Zuora, which offers a billing, commerce and finance platform as a service for businesses using a subscription-service model, has raised US$50 million in E series funding from some major players.
Next World Capital, Vulcan Capital and Northgate Capital are the latest additions to the company’s crowd of believers.
Zuora will use the money to expand into new markets and geographies and invest in R&D.
“This isn’t just about taking HR or storage into the cloud,” CEO and cofounder Tien Tzuo told CRM Buyer. “This is a fundamental change in consumer behavior.”
Zuora is “creating a category, but it’s hard to see how big it will get,” Denis Pombriant, managing principal of the Beagle Research Group, told CRM Buyer. “That depends on how they expand.”
What’s a Zuora?
Zuora was cofounded in March 2008 by Tien Tzuo, who serves as its CEO; Cheng Zou; and K.V. Rao.
The company sells a billing, commerce and finance Platform as a Service with multiple modules for businesses who sell subscriptions to their services.
Zuora is “adding new functionalities all the time” and will make some major announcements at its Subscribed conference, to be held in San Francisco in two weeks’ time, Tzuo remarked. (Per Tzuo, the first 50 readers who email him at firstname.lastname@example.org will get a free pass to Subscribed.)
Previously, the company charged clients 2 percent of their invoice value, but that has changed.
“The whole idea of taking away 2 percent of our customers’ margin made people uncomfortable, and understandably so,” Tzuo said. Zuora now has a tiered pricing model based on traffic volume.
Zuora’s Brave New Pay-as-You-Go World
This year, Zuora has increased subscription revenue by approximately 90 percent year over year, it said; it claims to have grown its customer base by 55 percent in the last 18 months.
In the past two years, Zuora has seen a seven-time increase in invoice volume, and it has signed over 20 $1 million-plus contracts, according to the company.
Zuora claims more than 600 clients, including News Corp., Dell, HP, Qualcomm and Trip Advisor. Customers signing up in the past two years include Borderfree, BoxHop, Carfax, Docusign, Gigya, Google Wildfire, Informatica, Joyent, MLSListings, and Zendesk.
The Other Side of Subscriptions
Despite the demand for Zuora’s products, most of the more than $130 million the company has raised to date has gone into sales and marketing, Pombriant said.
“When you create a niche that others jump into, there is a battle for mindshare, and that results in big spending to gain and keep the pole position,” he explained.
Perhaps there is another explanation — that relentless spending is essential to building up a market base because people are not quite as happy with the subscription model as Zuora wants to think.
“I talk to clients, and they feel they are being held hostage by companies who say they can no longer buy a software package but must buy a subscription service,” Dan Kusnetzky, founder of the Kusnetzky Group, told CRM Buyer.
“They don’t know what the costs will be, when updates will come, whether those updates will be compatible with what they’re doing,” Kusnetzky continued.
A subscription service “may be a short-term reduction in costs, but it’s not necessarily a long-term reduction,” he noted.
Smaller companies, especially, may be hard hit when they switch from a licensing model to a subscription-based one, because “when you look for funding, a software license is considered an asset, but the subscription model is just an expense,” Kusntezky pointed out.
Where’s Zuora Going?
Zuora has “great innovative DNA, meaning that they are innovating at the margins of their space,” Pombriant remarked. “They are also deeply into metrics, and I could see them providing analysis and advice about how to improve a subscription business.”
There also might be a big opportunity for the company in ERP, which is not well suited to supporting subscriptions, Pombriant speculated.
For CRM companies, most of which are subscription-oriented, “this is a tool that has helped them survive the growing pains associated with startups,” he said.
There is speculation that Zuora might become another giant like SAP, Oracle or Salesforce.com — the latter two are companies where CEO Tien Tzuo has previously worked.
“Business models are changing and new systems are needed to power them,” Tzuo said. “SAP and Oracle can continue to power manufacturing businesses, but they are not the future.”
On the other hand, “Oracle has so many products,” noted Pombriant, “that I wouldn’t make that comparison.”