Disclaimer: This interview is for informational purposes only and should not be relied upon as a basis for investment decisions. In Practise is an independent publisher and all opinions expressed by guests are solely their own opinions and do not reflect the opinion of In Practise.

{audio:0:03:12} Thanks for your time. Just to give you a quick intro, so that you know who you're talking to, I'm a long-term investor. I manage money for my family through an investment company and through a handful of partners, other entrepreneur families. The investment philosophy is very long-term and very concentrated on holding high-quality businesses, and not doing much buying and selling. As a result of that, having high conviction and knowing what you own. The sectors that we invest in are ecommerce and enterprise software payments, so adjacent areas, I would say. As part of diving into those sectors, I came across Twilio roughly two years ago. I've been continuously researching the company. At this point I want to validate or just disconfirm certain hypotheses. That's why I'm doing these calls.

{audio:0:04:30} That sounds great. It's a tremendously interesting company, topic, industry space, so happy to talk with you.

{audio:0:04:39} Let's maybe start with you. I saw what you did there based on the LinkedIn description. Maybe just take me back. Tell me what was your role, how long were you there and what your impressions were?

{audio:0:04:58} I was the general manager for the phone numbers business unit. As you may know, the phone numbers business unit is tremendously important to Twilio as a company and to its revenue composition, because everything runs on phone numbers. Messaging, voice, even WhatsApp runs on phone numbers to a certain degree. It is also the gateway by which many large customers enter the company, historically. You want to change that as you attempt to scale even more. Historically, that has been the entry point to both developer and, more recently, enterprise customers. Everyone in the business unit reported to me; design, product, engineering, administrative, and other functions. I was responsible for the P&L for that business unit. At the time, there were five or so business units. Other business units have names like voice and video, messaging. Phone numbers of course is another business unit. 

{audio:0:06:04} It's interesting that you say that, because I know the reporting, and I've never seen the phone number as a unit. The units I know are messaging, voice, email, apps and services.

{audio:0:06:19} Phone numbers is part of the Super Network. The Super Network is something that's talked about as the base layer that underlies all of these things. Talking about phone numbers for people outside of Twilio doesn't sound like the most exciting or dynamic source of revenue, but it is a very, very important part of the company, and still, strangely, 175 years after we started using them, a very, very durable and important technology. I think that it isn't an exciting, top-line item to talk about. It's often talked about more in the context of the Twilio Super Network, which sounds certainly more super and more exciting. 

{audio:0:07:05} Can you maybe describe how the phone business unit interrelates with those other segments, and how does it relate to the Super Network? Maybe explain what you meant by base layer. 

{audio:0:07:31} The phone system around the world is very vulcanized. It's very heterogeneous in terms of technologies. It is covered by a very disparate set of regulatory schemes across countries. For instance, the phone systems in Germany, Colombia, Bangladesh are all different entities, yet we can make phone calls to one another, with varying quality, varying delivery of SMS. What the Super Network does is overlies the world's telephone system and makes it possible to transparently, as a developer, make an API call that will work sending SMSs in Bangladesh, it will work sending SMSs in Germany and making phone calls between those places. Developers don't have to know about the world's telephony complexity. 

{audio:0:08:20} As part of the Super Network, there's also the addition of things like configuring certain parts of WhatsApp so that it functions more like a developer expects, so developers don't have to know the arcana of this underlying stuff. That includes, did the SMS get through, what is the call quality. All of this is transparently taken care of by this magic Super Network. A big, big component of the Super Network, probably the biggest component, is how phone numbers in the phone system work.

{audio:0:08:54} Is Twilio unique? Do other companies also have a super network like it?

{audio:0:09:09} Of course, Super Network is a bit of branding. Your question is, do other companies have an abstraction layer on top of this complexity that makes it easier for developers. The answer is certainly yes. Historically, the answer has been no. This is a change. Historically, if you were a developer maybe 10 years ago, and you wanted to make phone calls and send SMSs, you had very few options that were friendly and easy enough so that a developer who's developing a social media app, an ecommerce app or a checkout app could easily and reliably be able to send an SMS to a customer. It basically became that the word Twilio was synonymous with doing that. The Twilio logo itself is the dial pad of a phone. This is very much part of the DNA of the company and the history and the branding. 

