. We are very committed to that.

X: Is Microsoft also committed to that? The company isn’t famous for its willingness to cooperate with competitors.

DS: I think Microsoft understands the power of standards. They understand the importance of making their products programmable. If you look at SharePoint, which is one of the groups we are working most closely with, it’s incredibly customizable. It’s almost like a development language. There is a whole ecosystem of SharePoint developers who are able to use it as a toolkit to build a vast array of different sites. So I think Microsoft clearly understands the value of APIs and standards and programmable interfaces.

X: Microsoft has been getting a lot of bad press lately for management missteps over the last decade. Kurt Eichenwald’s piece in Vanity Fair this summer crystallized a lot of the complaints, with an emphasis on the destructive politics and management practices inside the company. As a former outsider, did you have any qualms about what it might be like to work inside Microsoft, and if so, what eased those qualms?

DS: It’s hard for me to speak to things that happened before I got here. What I would say is that now, it really feels like there is a tremendous amount happening in the company. It feels like a very innovative place right now. You’ve got Windows 8 coming out at the end of this year, which I think is the most ambitious upgrade to Windows ever; even the people who hate it say it’s incredibly ambitious. It’s all-in on touch. You’ve got Surface. You’ve got the next version of Office, which again is fully touch-enabled. You’ve got stuff happening with Xbox. You’ve got the Yammer acquisition. The company feels like it’s doing a lot right now.

X: Do you feel confident that you’ll have room to keep innovating?

DS: We are staying here in San Francisco and are going ahead with our plan to move into our new office. Microsoft has said they want Yammer to continue to be offered as a standalone product. They have given us quite a lot of operational independence—I am still running the company, and my CTO and co-founder Adam Pisoni is still here. We’ve made a long-term commitment to stay with the company. So I think we will be able to innovate. Microsoft has made it clear to us that innovation was one of the reasons they bought us. They absolutely don’t want us to slow down.

In fact, we just did our first post-Microsoft release. It’s one of the biggest we’ve ever done, and I think the best. We completely redesigned the website and introduced features like Online Now, which is a chat interface, and Inbox, a prioritized way of consuming your messages. On the design side, I think we finally have a look that is distinctively Yammer, but is still a social network; I don’t think anyone is going to accuse us of ripping off Facebook anymore. We have new features like trending files, company resources—a place to pin important items like documents and company announcements directly to the home page. The larger point is that we continue be very innovative, and that is what Microsoft wants.

X: What kind of company is Microsoft becoming? There’s a lot of talk that it’s evolving away from its focus on consumers, which was a legacy of its PC operating system business, and becoming more of an enterprise software company, with big systems like SharePoint and Dynamics and Office.

DS: I don’t think anyone at Microsoft sees themselves as just an enterprise company. You’re right that it has a very strong position; the Office division, if it were a standalone company, would probably by the most valuable enterprise software company in the world, and that’s just one franchise in their business.

I think one of the reasons Microsoft was attracted to Yammer was that we represent this move toward the consumerization of IT. They definitely recognized that trend, and I think they believe they can serve consumers and enterprises at the same time.

As Steve Ballmer has said, they are all-in on the cloud, they are all-in on touch, they are all-in on devices and services. When you are outside Microsoft, as we were before this deal, maybe you think that’s marketing hype. But I can tell you from the inside that it’s absolutely real.

X: Yammer put out an announcement this month about Crane, a sentiment analysis tool developed by a company called Kanjoya. Companies with Yammer can use Crane to look at what people are posting on Yammer and gauge morale within their ranks. How did that come about, and does it represent the sort of technology that you hope outside developers will keep building for Yammer?

DS: We don’t build features like Crane—we let third parties build them. That’s something most reporters don’t seem to get. They thought we had somehow launched sentiment analysis as a feature of Yammer. But now that we have an open platform, a company like Kanjoya can come along and build a sentiment analysis thing, and it’s great. We put out the press release because we have a little more reach than they do, but we have an open an unbiased posture with respect to all of these applications.

The whole idea of a platform is that people can use our APIs to build whatever they want. Sometimes, somebody will launch an app on our platform, and their competitors will think, ‘Okay, I can’t work with Yammer anymore.’ No. We aren’t announcing partnerships. It’s just that they announced an app on our platform. I agree that sentiment analysis is an interesting one, but really Kanjoya deserves the credit for that, and it’s up to them to make it successful.

X: You mentioned YamJam in October. It’ll be the first time Yammer has put on a user conference. Are you looking to foster more apps like Crane?

DS: That’s part of it. We have been doing “Yammer on Tour” for about a year in a dozen cites and have had phenomenal attendance. We had 400 people in London, 400 people in Sydney. We thought the time had come and that we were big enough that we should have our first user conference. It’s an opportunity for our customers to come talk to us and to each other. We will also have a lot of prospects there, people who are interested in becoming Yammer customers. We will have developers there. It’s an opportunity for everybody to come together and learn from each other as much as from us.

X: I have to ask you about your Facebook post from August 17, where you said that “Silicon Valley as we know it may be coming to an end” and argued that there’s a dwindling supply of ideas for successful new companies. That post kicked up a huge dust storm of replies and counterarguments from people like Marc Andreessen. First, what inspired you to post that?

DS: Why do people post anything on Facebook? This was just a spontaneous utterance. Once it got picked up, I had to explain my views in more detail, so that’s what I did.

X: Were you surprised by the vehemence of the responses?

DS: Yeah, absolutely. In hindsight, I guess the question is, why did people react so vehemently? There was so much emotion that maybe people thought I was saying they aren’t doing good work. That wasn’t my point. It was more of a structural point about the industry. I never said that Silicon Valley was dying or dead. What I said was that the Internet industry is different from what it was 15 years ago. We have large incumbents, and that creates issues and constraints that entrepreneurs have to work around.

