VCs approached Facebook to fund a spinout of Workplace valued at over $1B, but Facebook declined

Workplace -- the app originally built as a version of Facebook for employees to communicate with each other -- now has more than 7 million users, carving out a place for itself as an app to help companies communicate internally using essentially the same tools that have proven sticky in their lives with friends and family. That traction, it turns out, has been giving Workplace attention of another kind.

We've learned that Facebook (before it was rebranded as Meta) was approached by enterprise investors offering the social network a proposition: spin off the organization, they said, and let us back it as a startup. A deal would have valued a newly independent Workplace as a "unicorn" (at least at $1 billion) according to the source.

A source tells us that conversations didn't progress, primarily because Facebook (and now Meta) saw Workplace as a "strategic asset" -- not because Workplace generates sales anywhere close to the billions Meta makes from advertising on platforms like Facebook and Instagram, but important rather for presenting a more diverse face to the market. For regulators, it shows that Facebook/Meta is more than just a too-powerful social network; and for organizations, that Facebook can do more for them than just sell ads.

"It helps make Facebook [and Meta] look like an adult," the source said.

Spokespeople from Meta and Workplace said that they had nothing to share and declined to comment for this article.

It's not clear which investors were involved, but a source says that they were among those focused on late-stage, growth round investments with a view to injecting capital specifically in enterprise opportunities.

Their approach to fund a spun-out Workplace last year would have come at a time when late-stage and private equity investors were (and still are) ramping up their activities to snap up big, mature tech businesses. Thoma Bravo last year was reported to be raising $35 billion to home in on more acquisition opportunities in the space (and it's been making a wide number of investments and acquisitions to that end). Bloomberg estimates that private equity acquisitions totaled some $80 billion in 2021, up more than 140% compared to 2020.

That pace does not look like it is slowing down this year, and it includes PE firms approaching larger technology behemoths to spin out operations as they look to streamline and realise more capital from less core, or possibly unprofitable, or more generally lagging, assets. Just earlier today, Francisco Partners announced a deal to snap up IBM's Watson Health business, reportedly for around $1 billion.

Building a SaaS beachhead

For Meta, an approach to spin out Workplace highlights developments on two fronts.

On the corporate side, there have been calls to break up the company -- the latest development on that front from earlier this month is that the courts ruled that the U.S. Federal Trade Commission can proceed with a lawsuit mandating a sale of WhatsApp and Instagram, alongside, reportedly, a separate probe of its VR division for antitrust violations. It's a situation that some investors and shareholders will see as an opportunity, a tension that Meta might increasingly need to weigh up as it justifies holding on to its various assets.

For Workplace, the division has found itself at a key crossroads in the last several months.

On one side, Workplace has seen a number of key departures, including no less than its top two executives, Karandeep Anand (who this month was named chief product officer at Brex) and Julien Codorniou, who left to become a partner at London VC Felix Capital. A number of others have also left the building to move on to other opportunities elsewhere.

The logic behind some of that movement was described to me, charitably, not as a response to the bad PR that Meta has faced, but natural attrition: Here was a group of people assembled to create and build Workplace from the ground up, and now that it's a more mature product with a clearer focus, it's the right time for new people to come in and work on the next stage. (My personal opinion: Workplace's new head, Ujjwal Singh, feels like a solid choice to lead it right now.)

But even if there has been reporting contradicting that workers might feel worn down by Meta constantly being bashed in the court of public opinion, Workplace has not been immune to it, either. We understand that Workplace signed a huge deal with a major chain of restaurants, one of the biggest, but the customer asked to hold off on announcing the win last autumn because of the bad news cycle and "reputation issues."

"That shit doesn't happen to other SaaS companies," one person said.

That, it seems, would have been one argument in favor of distancing Workplace further from its parent, perhaps by way of a spinout, but it seems that Meta has the opposite idea.

Workplace has actually changed a lot over the years since it was first rolled out as a product.

Founded originally as a "work" version of Facebook -- expanding how Facebook employees were already using Facebook to communicate to each other in private groups -- Workplace was launched as a response to the rise of Slack and other chat apps for the workplace. Workplace's logic was that it had a natural advantage since billions were already using Facebook. And, bringing in a new service targeting a different kind of user, with a different business model -- paid, not ad-supported -- opened the door to new business possibilities for the company.

That's largely remained the strategy for the company even as the focus has changed for Workplace. Originally it introduced a number of integrations with other workplace productivity tools aimed at knowledge workers, part of a bigger effort to compete more directly against the likes of Slack and Teams. But over time, almost on accident, Workplace found an audience with deskless workers who communicated with their employers mainly by mobile. So what has emerged as the sweet spot for Workplace is being a communications app for both categories of workers simultaneously.

"We realised that instead of asking our customers to choose between Teams or Slack and Workplace, you could have both," a source said. "Others could handle real-time messaging communications for knowledge workers, while Workplace does asynchronous best for everyone."

And that appears to be the guiding idea for Workplace's strategy now, which has seen it recently integrate more functionality from Microsoft Teams into its platform to complement Workplace, and yesterday to announce a new integration with WhatsApp, which is already very popular with frontline teams, and will now become a more formal interface for Workplace communications. From what we understand, closer integrations and services involving Meta's VR business and the Portal are also in the works.

While the company is not due to update on user numbers until later this year, a source told us that there are now closer to 10 million users on Workplace, with key customers including some of the world's biggest employers, like Walmart, Astra Zeneca and others.

While Workplace had in the past been sold to customers as a standalone product, "I don't think it will be sold as a standalone application ever again," a source said.

Instead, it will be part of a suite, for example selling business messaging plus Workplace, or along with a Facebook login feature, opening up the prospects of how Meta can engage with those businesses. (The wider sales pitch to enterprises is also likely a behind its motivation to acquire Kustomer, the CRM startup, although that deal has yet to close.)

So far from being ready to part with Workplace, it seems that Meta is now positioning it as part of a beachhead comprising a bigger SaaS business. Can it mobilize as an independent company might have done to realize that opportunity? VCs might still be waiting in the wings if it doesn't.