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Zuora’s Journey To Managing The Subscription Economy

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Gillmor Gang: Pass the Buck

The idea for subscription billing startup Zuora was born in Marc Benioff’s office. In 2006, K.V. Rao, then a WebEx senior engineer, was meeting with Benioff and Salesforce CMO Tien Tzuo. Tzuo made a comment that subscription billing was a hard problem for Salesforce, and Rao agreed that WebEx also felt the same challenge. He left the meeting with the feeling that this problem was something he could solve.

Rao researched ideas for the next few months and recruited fellow WebEx engineer Cheng Zou to work on the fledgling startup. The next step was to raise money. By then it was 2007, and it wasn’t easy to raise money, he says, especially for a company that wasn’t consumer-focused. Rao and Zou scored a meeting with Benchmark’s newest partner at the time, Peter Fenton.

As Rao tells it, he totally bombed the meeting. “[Fenton] told me that it was one of the worst presentations he’d seen in VC history.” Fenton did see a potential opportunity with the idea, but saw deficiency in the team. Not long after seeing (and passing) on Zuora, Fenton had breakfast with Tzuo and told him about Rao and his idea, with the subtext that this could potentially be Tzuo’s next step after Salesforce. Fenton always believed Tzuo would be a great CEO, and saw the potential to apply his Salesforce learnings to Zuora.

Zuora’s premise was around a cloud-based billings platform that would alleviate the need for online businesses to develop their own billing systems, especially to handle recurring payments like those associated with subscriptions. The company wanted to build a platform that would automate metering, pricing and billing for products, bundles and configurations.

Rao and Tzuo started the standard co-founder “dating” ritual. They met for coffee, took to the whiteboard for strategy sessions, and had a few double dates with their wives. Tzuo got the feeling that Zuora was on to something and this was his next step. So he went to talk to Benioff to get his approval and perspective. As Tzuo recalls, Benioff always said he had to go to his then-boss Larry Ellison at Oracle three times before he got the approval to leave. Tzuo expected Benioff to be equally as hard on him — but Benioff believed in the idea, and as Tzuo explains, “is a big believer in building.”

Benioff was also a believer in karma: Ellison had put some of the first money into Salesforce, and he ended up putting $1 million in Zuora.

Tzuo started at Zuora in January 2008, and kicked off his new beginning by helping to raise the company’s first round of funding. Tzuo went back to Fenton to see if Benchmark was interested, and Fenton, who was on his honeymoon at the time, immediately lined up the partnership for a meeting.

“This is a company where there was a gut feeling with partnership that we should invest,” says Fenton. “There was a glaring need in the market for a billing system, and the thing that haunts billing is the complexity. Zuora changed that.”

Zuora ended up raising $6.5 million led by Benchmark, with Benioff and Tzuo both investing.

K.V. Rao, Tien Tzuo, Cheng Zou of Zuora

K.V. Rao, Tien Tzuo, Cheng Zou

Solving The Billing Problem

We now live in a world where, on the front end, paying for subscriptions is as easy as tapping a button and entering our payment information. But on the back end, subscription billing is as complicated as “designing an entire database,” says Zou. “It’s not something that a programmer can do because our ambitions were so broad. We wanted to create a billing system that covered any industry.”

As Tzuo explains, “This isn’t something two kids from Y Combinator can do….if you think of Salesforce as the CRM for every industry, and WebEx as web conferencing for any industry, we wanted to be cloud-based billing for everyone.”

It took the Zuora team six months to turn the prototype into a live cloud-based engine, and in July 2008, the company’s first customers, Coremetrics and Marketo, went live.

For most companies, billing is complicated and difficult to build in-house. Legacy systems are expensive and cumbersome. As SaaS started to become more of a buzzword in 2008, customers found Zuora through simple Google searches. “We walked into demand right away,” says Tzuo.

Early customers included then fledgling startup Box (which is still a customer today), and even Sun Microsystems, which remained a customer until Oracle bought the company. UK company Reed Business Information was one of Zuora’s earliest large deals.