{audio:0:10:11} Technology gets easier and easier and becomes more and more commoditized in every realm. This is no exception. You have startup-ish companies like Infobip in Croatia and MessageBird in the Netherlands. These new startups are coming into this realm, and they're doing it in the way you expect. They're saying, okay, we're not going to get all 200-plus countries that you can use Twilio in, but who cares, because if we have the top 30 countries, we're going to get the most monetizable customers at the lower cost of complexity. We're going to shear off this very profitable part of voice and messaging. You see MessageBird, Infobip, Vonage and Nexmo doing that, and basically moving from there. A year and a half ago, you even saw Microsoft introducing Microsoft communication services that also does all this Twilio stuff. They've chosen to do a very small set of countries. They feel that it's worth putting their foot in the water here rather than relying on a third party like Twilio or MessageBird. 

{audio:0:11:27} Yes, other companies are now doing this because there are two factors involved. Making voice calls and sending SMSs has become highly commoditized. I think that everyone realized that these decades-old or centuries-old technologies are not our future. There is an interest in, I guess, extracting the value from it and being positioned to move to what comes next, which is almost certainly OTT messaging, over-the-top, meaning WhatsApp, push messaging to your phone, things that don't use the world's telephone system.

{audio:0:12:17} There is a lot of different pieces to which I would like to double click on. How does Twilio face this increased competition?

{audio:0:12:37} It's very interesting. You'll see that some of the competitors now have broader offerings than Twilio in some sense. You'll see that MessageBird and Infobip will offer messaging channels like Instagram and Line and other ways to send messages that Twilio either doesn't offer or doesn't officially support. They're really doubling down on this ability to send SMSs and send voice. 

{audio:0:13:07} Twilio's going another direction. Twilio's going what we in Silicon Valley call up-stack. They have decided that they see how much money their customers are making, like call centers and contact centers like Flex and customer engagement platforms and how much money and how much of a deeper relationship with a customer those companies are able to achieve using Twilio. Twilio wants to enter that market itself. You see Twilio having its own contact center. It's clearly building its own customer engagement platform and it's realizing that phone numbers are interesting. If we woke up tomorrow and iMessage and RCS – Google’s and Apple's ways of messaging – decided to interact, SMS would be dead overnight. This is not a revenue stream or a technology that you want to bet the future of what is a very high growth company on; a company that's very committed to very high growth. You don't want to commit those growth numbers to expansion of use of the phone system. I think that just doesn't make sense. 

{audio:0:14:26} You think the commoditization and I suspect pricing pressure will be less higher up the stack?

{audio:0:14:38} Yes, of course. Twilio's producing a more programmable Salesforce for builders, but it's a customer engagement platform. When you see Salesforce, their customers are pretty price-independent. They are religiously attached to the Salesforce universe. They have incredible trust in Salesforce. If you just want to send an SMS when your checkout is complete, you want to send the customer an SMS when their delivery is being made, that is not a very deep relationship with the customer. In fact, the end customer doesn't even know that Twilio's delivering that to them. The world knows Salesforce. They have a deep relationship with Salesforce. Yes, there's certainly greater ability to make more money. I think Salesforce has proven this.

{audio:0:15:30} Was that the internal ambition? Was that the vision, to replicate what Salesforce has been doing? That's what I took away doing my desk and field research. Is that something that you internally also talked about?

{audio:0:15:45} Yes, it's clear that the leading customer engagement platform in the world is Salesforce. There are other various Salesforce customer engagement platforms, and of course, discussion centered around what was seen in existing customer engagement platforms and the real special superpower that Twilio could bring to customer engagement, which is that its audience, its DNA, is in builders, in people who build things; in programmers who want to assemble things that are custom for their uses. 

{audio:0:16:19} That's an opposite direction that Salesforce is coming in from. Salesforce is coming in from this approach of, it’s all built for you. They're trying to add customization with Salesforce Ad Club, but they're coming at customer engagement from a prepackaged business use case position, whereas Twilio appears to be coming at it more from their strength with builders, programmers, these people that they believe and I believe are becoming more and more decision makers in all businesses. I say appears, because I want to speak from publicly available sources.

{audio:0:17:00} Do you think that Twilio has a shot at winning this? I'm not a developer, but my understanding is that the capabilities required to build applications is a different one than the layer at Twilio is coming from originally, which is close to the infrastructure piece, I would say.

