Editor's note: Inc. Magazine announced its pick for 2016 Company of the Year on Tuesday, November 29. It's Riot Games! Here, we spotlight Slack, last year's Company of the Year winner.

Slack CEO Stewart Butterfield is a playful fellow, even when he's arming for war. When he left his job at Yahoo in 2008, Butterfield famously did so in one of the all-time weirdest resignation letters, a drawn-out riff on his passion for tin.

In November 2016, Butterfield dusted off his stationery and composed another cheeky note. This one was addressed to Microsoft, "congratulating" the software giant on its launch of a new workplace-collaboration product called Teams--a product press reports had for months been foreshadowing as a would-be "Slack-killer."

"Wow. Big news! Congratulations on today's announcements," Butterfield wrote in the letter, which he published as a full-page ad in The New York Times. "We're genuinely excited to have some competition."

"However," he went on, "this is harder than it looks.... You're not going to create something people really love by making a big list of Slack's features and simply checking those boxes."

Butterfield was sincere in embracing his frenemy. A year ago, when Inc. named Slack its Company of the Year for 2015, it was essentially in a category of one, a niche product beloved among early adopters in the tech and media industries but relatively unknown in other parts of the business world. In a way, that was limiting, says Butterfield: Since most potential customers weren't using anything like Slack for intra-office chat and document sharing, the idea of spending money on it was a foreign concept.

One step ahead

Twelve months later, all of that has changed. Without abandoning its trademark whimsicality, Slack has grown up, a lot. It now has more than 1.25 million paid users, up 160 percent from a year ago. Annual recurring revenue has also doubled, to more than $100 million. The 33,000 teams using the paid premium version include corporate giants like IBM and Comcast. Slack's work force has swelled accordingly, to more than 650 people, with key executive hires coming from places like Salesforce, Apple, and Palantir. It has added a cool billion dollars to its valuation, now at $3.8 billion.

And, yes, the competition has gotten as big as it gets, in the form of Microsoft, the 800-pound gorilla of the enterprise software world. Assessing the new threat, Butterfield is mostly sanguine. Since Microsoft is pushing Teams as part of its premium Office 365 bundle, he says, that means the 70 percent of businesses that don't use Office are still ripe for the taking.

More important, he says, Slack has a huge head start, one that will become much more apparent when it unveils its new enterprise-tier offering in the first quarter of 2017. That one is built specifically for use within very large organizations, with capabilities such as federating teams and managing permissions across tens of thousands of users.

Playing catch-up, he says, Microsoft is nowhere close to being able to challenge Slack on enterprise. "This might sound unnecessarily biting, but they haven't seen what we've done yet, so they don't know they're going to have to copy it," he says. "I think they just look at Slack and see the basic features of it, but they don't understand what a challenge it's going to be to administer when you have hundreds and hundreds or thousands of teams. We've just seen so many examples of how it works or fails to work in really large organizations."

Another change from a year ago: Slack now has an actual, honest-to-God sales operation. It has even dabbled in television brand advertising. But the key to growing the customer base continues to be making sure Slack's viral word of mouth translates into new premium subscriptions. Toward that end, Butterfield has built out Slack's customer success team, whose members, among other things, conduct training sessions at big companies to make sure employees using Slack for the first time know how to get the most out of it. "If it was just turned on for 5,000 people all at once with no instruction, it just wouldn't work," he says. "It needs to come with some starter culture."

At the heart of Slack's selling proposition is enhanced productivity. In surveys, customers have told the startup their teams are, on average, 32 percent more effective since they got on Slack. Butterfield discounts that figure as probably inflated, but notes that even a 3 percent productivity increase for a team of, say, software engineers easily enough generates "massive return" on an $80,000 premium subscription or a $384,000 enterprise subscription.

Big plans, bigger challenges

Someday soon, he hopes, Slack will be able to make teams radically more efficient still. Slack's API already makes it easy to create programmable "bot" users that employ conversational chat to carry out simple functions--for instance, turning receipts into expense reports. As artificial intelligence makes bots more capable, and as companies that use Slack integrate it more and more into their other software systems, he says, "you could ask a bot the kind of question you would ask a really competent chief of staff who had the ability to read every single message in every single channel," he says. "If you had that hypothetical never-sleeps, infinite-capacity, perfect-memory chief of staff, we'd get a lot more leverage out of the investment we make in all these IT systems and software platforms."

Speaking of getting leverage out of an investment, Slack's backers, who have given the startup some $540 million in capital to date, are probably starting to think about their own returns. Unlike so-called "unicorns" that will do anything to delay going public, Slack, says Butterfield, has been operating in a way that will allow it to IPO whenever it wants, hiring a controller and conducting multiple audits. The major obstacle for now is that Slack is simply shooting up too fast to be able to give Wall Street any reliable forecast of its future growth. "One of the things you need to go public is a high degree of predictability," he says. "When you're growing more than 100 percent a year, a little change results in a big delta."

Published on: Nov 28, 2016