Zuora, the subscription billing company announced that it has concluded its Series C round of financing raising $20 million and bringing its total capital investments to $41.5 million. The round was led by Redpoint Ventures and the existing investors including Benchmark Capital, Marc Benioff, Shasta Ventures and Tenaya Capital also participated.
This strong performance says a lot about the company, its management and the idea of the subscription economy. In a time when credit is tight and venture funds are raising much less capital than they did five or ten years ago, Zuora’s success marks a kind of breakthrough that says good ideas can still be funded and that the subscription economy is a real good idea.
Analysts refer to the just finished recession as a balance sheet recession rather than the more familiar inventory related type. In classical economics when inventories get out of hand, production slows, causing a decline in economic activity, and inventories are sold off to rebalance the system. Inventory recessions have become less prevalent in the last several decades as powerful analytics software has been employed for inventory management and ERP technology has better managed production.
The balance sheet recession happened when the banking system became over leveraged and credit collapsed. Over the last two years corporations and individuals have worked to deleverage their accounts and in the process low credit availability caused a recession.
This recession precisely points out the importance of the subscription economy and may be a harbinger of recovery, albeit on different terms. Leverage is being replaced by subscriptions as companies and individuals come to the realization that they don’t have to own everything they use if a viable subscription is available.
So far, companies like Salesforce.com, RightNow Technologies, NetSuite and many others have leveraged the subscription model to good effect with Salesforce becoming the first company to achieve billion dollar revenues based on the subscription model.
But subscriptions are not simply for software and that’s where Zuora comes in. Many other industries could profitably take advantage of the subscription model if only they could accurately invoice and collect. The hidden issue for many companies wanting to enter the subscription economy is that their antiquated billing systems cannot support the high transaction flows inherent in the subscription model.
Enter Zuora and its ilk. As a leading company in the rapidly growing subscription billing industry, Zuora has figured out the business process including the transaction flows. Zuora, or a company like it, will be at the heart of a change in the publishing industry as newspapers and magazines begin moving their subscriptions to the Web. Periodical publishing is a great example of an industry hamstrung by its billing processes. With billing so difficult all but a small handful of newspapers—The New York Times, The Wall Street Journal for example—give away their product. Those papers have begun to stop the revenue drain and they are in the vanguard.
So, Zuora has twenty million dollars more in the bank this morning and because the company has been cash flow positive for most of this year, it looks forward to spending the new money on growth. It is hiring sales people and opening up its European offices, for starters. You can do a lot with that kind of money, including spark a business revolution, which will surely follow.
Zuora is touting a new idea called the subscription economy. It’s not radical and others might have had the idea before but I was not aware of it. The subscription economy is just what it sounds like and it reiterates the reality we see all around us. Today, the company announced the release of its flagship product, Z-Commerce for the Cloud, at GigaOM’s Structure 2010 event in San Francisco.
Z-Commerce for the Cloud targets the growing market for all things delivered by subscription rather than through the common ownership model. For decades we’ve been moving to a subscription economy starting at least with leasing cars and getting our cell phones and services in monthly increments. The trend accelerated ten years ago with on-demand and later SaaS and Cloud Computing.
When you lease a car the overhead incurred by the vendor in setting up the lease and billing you monthly is not great and hardly differs from a conventional loan. But as subscriptions penetrate the market and support smaller and smaller transactions, it becomes difficult to justify the cost of billing and the reality that customers can change their minds regarding the subscription. Often. Get a monthly bill wrong and the best you can hope for is losing money, the worst is having an unhappy customer.
SaaS seems to be the tipping point for conventional billing. In other words, a SaaS company can afford to bill conventionally but the balance sheet would be better if it didn’t. Smaller transactions can’t even be considered with conventional billing. You might say that newspapers and magazines run on a conventional subscription and billing model but that would be a bad example. Publishers are losing their shirts these days largely because ad revenues are eroding and those revenues once supported the conventional back office. No more.
The billing tipping point should mean that there are as yet unexploited niches for small dollar subscriptions that could not be contemplated according to the old billing model. What they are is a mystery at this point but I am sure the marketplace will take advantage of this new capability.
So, long story short, clean transactions and fast and efficient maintenance are necessary to push the subscription economy ahead and that’s the significance of Zuora’s announcement today. If you want to confine subscriptions to the tech sector, that’s $3.4 trillion and if you reasonably ask if it applies to the rest of the $16 or so trillion US economy you see the importance of getting the billing question answered before we proceed further into this century.
I am not going to reiterate the press release, you can find it easy enough, The analysis of this announcement’s significance is all I am after and I think you’d agree that it really is significant.