Subscription billing and payments pioneer, Zuora, today announced its series E funding. The tranche of $50 million brings the company’s total capital investments to $132.5 million, much of it spent on sales and marketing. This convinces me that the hardest thing about being a disruptive technology is the cost of getting the idea into people’s heads. Salesforce spent a similar amount on sales and marketing while getting going and it’s reasonable to say that this is now the formula.
The really good news is that all of the company’s original investors have ponied up repeatedly to buttress the company and that includes individuals like Dave Duffield founder and co-CEO of Workday and Marc Benioff, co-founder and CEO of Salesforce.com as well as conventional venture companies like Benchmark Capital, Greylock Partners, Redpoint Ventures, Shasta Ventures, Tenaya Capital. You could say the smart money is on Zuora in anticipation of an IPO at some undisclosed point in the future.
All the cash gives the company a cushion that translates as an IPO someday but on its terms, there’s no rush. And the financial news and prognostications are nice but the underlying fundamentals say even more. They say that Zuora got it right in 2007 when the company identified the back office of subscription companies as the place most in need of help to make the model work. Co-founder and CEO Tien Tzuo had an intuitive understanding of the back office having seen first hand what a fast growing subscription company had to deal with each month getting its billing done right.
At Salesforce, Tzuo was chief strategy officer and, when he recognized the need, he built a sort of version one of what would become Zuora but he didn’t stop with billing at Zuora. The company now offers solutions for payments, or commerce, and finance but even more than this, it is innovating around the idea that the subscription business model is fundamentally different from the conventional product or service models we’ve lived with since the Medici invented double entry bookkeeping. Keeping an eye on the business model means the company will be able to innovate around the core idea for a long time and that’s a good thing.
Zuora makes its mark taking the broad view, which is in part why I like them. The response from the market and the venture community tells me they’ve struck a nerve and the fact that there are many other companies plying the same waters tells me this is important.
So, good on you Zuora. I am looking forward to speaking at their user conference in a couple weeks in San Francisco. It should be quite a party.
Building Innovative Subscription-Based Businesses (BUS-185) is the title of a new continuing studies course planned by Stanford for the spring semester. The course is all about the subscription businesses we’ve been discussing here for many years. When a university like Stanford gets around to offering a course like this, it’s a pretty good indication that the subject matter is no longer a fringe idea to say the least.
Pal, Martin Westhead will lead the discussion for seven weeks on Thursdays from 7:00 to 9:00 pm from April 4 to May 16. I am not sure if this is available as an online course but if you want to get a head full of knowledge on the subject of subscriptions, this is a good start.
The AppExchange is undoubtedly a significant portion of what makes salesforce.com unique. Pre-integrated solutions dramatically reduce the cost to the customer to extend the capabilities of Salesforce and the fact that it has already gone through growing pains means it will take other providers years to mimic its capability and impact.
~Narinder Singh, co-founder and CSO, Appirio
Nine Years ago I wrote The New Garage. It was a thought piece that tried to peer into the future of Software as a Service (SaaS) and make some predictions from a business and economics perspective. Salesforce had recently started promoting its platform in the making (then called S-Force) and encouraging third parties to develop applications that complemented and extended the basic Salesforce CRM solution so there was reason to speculate about the impact this new approach would have.
But also, the history of business and industry is a long story of better, faster and cheaper and at that moment all three were all in the driver’s seat. Back office software had already demonstrated many business process improvements leveraging automation and the Internet, and I thought it was time to turn some of these techniques on software. SaaS was a good start but it had further to go, I thought.
Early impacts lead to tipping point
I saw S-Force as a tool and an economic system that could revolutionize software, making it possible to create and deploy it in a just in time fashion. At that time you almost had to be nuts to think that. After all, even after the initial success of SaaS, software was still something you installed and slaved over for a long time before you got it right, not something you could just plug in like an appliance. And integration? Don’t ask! What was I thinking?
“We’re at a tipping point,” that’s what I was thinking.
The cold, hard truth of the matter was that you couldn’t expect to sell software subscriptions for a few bucks a month and encumber yourself with all the overhead of a traditional software company because you’d go broke. Something had to give. Either software would forever be something you sculpted from a block of marble or you had to figure out how to stamp out perfect copies that plugged in and just ran — no excuses.
My bet was that we could do the stamping but it wasn’t based on any hard economic data. It was based only the conviction that commoditization would have to continue and that something like what’s now the AppExchange would be the result. In truth, there were predecessors to the AppExchange. Steve Jobs opened an online store at NeXT in 1997 and six years later in 2003 Apple set iTunes in motion and today you can buy tens of thousands of apps at the AppStore for all your Apple devices.