Mary Collerton explains that in late 2008, Reed Business Information was looking to replace a system in-house to manage electronic subscription billing. “We preferred to buy before building; we found Zuora through a search on the web and were impressed with the functionality they could provide.” Even now, she says, the executive team checks in with her and her team to ensure integrations are going well.

From the start, Tzuo wanted to make sure that there was an element of customer centricity. At off-sites with the entire company, each employee is assigned a customer and has to walk through their billing challenges and present to the company how each customer should approach their billing situation.

“We really want everyone to understand what it means to be in our customers’ shoes. Every employee should have a deep understanding of this — not just our sales or implementation teams,” says Tzuo. He still interviews every single employee to ensure a good cultural fit.

In mid-summer of 2008, Zuora was at Benchmark giving the partners a product update, and Bill Gurley told the team to start raising soon. Lehman Brothers had not collapsed yet, but Gurley said he was a little nervous about the Q4 funding environment, and the Series B needed to be raised soon. In August, Zuora signed a term sheet for $20 million, which was led by Shasta Ventures, with Benchmark, Benioff and Tzuo all putting in more.

Benioff had given Tzuo advice to get to cash flow positive as soon as possible, and for the next year Zuora didn’t spend a lot, choosing to focus instead on serving customers. The economic downturn ended up being a blessing in some ways for organic sales — bigger companies saw the cloud as a way to save money and were more willing to bet on the smaller guys, says Tzuo.

In 2009, Zuora was able to triple revenue. “It took us a few years to get our product footprint broad enough so customers felt that they didn’t have to make big tradeoffs.”

Redpoint led a $20 million round in Zuora in 2010, in which the valuation doubled, says Tzuo. A year later, Index Ventures participated in the company’s Series D. Around the same time, Zuora started to place more people internationally, focusing first on Europe and Australia.

Index’s Mike Volpi led the round and joined the company’s board. As Volpi explains, Tzuo and his team have set themselves apart by taking an existing knowledge base around the challenges of billing, and extending this to an actual product. “This is very special and unusual,” says Volpi. He adds that there is no one who understand subscription services as well as Tzuo.

The company raised its last round in 2013, at $50 million, at just under a $1 billion in valuation. Next World Capital and Paul Allen’s Vulcan Capital were both in the most recent round. Zuora is expecting $100 million in sales for this year, we hear.

Despite building an impressive set of technologies used by companies like Dell, Zendesk, Pearson and Tata, Zuora has never fielded any serious acquisition offers. It’s surprising considering that some of the company’s contemporaries, particularly in the cloud SaaS space, like Zendesk and Box, were getting serious attention.

“It doesn’t really phase us to not have any acquisition interest,” he says. “And we believe SAP and Oracle are archaic — if they acquired us it wouldn’t be a good fit.”

Fenton says he is sometimes surprised that Zuora hasn’t fielded more acquisition interest but at the end of the day, Zuora has built something that doesn’t have much competition and are the clear market leader.

One area where Zuora will need to focus its attention is on integrations. Volpi believes that shutting down the boundaries between data will be key for further adoption. The company hasn’t made any acquisitions but is considering doing more in M&A in the near future, perhaps in startups where the technology could add to the existing product line.

Zuora’s seven-year journey is in stark contrast to the more common startup journey we see these days with two to three years of development, and then a multi-billion-dollar valuation or exit or acqui-hire. Fenton credits the perseverance of the leadership team in having an unwavering commitment to success, despite the hardships of running a startup.

“They signed up to solve a really hard problem, and they have been able to stay motivated to solve it, while many would have lost faith. Tzuo and his team are spiritually connected to this, which has allowed to him to build a great team,” he says.

Fenton adds that he usually tells founders that it’s best not to focus on how long the road is and to stay in the moment. But Fenton also firmly sees Zuora as a public company.

Bankers are already courting Tzuo to see if he’s interested in taking the company public. While that’s the goal, he’s not focused on it at the moment. He’s already been through this rodeo after working through an IPO with Salesforce.

For now Tzuo doesn’t want to be distracted from Zuora’s vision, which is helping companies to find success in the subscription economy.