{audio:0:17:24} I don't think that's exactly correct. I think that developers of all types – if you look at a developer who's sitting down – more and more, are really into business calls. Developer sits down; I want to build a social media app; I want to build the next Snapchat. As part of that, they need to make some phone calls and send some messages. They are not operating at the infrastructure level. They are operating at the application level. Their goal is to produce a functioning application for their customers. Those are Twilio's customers. These APIs that Twilio uses are expressly designed to separate you from infrastructural needs and to keep you at the business level using APIs.

{audio:0:18:06} Part of the validation that that is where the money is, is that you see Salesforce aggressively moving in this direction, which is a harder direction to go, actually, because opening up the legacy infrastructure to make it programmable is a little harder than starting at the infrastructural level. I think Twilio has a shot, but I have to say, the power of incumbency and the massive amount of boots on the ground that large customer engagement platforms like Salesforce have is a challenge. 

{audio:0:18:36} Another challenge Twilio may have is that you're going to trust your customer engagement platform with all your critical business data. Historically, Twilio's done the opposite. They actually have not kept the data because of telephony, messaging. You can't really keep a lot of the stuff around from a regulatory standpoint. The addition of Segment I think is a play to inject the competency into Twilio's DNA. It remains to be seen if that'll be successful. If it is, they do have a shot at becoming a customer engagement platform that is successful.

{audio:0:19:15} How are you impacted in your role and in your business unit with that shift away to higher up the stack, let's say?

{audio:0:19:29} I think I'm really clear-eyed about this, and I think everyone is, that phone numbers have been a huge part of Twilio's growth, as has SMS messaging. SMS messaging, voice, phone numbers is still a huge proportion of revenue. I do think everyone realizes that, in order to achieve the kind of world-dominating growth honestly that Jeff Lawson talks about, we cannot do that simply being the communication layer for other players that are achieving that dominance. We want to be one of those players. I think that Twilio's very good at enlisting all the business units in its corporate vision; sometimes very over-the-top, very rah-rah, but employees want to be part of something that's successful and that is projected. 

{audio:0:20:21} I think if you're asking are people in phone numbers and messaging and voice upset that there's so much focus up-stack, answer is no. They're really excited to be part of a successful company. Remember, a lot of the people there are motivated by stock-based compensation and the enormous financial success of the company. They want to further that. There is not territoriality around the resources being poured into doubling down on phone numbers or messaging.

{audio:0:20:51} Maybe related to that, I read that Twilio's structured in very small, independent teams. Is that true? Is it how you read about it? How many teams did you have in your business unit, for instance? Could you describe how this is structured.

{audio:0:21:27} It is true. This is public information we just talked about. There's a lot of people that have given talks about this at the company. There are a lot of small, independent teams. For instance, you would have a team dedicated to the quality of the calls, dedicated to the quality of the messaging. In Silicon Valley lore, these are often described as loosely coupled, having the autonomy to innovate and succeed and build. There's a lot of great things about small teams. In any tech company, there's the obvious disadvantage that these small teams are racing ahead independently and sometimes working across purposes or having then compatibility and meshing issues. I think Twilio does a decent job at this. 

{audio:0:22:16} Part of the reason you want a company like Twilio as a one-stop shop for messaging and voice and now all of the new offerings within Segment and SendGrid is that you want all this stuff to work in a very, very cohesive and parallel from a user experience standpoint, an API standpoint, technology standpoint. That can be harder to achieve with small teams. 

{audio:0:22:48} The answer to your question is yes, it's true that Twilio works in small teams. There are lots of them. They are truly autonomous in many senses. The downside of that is that it can be an impediment to the most efficient growth, because while you may be innovating in some sense, you have a tax to pay in making sure that all these small teams have built things that work well together. It may not be necessary to have extremely strong customer-facing innovations and things like phone numbers and messaging, where it's pretty clear what you want to do. You want to improve UI, sure. You want to have better quality. I don't know if it having fully autonomous small teams is fully compatible with larger growth. I think that the company realizes that it is making a lot of internal steps to make sure that there's a moderation of these small teams so that they do work in a way that meshes well together and produces a cohesive product. The company's aware of it, for sure.

