Zuora’s $50 million Series E round banks on growth of subscriber biz models

By Fritz Nelson , written on September 5, 2013

From The News Desk

Zuora, providers of cloud-based billing and financial software for companies selling subscription services (like cloud-base software companies), announced a Series E round of $50 million today, bringing its total capital raised to $132.5 million since the company’s birth in 2007.

New participants in this round include Vulcan Capital (the investment arm of Paul Allen’s firm, Vulcan Inc.), Northgate and Next World Capital, with additional funding from Zuora’s original investors (Benchmark Capital, Shasta Ventures, Tenaya Capital, Redpoint Ventures, Index Ventures, Greylock Partners, Marc Benioff and David Duffield).

That’s a lofty fan base and a hefty bag of cash.

Zuora CEO Tien Tzuo says the company has been cash-flow positive since 2010, even before it received its Series C round, and that its war-chest was well stocked for at least the next two years, but the company and its investment partners see an explosive opportunity that warrants even faster acceleration for this 300-person startup.

“We think we are in the first 10 percent of the company’s potential valuation,” says Peter Fenton, General Partner at Benchmark, and also a Zuora board member. He says that many of his firm’s portfolio companies had built, or were going to build a billing system for their subscription services, that it was an obvious pain point, rather than just some theoretically good idea.

Personally, I think the company just wants to work its way through the alphabet, becoming the first company to raise a Series Z money.

Zuora used its Series D funding ($36 million) to expand internationally, and has offices in London and Sydney, and several global customers to show for it, like Fairfax Media, Touring Suisse Club, and Telstra in Australia. Tzuo says the latest infusion will simply go to “more of the same,” especially as subscription businesses emerge in areas like financial services and education, among many vertical industries.

While Zuora won’t talk about its revenue or valuation, even under my lawyer-like interrogation, Tzuo said the company’s subscription revenue was growing 90 percent year over year, and has seen a seven-times increase in invoice volume in the past two years. The company reports that its customer base grew 55 percent in the past 18 months, and that it has signed more than 20 contracts of over $1 million.

Zuora’s offering includes finance, billing and ecommerce, which are typically part of Enterprise Resource Planning (ERP) software suites, all as on-demand services. The big difference, and the fuel behind investor excitement, is that Zuora’s modules all assume a business built around subscriptions to services, rather than sale of product. Zipcar instead of Avis; Box (a Zuora customer) instead of hard drives; Dollar Shave Club (a Zuora customer) instead of Target.

Many disruptive startups are emerging with that business model (Zendesk, Marketo, and SendGrid in the technology space, all Zuora customers), many traditional companies are adding it, or moving toward it (SAP, Oracle, definitely not customers), and many traditional subscription-based companies are looking to capitalize more adroitly on the model (Newscorp and VNU in the media space and AT&T and Telstra in the telecom sector... again, yep, all Zuora customers).

“ERP is good at warehousing, tracking fleets, tracking your supply chain, tracking cost of goods,” says Tzuo, which are not the things that a subscription-oriented business worries about. Those businesses worry about pricing models and customer engagement.

Subscription businesses may have different pricing tiers based on time (per day, per month), number of users, customer segments (a single consumer vs. a small business), or sales channel. These services require the business to continually collect the subscription fee, which may mean dealing with credit cards that expire or hit their limit, or with international payment methods and taxes. And I’m barely scratching the surface of the complexities.

Where “SAP was the repository for a bill of materials,” Benchmark’s Fenton says, “Zuora must be the central repository for a new data type, the subscription record.” He adds that once a business has that, it can add analytics, and from there start to upsell and cross-sell and grow new opportunities.

SendGrid, a Zuora customer, is a cloud-based platform for email services, including running an organization’s email, but also for high-volume email delivery. It serves thousands of companies, including FourSquare, Pinterest, Airbnb, Spotify, and Pandora, and delivers more than 7 billion emails daily (so they’re the culprits!). The company’s CEO, Jim Franklin, says SendGrid uses Zuora for revenue accounting, and that it was originally on the verge of building its own subscription billing system.

Two years ago, he says, the company pushed its numbers manually into a Microsoft Access database, spewing out the monthly board report. Now that’s all automated, and happens in real time. Zuora’s system can build a full board packet in an instant with a wealth of information, like top customers, active and inactive customers, by plan type and so on. SendGrid can even spot potential problems, say when a customer’s bill is likely to jump significantly, allowing SendGrid to alert the customer in advance of getting the bill.

Zuora CEO Tzuo says that the traditional ERP companies “don’t get it.” For example, he says, the shopping cart metaphor for commerce is broken because it generally stops at the checkout, and doesn’t take advantage of the customer relationship. There’s “a whole new form of commerce,” he says, noting that Zuora will be making some announcements in this area at the company’s user conference, Subscribed, later this month.

Tzuo acknowledges that many existing companies are experimenting with subscription models as they evolve their businesses, and that this necessitates pulling Zuora data back into traditional ERP systems. He says that Zuora will create what amounts to “a subscription subledger that allows you to run your subscription business the way it’s meant to be run,” and that the subledger can plug into the master ledger housed in Oracle or SAP systems.

Something must be working. Zuora’s customer list keeps growing. I’ve named nearly a dozen so far and haven’t mentioned TripAdvisor, DocuSign, Dell, HP, and Qualcomm. It’s time to start wondering what Zuora’s exit strategy is, especially in an era where NetSuite, Workday, and Salesforce, three of the most prominent pure-play software-as-a-service companies, continue to demonstrate growth numbers that trample market expectations quarter after quarter, and companies like SAP, Oracle, Microsoft, and IBM keep gobbling up pure-play cloud companies as if their business survival depended on doing so, and it may.

Tzuo says the company’s aspiration is to be a multi-billion business, that he’s not trying to flip it, but that it will be public one day. When I point to Workday’s lofty valuation, he says those types of valuations also exist in the private market. Benchmark’s Fenton says that in the software industry, being the first in a market and being the leader typically means an 80 percent share.

In other words, there’s plenty of time to talk exits.

Benchmark’s Fenton says what Zuora has built tackles one of the most intricate business processes he’s seen, which is also what makes him think it would be incredibly difficult for another company, even one with roots in financial software, to mimic.

Naturally, then, it doesn’t seem that far-fetched to imagine a company like Workday adding a vital, growing company like Zuora. Or NetSuite, or SAP, or even Salesforce.