Zuora raises $115m to smooth its path to IPO

Phil Wainewright Profile picture for user pwainewright March 10, 2015
Summary:
IPO-bound subscription economy standard-bearer Zuora has raised $115m to bring total funding to a cool quarter-billion. Its CFO told me what it all means

Tyler Sloat CFO Zuora 250px
Tyler Sloat, Zuora

Subscription business management provider Zuora reveals a $115 million round of new funding today, bringing its total raised to date to $250 million. With participation from public market investors Wellington Capital Management LLP and Blackrock Inc as well as all existing investors, the new round provides confirmation that Zuora is on track for an IPO at the same time as giving it breathing space to choose its own timing. As CFO Tyler Sloat told me in a phone briefing on Friday:

What it allows us to do is really focus on executing and growing. We don't have to focus on what it's like to be a public company or be that public company. We just bought ourselves some time.

We now have the capability to go public when we're ready as opposed to having to think about [the IPO] as a financing round.

This will help Zuora avoid the fate that last year befell its longstanding customer, enterprise SaaS vendor Box, when a delay to its planned IPO forced it to seek extra funding on terms that constrained its choice of timing.

IPO ambitions

The new investors also include Premji and Passport Capital, but it is the participation of Wellington and Blackrock that signals Zuora's IPO ambitions, as Sloat explained.

These public investors, they're mandated to invest in public companies. These public guys, they're realizing if they don't get into some of the hot companies early, then when they go out on their roadshows, they have very limited time to put in their book orders.

If they know about them they'll be able to get a bigger allocation and participate at that pricing. The intelligent guys like Wellington have got in even earlier.

Sloat wouldn't divulge the valuation at which the funding had been raised but confirmed it was significantly above the previous round.

It's an uptick from the last round. Every round has been a really big increase.

He attributed the keen interest from investors to Zuora's position as a leading vendor in enabling what the company has taken to calling the subscription economy.

The only reason we were able to get these public investors is because this shift is happening everywhere and we are right in the middle of it.

It's about businesses now putting the customer at the center of their business model. When they do that, they need this ability to iterate on their pricing, learn about customer usage patterns and provide a lot of flexibility.

Enterprise adoption

One marquee customer that Zuora cites to illustrate this shift is the French global electrical equipment maker Schneider Electric. It is currently developing a subscription offering, running on Zuora, which will offer smart buildings on a subscription basis tied to the energy efficiency that can be delivered through managing connected devices and equipment such as elevators, lighting and climate control.

While Zuora is succeeding in landing large enterprises including Schneider, Financial Times and TripAdvisor, its market also extends down to smaller businesses. Sloat told me:

We have the early stage company that we service through internal sales that might be paying $50k [per year], all the way up to a million dollars annually right now as well.

Zuora charges its customers based on a percentage of their subscription revenues billed through its platform. Therefore its revenues are more sensitive to actual business performance than the more conventional type of SaaS contract based on numbers of users. Nevertheless, it still managed to post growth of 109 percent last year in the value of invoices transmitted through its systems, with 30 percent of that growth coming from existing customers.

This model also means that a customer that begins on a low volume will often scale much higher as it expands its subscription offerings. But that's all the more reason to target larger enterprises, said EVP of field operations Marc Diouane:

If you want to scale at the speed we want to, you need to sell to large companies. When you show value and realize value you get the follow-on business.

This is a field where established ERP and financials vendors are not playing, he added:

ERP cannot do what Zuora does. Our goal and our company and our solution is to manage the customer lifecycle. For SAP and Oracle it's extremely difficult, they cannot do that because they are not focused on the customer, they are focused on one transaction after another.

While the US is Zuora's strongest market, the company is also expanding internationally, with growth of 150 percent across France, Germany, the Netherlands and Nordics, said Diouane.

My take

Hitting the quarter-billion dollar mark in funding is quite a landmark. Zuora is certainly riding a new wave of subscription business models and it's always interesting to see some of the innovative work its customers are up to. But it's a tough sell and when it finally comes to IPO it will have an interesting time explaining exactly how its business model works to the public markets.

Disclosure: Oracle and SAP are diginomica premier partners.

Image credits: Money dollar bills in sky with clouds © Rrraum - Fotolia.com; headshot by Zuora.

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