{audio:0:23:59} One more thing is that when you're recruiting in Silicon Valley, it's a very powerful recruiting tool to talk about having small, autonomous teams that have the ability to innovate. A lot of this is true. The accent on it is, I think, also aimed at recruiting.

{audio:0:24:19} Maybe two related questions. There were many leadership changes over the past year or so, the past two years. How should an outsider view this, in your eyes? Is it part of the journey? Is it part of these changes that are being made? What's your take?

{audio:0:24:54} This is my personal opinion, as a member of the leadership team. I was not on the E team. I was a general manager. All these people are one level above me. I know them all. The people who have left are great people. The people I know who have recently come in are really great people. I think that it should not be viewed as dysfunction at the company. Really stalwart, steady people like Khozema and Jeff are just part of the institutional DNA. They have endured through all these changes. I will say changes in product and sales is a bit disorienting. I wouldn't want to see that continue long-term. I think it's probably a legitimate accommodation of the type of growth they need to achieve and the change in the business to a customer experience platform. It probably makes sense that there were changes. It's probably excessive. 

{audio:0:26:02} I think that in any company that is such a tremendous financial success, from a personal standpoint, some people do so well financially that they choose to exit. I think that's a side effect of having such a successful company. This extends to layers of leadership below the executive team, where you've made so much on stock you reconsider your life, honestly. I wouldn't say that there's problems in the company, that's the reason. This could cause problems if it endures long-term. 

{audio:0:26:38} It's not something that worries you based on what you've seen so far, but if it were to continue, it would be worrisome?

{audio:0:26:48} Yes. This is certainly publicly available from people posting in LinkedIn and blogs and articles. Most of the attention goes to the senior execs that are turning over. In any company where you have a huge inflation of stock failure like that and people are making a lot of money, there is going to be turnover. It's coming simultaneously with an expansion of the scope of the business into a customer experience platform. I'm hoping that we would see solidification of the top-tier executives and that second and third tier as well. I think it probably will happen.

{audio:0:27:26} What's your view of the leadership team behind Jeff Lawson? You said they were good people, but if something were to happen to him, would the company continue to do well?

{audio:0:27:40} This is a tough question, because I would not want to say that Jeff is not necessary.

{audio:0:27:49} What I'm saying is, there are companies that are built to last for a very long time and, obviously, the founders are important and they're visionaries and they're there. Let's say they have a strong bench that in case something happens, some people could carry the freight. Then there are others that don't do that. I'm trying to understand what Jeff has done and how he has positioned Twilio.

{audio:0:28:23} I can only speak to the time that I was there, which is up to about a year ago. You know there have been a lot of changes since then. It's always been the case that Jeff has really put very, very strong people, often people who disagree with him, on the leadership team. Certainly, he is a big personality, for sure. He's inspirational to some people at the company, and he drives other people crazy. That's also quite publicly known. I think that that's moderated by a very competent leadership team around him. 

{audio:0:29:02} There's a certain segment of the company that basically would walk over hot coals and do anything that Jeff said. That level of extreme dedication to a very, very powerful leader would probably be the biggest loss. I do think the leadership team could take over on all those fronts, but from a recruitment standpoint, from a retention standpoint, from a motivation standpoint, that would be a hit.

{audio:0:29:44} I want to hold investments for a long time so one of the most important things is culture and the quality of people. That's why I'm putting the emphasis on that. If you had to describe the culture or the soul, let's say, of Twilio in five words, what would these five words be?

{audio:0:30:08} The first would be intense, for sure. This is a long hours, very intense workplace in all senses. The second word I would say, very hardworking. People are extremely hardworking there, in some cases to a fault. If you're retiring, it can be very rewarding. It's just intense and hardworking; it's very goal-driven. There are metrics galore. There's constant refinement of process. Again, almost it can be to a fault, in my sense. This is my personal opinion. A lot of people thrive on this sort of thing.

{audio:0:30:54} This may be a problem with the culture. There's almost a hyper-confidence, an extremely high degree of hyper-confidence in the ability, maybe even superiority, of Twilio. I think that that can be powerful, but it is interesting that one of the publicly stated values of Twilio is be humble. I think that even the company realizes that this can be a flaw in the culture when it goes to over-confidence. 

