Over the last few years, Startup Land has played home to the dramatic re-emergence of a tried-and-true, familiar model: Subscription commerce. The rise of smartphones, tablets, “The Cloud,” Big Data and the steady maturation of digital marketplaces and distribution channels has fundamentally changed the way we shop, socialize and do business. As a result, businesses are increasingly shifting their focus from the old model of selling “product units” to the comfort and stability of subscription-based, recurring revenu streams.
Companies like Netflix, Spotify and Birchbox collectively tipped the first domino, and today have assumed the role as the poster children for a new generation of subscription-based businesses that are flooding the market. Tien Tzuo, the founder and CEO of Zuora — a platform that aims to help tech companies shift to a subscription-based model and automate and manage payments — has spent years extolling the virtues of this new “Subscription Economy,” using businesses like Netflix to illustrate this transformation.
Fast forward to today, and Tzuo’s evangelism — while undeniably self-interested — has also begun to look prescient. For good reason: As the number of converts to subscription-based models continues to grow, Zuora finds itself at the center of a fast-growing new economy. And investors have taken notice. Today, the five-year-old company announced that it has raised a new, $50 million round of Series E financing that it will use to help those embracing the Subscription Economy convert their business (and customers) to new models and manage the challenges that come with adapting to these new monetization structures.
Tzuo is quick to remind us of how difficult that transition can be for companies that have long been weaned on the old way of doing things. Traditionally, businesses have turned to SAP and Oracle for enterprise-grade ERP services that help them manage core business metrics and operations, from warehousing to managing inventory and fleet. But for companies like Dropbox, Salesforce and Netflix that are building businesses amidst the emergence of the subscription economy, these platforms no longer fit their needs.
These new models require new ways of looking at customer relationship practices, pricing, invoicing and order management, and it’s not simply about moving HR to the cloud, he says. It has to go deeper than that and reflect the fundamental shift in how the average consumer shops, works and interacts with digital marketplaces. Strategically, since launching in 2007, Zuora has basically been on a mission to build the next SAP — to build Oracle-grade software and services tailored to the needs of those trying to make it in a Subscription Economy.
To help shepherd companies through this process, Zuora has built a simple, SaaS-based solution to allow media, telecom and software companies to implement pay-as-you-go pricing models for their customers and take advantage of modern applications that move away from manufacturing-centric systems to offer a range of billing and finance tools. By doing so, the Zuora founder tells us that company has seen a 90 percent increase in subscription revenue (year-over-year) and has grown its customer base by 55 percent in the last 18 months.
Zuora now counts companies like Dell, Docusign, Gigya, Joyent, Zendesk, Box, Pearson and News Corp. as clients — pulling from a range of different industries — and now boasts nearly 300 employees, half of which have been hired in the last 12 months, Tzuo says.
The company’s significant $50 million infusion of capital brings its total funding to $132.5 million and has the company adding three new lead investors as part of the Series E financing, including Next World Capital, Vulcan Capital and Northgate Capital. The company hasn’t been actively fundraising or looking for new investors, Tzuo says, but impromptu calls from people like Vulcan Capital and Microsoft co-founder Paul Allen expressing interest in investing and supporting the business have a way of changing that.
It’s also a testament to the fact that, over the years, Zuora has been able to position itself as one of the go-to billing and CRM service providers for the subscription commerce space. Having hit profitability in 2010 and with a 7-fold increase in invoice volume over the last year, the company hasn’t needed the money that badly, Tzuo says.
However, with $50 million in additional capital now in the bank, the founder says that Zuora will be able to ramp up its ongoing international expansion, with the company having recently opened offices in London and Australia, to name a few. At this stage, while Tzuo declined to share specific projections, Zuora has begun to toy with the idea of the public markets. “Ultimately, we want Zuora to be a public company,” even if the on-ramp is still a year or two out at this point, the CEO explained, and the new capital ensures that Zuora will have the runway to get there when the time is right.
“While other consumer-facing companies may be more visible and get more fanfare, it’s the productivity and utility of enablement platform companies like Zuora that drive the market forward and allow all the customer-facing innovations to occur,” says Next World Capital GP Craig Hanson. “As a venture capitalist, you want to back the critical, revving engine that drives the business forward, not the pretty exterior and certainly not the latest ‘fuzzy dice’ gimmick.”
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