The good news is that the Internet is expanding and overrunning traditional institutions. As Marc Andreessen said, software is eating the world. That creates tremendous opportunities for entrepreneurs to go into new industries. I compared the Internet ecosystem to a forest. It’s not a young-growth forest anymore. There are some giant redwoods at the center. But the forest is expanding, so I say go to the outskirts, find some new markets to explore.

X: Who are the big redwoods that people should stay away from, and what areas are still on the outskirts?

DS: Maybe “stay away from” is too strong a term. Now that I am part of Microsoft, I don’t want to be saying to people, “Stay away from us.” If you’ve got a way to disrupt our business, go for it. But you don’t want your idea to be so obvious that it’s almost surely on the near-term product roadmap of one of these big companies, because they are going to do it in the next year, and they have enormous resources. So you have to come up with an idea that is non-obvious and is not on anyone’s near-term roadmap.

One of the things that bought us a couple of years was that everyone hated the idea of enterprise social networking. Most people thought it was crazy. We could barely get it funded. So if you want some degree of non-obviousness, you just go into a market that doesn’t have any other tech companies in it. I’ve pointed to Uber in taxicabs, and I’m an investor in Cherry, which is attacking the car wash industry. I love that, because there are no big tech companies playing in that space.

X: There’s a point of view that big waves of innovation only happen when you get a brand-new platform that people can build on top of. Yammer, for example, didn’t exactly build on top of Facebook, but Facebook did establish this category of social networking that you capitalized on. Apple and Google enabled something similar with iOS and Android. Do you think we’ll now have to wait for another fundamental platform advance before there can be another wave of green-field innovation?

DS: No. What I think is creating movement is the fact that the Internet is going into more spaces. Mobile is huge right now because you can now carry computer power wherever you go. You’ve got this programmable device that can be a control panel for any application, and it’s all touch-enabled. That unlocks the potential for a vast array of new applications.

I do think that if you look at what’s happening with Zynga on Facebook, you definitely want to exploit these platforms to get distribution, but you need to get escape velocity so you can get off them eventually. You don’t want to be completely dependent, if you want to create a viable company. We were inspired by what Facebook and Twitter did, but we never had any dependence on them. Ideally, you have some soft of network effect across devices or across platforms so that you are not beholden to one platform.

X: I want to ask you a couple of questions that aren’t directly related to Yammer, because I know you’re likely to have opinions. One is something we talked about last time—secondary markets and vested startup employees cashing in their shares before an IPO. Among startup CEOs, there was a lot of uncertainty and concern over that subject a year or two ago, but now we’ve had the Facebook IPO and it seems that there’s less urgency. Do you think that issue is settling down?

DS: I think the whole process is becoming more standardized. It used to be that individuals and companies were just kind of hacking it. The whole secondary market strategy started with these situations where individuals would go off and sell their shares. Now companies are taking control of the process. One company bylaw that is becoming more and more standard is that individuals are not allowed to transfer their shares without the approval of the company. So I think more and more of these secondary sales are going to require the consent of the company, and therefore companies will control when it takes place—probably at some sort of event. But I think secondary trading will continue, to the extent that the IPO market has faltered and companies feel like they need to provide liquidity. But the Wild West era is being reined in.

X: How important is a college education? Your college friend and PayPal colleague Peter Thiel is a vocal critic of universities, and has been putting his money where his mouth is with the Thiel Fellowships, which allow students under 20 to bypass universities and pursue their passions or their businesses.

DS: I guess it kind of depends on what you do there. If you spend five years partying, it’s probably not very valuable and the government should probably not have to pay for that. On the other hand, it’s possible that if you study computer science and become a programmer, that’s really valuable.

Since I met Peter at college, and that ultimately led to us doing PayPal, I would say that for that reason alone it was probably a valuable thing to do. But Peter is not saying that everybody should [skip college]. There has been this hysterical reaction to the idea of 20 kids, out of millions, dropping out and doing the Thiel Fellowships.

I do think that the culture is becoming very credential-oriented, and that people now value a college education just as a credential, without actually looking beyond it to see if it truly has value for each person. It is the case that college graduates earn more. But it’s also the case that the smartest, most driven people tend to go to college, so you can’t say there is causation there. All you can say is that college didn’t ruin these people entirely.

X: When you’re interviewing people at Yammer, do you care if they have a college degree on their resume?

DS: Not really. My CTO Adam Pisoni dropped out of high school—he’s not even a college dropout. So when it comes to computer programmers, I could care less what their credentials are. The question is how good are you, and on-the-job training is much more valuable than learning in a classroom. I don’t think anyone in a startup really cares about your credentials.

X: How bad is the talent crunch right now in Silicon Valley? Are you finding the people you need?

DS: I think we are finding enough people to keep growing, but it’s a very serious issue. The biggest constraint right now on the technology industry is a lack of software programmers. We need way more.

X: Do you see any encouraging signs in that area?

DS: Somebody told me the other day that computer science is now the most popular major at Stanford. That is very encouraging. When I was there in the early ‘90s, I think it was political science or something equally useless. I think people are realizing that this is the industry of the future. When I was in school, the movie Wall Street was the big cultural touchstone and everybody wanted to be Gordon Gekko. Now it’s The Social Network, and everybody wants to be Mark Zuckerberg. There are some good things happening culturally, in terms of people waking up to the world of entrepreneurialism. When I graduated, I didn’t even know it was an option, but it’s now something college students are very aware of. So if we have more smart kids graduating from college or dropping out of college with the mindset that they are going to go into something entrepreneurial, rather than become Wall Street bankers, that can only be a good thing.

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

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