{audio:0:31:24} Intense, hardworking, goal-driven, hyper-confident, and for the last one, I'd say customer-reactive. I think this is a bit of the culture that could use some work, just in my opinion. When customers see a problem, when customers are experiencing pain, there is incredible empathy for those customers. There are pairs of shoes hanging all over the office. There's a saying that you want to walk in the customer's shoes. They ceremonially trade shoes with the customer; a lot of stuff that happens.

{audio:0:31:59} It can be customer-reactive. We can sometimes wait until the customers experience a problem and then have a very, very strong immediate reaction to that and just fix it and make it work. When you are working so hard and you're growing so fast, sometimes you wait to react to customer needs. If there is a flaw in the culture it is that you may want to be more thoughtful and move more toward anticipating the customer. I do think the company's moving in that direction; it will be forced. In my opinion, as of a year ago, that is a cultural direction that the company could improve on. 

{audio:0:32:40} May I ask you – because you left one year ago – why did you leave?

{audio:0:32:48} It was a little bit of the things I talked about. Some of it was the good performance in stock did open up some other options. It's not really related to the company. I personally wanted to work in a very small-sized startup kind of environment. I wanted to be permanently located where my family is. That is a little tougher at Twilio than in a more contemplative, research-oriented startup. It was a more personal decision. I do think it's a great company, great place to be. As I said, it's very intense. There's a lot of hours.

{audio:0:33:50} Understood. I've heard what works well at Twilio. You mentioned one or two things that did not work well, which are the hyper-confidence which could be a danger and the other thing being the reactiveness instead of proactively addressing these customer issues. What else does not work well?

{audio:0:34:19} As I said, as the company moves towards having a more up-stacked, more integrated platform, I do think there's going to have to be a cultural shift up to more top-down planning, in my opinion, rather than allowing small teams to work so independently. That may come at the cost of innovation in some sectors, such as things that are basically lower on the marketecture diagram, lower in the cake, which would be messaging, voice.

{audio:0:34:51} That's probably a cultural change. I think Twilio too is working on it, but being more outward-looking – this is the hyper-confidence part – taking competitors more seriously and being more outward-looking about what they are doing, and learning from and collaborating with competitors, I think, or being more of the community of companies that are working in the communication platform space, rather than the utterly dominant leader. You'll need the collaboration of those companies to be a successful customer experience platform.  

{audio:0:35:33} Two thoughts here. One is that the collaboration or competition with hyperscale was alluded to that before with Microsoft. The other thing is the collaboration with integrators. I think that that will be important in that next phase. If we maybe double-click on the hyperscaler first, do you see them as a risk? Is Microsoft – and I think AWS also has a competing product. –  something to worry about, in your opinion? If yes, why, or why not?

{audio:0:36:12} Yes, it is. I think that we all thought from a developer standpoint, when all these developer tools appeared on the internet, a thousand flowers would bloom and everything would be wonderful. I do think that developers are attracted to a single platform that can do all the things for that. If you are a dedicated Azure developer, and you have Microsoft communication services, and it comes from a billing, from an integration, from an API standpoint, just as part of your existing platform, it is attractive to use it until you can't, until you need to make those phone calls to Belarus and you can't do it and you add Twilio. It is a danger. It could certainly shear off a part of the communications revenue, which is still a large part of the company's revenue.

{audio:0:37:06} Having said that, many vendors, many companies multi-source. You'll notice, if you see Twilio and you see all its competitors, everybody's got Uber as a customer, everybody's got Lyft as a customer, everybody's got Amazon as a customer. That's because it is becoming much easier – for phone numbers, for SMS, for voice calls – to have multiple vendors, even if there's price fluctuations and vendor is dynamically switched to the other vendor. You can do this in code now. It's becoming trivially simple. When you talk about commoditization, commoditization of Wii is one thing but you still have to ship the Wii on a rail car. Commoditization of SMS is pretty easy. You just need a line of software to switch your vendor in a microsite.

{audio:0:37:52} These platforms, where they will shear off some of Twilio's business perhaps, due to cost or ease of integration, probably won't eliminate Twilio entirely as a vendor, because of Twilio's broader reach and coverage and better maturity in the offering in some sense, and the ability for end customers to multi-source easily. Twilio will probably remain a vendor, although in many cases probably not the vendor of these services.