All in a name
It’s hardly remembered today but the AppStore (name and domain) were originally Salesforce properties and that CEO, Marc Benioff, gave them to Apple. According to a 2008 Benioff interview with Bloomberg, Jobs had met with Benioff and his team in 2003 to offer advice on the Salesforce online store and the gift was a gesture of gratitude by Benioff to Jobs.
A store for enterprises
But those were consumer sites; there had never been an online application store for enterprise grade software until salesforce.com launched the AppExchange in January 2006. This year marks the seventh anniversary for AppExchange an odd anniversary to celebrate perhaps, but a good chance to look at the AppExchange to see how well it is living up to the original vision. Here are some of my observations.
- The partners have built a long list of useful solutions including HR systems, field service, accounting systems, sales tools and marketing automation products. These are systems that enrich the Salesforce experience but at the same time represent application areas where Salesforce has decided not to concentrate its resources. Where Salesforce has stepped aside, the partners have stepped in.
- The AppExchange created the opportunity for a very long tail of credible business solutions. In the more than 1,700 applications you can find on the AppExchange, there is a host of small applications that just make life easier for the Salesforce customer; some are strategic and many are exceptional. They are applications that integrate with other applications, distribute incredibly fine-grained information and automate processes in unlikely ways that just happen to work well for populations of users who need those exact solutions.
- The AppExchange is a good place to do business for companies of any size, especially for SMB’s. Many AppExchange vendors tell me that they make their living building and servicing their apps to the point that the permutations of Salesforce CRM with partner applications is, if not infinite, then at least very large (roughly 1700! or 1700 factorial). I had predicted this in The New Garage but I had envisioned problems with revenue splits and single sign-on. Both challenges have been dealt with.
- Perhaps most importantly, enterprises go to the AppExchange to find and buy solutions. One of the constant refrains I hear from AppExchange CEOs is that enterprise buyers find them on the AppExchange and buy solutions through it.
So here we are after seven years and the AppExchange is by all measures a big success. This blog is the first in a short series of posts that report on the AppExchange’s growth and the success of some of its many partners from small boutiques to large businesses. This series pays particular attention to ten AppExchange partners that distinguished themselves last year including in no particular order: TaskRay, TOA Technologies, Contactually, The TAS Group, Tango Card, Zapier, Apttus, KnowWho, nCino and KXEN.
In my last piece, I discussed with Tien Tzuo, CEO of Zuora, the vagaries of the subscription services market and how Wall Street analysts have a tough time dealing with subscription metrics. But already I feel a need to go beyond the original piece to add some depth to the piece.
The nub of the story, and it is not the first time I write about Wall Street and subscription metrics, is that many of the analysts use metrics that value conventional manufacturing era companies rather than subscription companies. The businesses are different and the ways you measure them need to be different too.
Just to boil it down a little, when you sell one thing one time and collect all the money then and there instead of repeatedly selling access to a company’s products or services, the money comes in slower and it has to be accounted for differently. If you value a subscription company for what it brings in this quarter only, as you would a conventional manufacturing company, you are only looking at a small fraction of the value that the subscription company generates. So, your analysis will be flawed as a result and the advice you give from that analysis won’t be worth much.
For many years we’ve agonized over the fixation on quarterly results which the analysts pore over to get a sense of how to advise investors. The problem with this is, of course, that no matter how small the time slice you analyze this way, it is rearward looking and it cannot tell you much about the future. It’s like steering a boat by only observing its wake.
But over the weekend I ran across this article in the New York Times by a Harvard Business School professor, Nancy F. Koehn. “Lincoln’s School of Management” is part of a flood of all things Lincoln this year in which we celebrate the 150th anniversary of the Emancipation Proclamation and it’s worth reading as a buttress to Tzuo’s analysis.
Tzuo is right in claiming that the analysts have the wrong toolset for the job of analyzing subscription companies, but the issue goes deeper — all the way to asking why we measure what we measure. One of his points, which the Lincoln article seems to back up is that doing business, not turning somersaults for Wall Street, should be the main emphasis of any business. It seems like common sense and when you put it this way you wonder why so few people appreciate it.
Companies that focus on their knitting rather than the analysts in the grandstands do better for customers, employees and shareholders over the long run. That’s what the Lincoln piece is about and it’s what Tzuo has been telling anyone who would listen as he has extolled the virtues of subscriptions.