{audio:0:38:29} That's very insightful. I would want to understand a little bit more about financials and capital location at Twilio. You were saying that the company was very metrics-driven. Could you maybe share how that was? What were the metrics you were focusing on? How is business run, basically?

{audio:0:39:09} I won't speak to specific metrics, because that would contain contents of leadership meetings. I can tell you about the families of metrics that are really important. There are, as in many tech companies, periodic metric meetings. The people own these metrics, which sounds obvious, but this is not the case at many companies. There is an individual who owns these metrics, who owns the explanation of why they are or are not meeting these metrics. Important families of the metrics center around revenue, for sure. 

{audio:0:39:43} Unlike many companies, people who are at the director level and even below are well aware of the revenue that their product is bringing in and steps they can take to increase that revenue. There's a big emphasis on revenue. There is a big emphasis on customer turn, and obviously, this comes with revenue, but increased usage by customers. That's flagged quite periodically and addressed; customer churn and revenue. It might sound obvious, as a business person, but having these metrics that are important too and having engineers aware of these metrics is a cultural accent on how important this is at Twilio. You won't see that in some other product-driven companies.

{audio:0:40:32} Other stuff that is really important is the usual things such as outages, deliverability. I'd say there's an outsize emphasis on customer churn, on growth, on customer count, especially for some products. How the customer is purchasing, using, and succeeding with the product is a metric that percolates down to a much lower level than you may see at other companies. I think this speaks to the desire for growth and revenue.

{audio:0:41:09} What about margin and rough margin? I'm asking this because the narrative right now in financial markets – and for Twilio that has been true for a long time – is this focus on this low gross margin that you have in the messaging business.

{audio:0:41:28} I should've mentioned that as well. Margins are something that I was very aware of and responsible for in my daily job. Finding ways to make margins better, by decreasing unneeded cost is a big focus. As at some companies like Amazon and others, there's a concept of finding mechanisms, even at the IC level, where you can improve costs, and that is celebrated and included in the metrics to encourage that sort of behavior. 

{audio:0:42:05} Having said that, as with anything that's commoditizing as voice messaging, phone numbers, that big segment of revenue, deliverability, this stuff is all becoming highly commoditized. It is very, very difficult to expand margins, because you are always subject to the underlying cost of your vendors. In some cases, those vendors are introducing APIs to compete with you. You've seen moves like Twilio moving to buy Zipwhip, which was an underlying vendor. You can try to integrate and consume your underlying vendors, but I think that's just not the direction Twilio wants to go. The ability to improve margins is going to be mostly limited to the efficiencies that the business can wring out of the system. There's probably still more there, but it's not going to be a step change, in my opinion. 

{audio:0:43:06} Twilio is very peculiar, because you've had this incredible revenue growth, 7x to 10x since they went public, I think. The way the business is run is it's run basically at break even, always has been. It doesn't need any capital. It's very unique. As an investor, you need to try to understand, what is investment. The R&D piece is quite large. The marketing piece is quite large. I'm trying to understand how is the business running, how would the core probability of that business look if it was not investing for growth so aggressively? Is that something that is being discussed, considered internally?

{audio:0:44:00} Yes. You can see that the up-stack business is a much higher margin. Obviously, a lot of R&D is going into stuff that is new. The stuff that is new is the stuff that is up-stack. The stuff that is up-stack his obviously higher margin than the commodity phone numbers and stuff. Certainly, it's not any secret that the increased margin, increased revenue, the future of the company is going to be an up-stack play, where customer experience platforms make an awful lot of money, and their margins are pretty small. Jeff has said that many times.

{audio:0:44:45} It's the success of that shift, I think, that a large amount of the R&D money is being bet on. If that comes to fruition, you would see the improvement of margin and expansion of revenue.

{audio:0:45:08} There's continuous R&D on delivering better and more efficient phone, messaging, voice, video even; the stuff that's been going on for a while. Part of that is into accommodating regulatory regimes around the world that are becoming more and more stringent. That's a hard thing to do. It's publicly released information that Twilio has spent a lot of money making sure that, across the world, they are in regulatory compliance with all the countries in which they operate. This is not true of many competitors, especially startups that are not able to invest that sort of money. For large enterprise players, that's very appealing. 

{audio:0:45:54} Even if a competitor who is doing voice messaging may be a bit cheaper, I think that Twilio has invested widely in making sure that it has regulatory compliance – and this is expensive things, not just check boxes – and software to support it. There's transparency to the customer, user interfaces, APIs that support the regulatory compliance. All of this was a fairly big investment by Twilio. I think it is the right one if you want to preserve the revenue that you need to get from voice and phone numbers and to make it the adult in the room of this market where a startup is not able to maybe be in perfect compliance across the world.

{audio:0:46:35} In terms of this R&D investment, how is the progress or the return on that investment tracked? Is that also scientific and metric-driven. I'm trying to understand how much waste there is in Twilio?

{audio:0:46:59} Things are absolutely tracked. It is very metric-driven, I think sometimes to a fault. If you have any process, especially one like R&D, where it's a creative process, essentially, and an innovation process, it can be hard to attach metrics. If you do have a set of nine metrics that you're tracking, you may not actually be detecting natural progress. This is a black art that affects the industry. 

{audio:0:47:26} When you are moving into new territory, you're obviously going to have more money spent – I wouldn't call it waste – that doesn't directly result in revenue or improved margins or the type of financial metrics that you'd like. Yes, when you're spending a disproportionate amount of R&D in a brand-new market, you're going to have more revenue that is not productive to the upcoming order, but if you do it right, is productive to the FY two years hence.

{audio:0:48:02} Would you consider the approach to that to be disciplined? You've seen other organizations; is it disciplined, tracked, reviewed, adapted?

{audio:0:48:17} Yes, I think that's true. As we talked about, there has been a fair amount of executive turnover. That has to affect the efficiency by which R&D is prosecuted. I think settling in to an executive team that has a consistent vision and direction for their reports is going to help R&D efforts achieve their goals.

{audio:0:48:54} In the grand scheme of things, across tech companies, I think Twilio is doing a better than average job in tracking the success of R&D efforts. One thing that companies have a really hard time with is, when R&D efforts is not successful, ending them and moving to a more successful path. Twilio's very good at that. They're pretty clear-eyed about R&D efforts that are not succeeding and moving in a more productive direction. In the sense that Google would probably be the best at that and maybe Amazon's one of the worst at that. Twilio's quite good at it.

{audio:0:49:30} You would say Google is good at that, and Amazon is not. Interesting.

{audio:0:49:35} From a developer standpoint, Google loves to kill things, to the point where you can't even depend that the product is going to be there next week. As a developer, at Amazon – I'm talking about the AWS side of the business – stuff will stick around for years with only a couple customers on, and they're happy to keep it kicking around. Maybe Amazon's not the best example. They do kill stuff, but it sometimes appears past the point of diminishing returns, which they can support, at least historically, because they just have such a heterogeneous business, with lots of revenue coming in. 

{audio:0:50:14} I think Twilio has a good mix of Salesforce execs and Amazon execs and some Google people. I think they have a good blend. They're pretty clear-eyed about stuff. If there is inefficiency, in my opinion it's due to executive turnover and just the fact that they are moving into something new. For them, it's pretty uncharted territory.

{audio:0:50:35} Maybe one question on the uncharted territory; a lot of things were initiated through M&As. They bought Segment. They did this move with Zipwhip. You talked about product cohesiveness being an important criterion. How have these products been integrated? How would you rate the acquisitions?

{audio:0:51:03} Those are really different acquisitions. With Zipwhip, Twilio's basically buying a supplier so that you can send texts to over 800 numbers. It's just that there's a great efficiency there. In terms of getting great staff, there's not that many humans left in the world who know how the phone system works. Kids are not graduating from college eager to work on the phone system. It's a great acquisition from a human standpoint. It's basically a solidified cash cow.

{audio:0:51:33} The Segment acquisition is totally different. It's like acquiring the trust and the DNA around becoming a customer data platform and getting Twilio's enterprise and other customers’ confidence that Twilio can be the guardian of their data and manage it and move it to this customer experience realm; completely acquiring that whole chunk of R&D that would have to be done. It's good for that reason.

{audio:0:52:03} An acquisition like SendGrid is somewhere in the middle. You want to complete this omnichannel story. Email is not the most advanced technology in the world. I think that that's been a middle job. There are a lot of publicly posted complaints about API not being perfectly compatible or everything not being perfectly compatible, but it's a nice completion of the story, so I think it's a range.

{audio:0:52:26} What did surprise me about Twilio's acquisitions is – if you consider a company that's got that much money around and the stock is that high and aspirations are that great – I was actually surprised that more acquisitions were not completed. I would be surprised from the outside, I should say, that more acquisitions are not completed. I think maybe there's been too much deliberativeness about acquisitions.

{audio:0:52:52} How would you rate the acquisitions for Twilio as a platform, for Twilio as a product? How have they been integrated into the product? Talking about Salesforce, that's something that is being criticized at Salesforce. Those are financially attractive acquisitions that they did, but the product is clunky. It's not cohesive.

{audio:0:53:13} I think it really varies. Zipwhip, perfectly integrated; SendGrid, pretty well integrated; Segment, too early to tell.

{audio:0:53:20} Are you familiar with the Syniverse investment that they did?

{audio:0:53:31} Can you tell me why they are doing this? What is the rationale?

{audio:0:53:38} As a reader of publicly available sources, I can comment on it. I wouldn't want to comment on any sort of internal discussions. I can tell you that you can see in this industry that there is an enormous amount of consolidation, as there is with most legacy commodity industries. You'll notice that Sinch bought Inteliquent. That's something that certainly is not great, because Inteliquent is a big supplier to Twilio. When you see competitors buying suppliers, your suppliers, that is something you certainly don't want to happen when you're trying to create greater efficiency and you don't want to be subject to increases in underlying cost. 

{audio:0:54:21} The better relationship that Twilio can have with extremely important suppliers and collaborators like Syniverse, the better. I think it's that you want to make sure you have a close, tight and free flowing information relationship with important partners and suppliers like that. You would also like to perhaps fend off purchase of those important partners by other companies. This is all obvious stuff that's been publicly stated.

{audio:0:54:56} Can you explain to me if this Syniverse investment is related to the changes on the 10dlc A2P fees by the carriers?

{audio:0:55:12} I think there's a lot of stuff going on. As I said, there are a lot of changes in regulatory regimes around the world. The US phone system is becoming a lot more like Europe's, where you have to know who the person is when they call. The old days where you pick up the phone and you don't know who it is are probably over; same thing with text messaging. There has to be this thing called STIR/SHAKEN. You have to assert who you are. It has to be accurate. You have to send a message, a commercial message. Commercial messages are being segmented from personal messages. 

{audio:0:55:48} This is all really, really complicated stuff and really expensive to accommodate. It would be much easier if it was just a free-for-all and everybody could do everything. It's an annoyance for customers too. It induces them to leave the phone system entirely and go to OTT and just send push messages or when the package has shipped.

{audio:0:56:09} Having an investment in a partner like that is really important, because it can just reduce the overall cost of dealing with this in changing landscape, and it can also ensure that you have early, accurate information about what their direction is going to be, how you can effectively partner with them. It collapses down a lot of cost. I think it's a good cost-saving measure. It makes sure that no competitor has a better relationship with an important supplier like that.

{audio:0:56:45} What is the biggest risk to Twilio, to the firm? What could kill the firm?

{audio:0:57:02} I think the biggest risk is a really a manifest change in the way that over-the-top messaging works before Twilio is ready to fully transition financially. Say tomorrow, as I said, Apple and Google sign an agreement that RCS and iMessage will interoperate. This would mean that no business in the world needs to send an SMS message using the traditional phone number. That would be a really big change. There are already changes happening, such as the new password.

{audio:0:57:35} A large proportion of SMSs, believe it or not, are 2FA acknowledgements for authentication. This is already insecure, but passwords going away is also a threat in that if this takes hold very quickly and the 2FA revenue vanishes, all suppliers of SMSs around the world are going to see a reduction in revenue. It's a substantial portion. Any force, technologically, that reduces our reliance on the phone system is going to hit that segment of revenue that Twilio still depends on. If it happens really, really quickly or really early, it could be a financial hit at a time when they're relying on that, before they transition to customer experience platform.

{audio:0:58:28} Is that the only thing you're worried about?

{audio:0:58:34} The other thing is that the talent – Silicon Valley engineers, the very top people – are always looking for the very top-performing company where the stocks skyrocketed. They tend to run to whatever company appears to be performing that way. 

Twilio: Positioning & Growth Opportunities

Former VP and General Manager at Twilio

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Former VP and General Manager at Twilio

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