Gartner’s recent report on Software-as-a-Service (SaaS) estimates that global spending on SaaS will grow 18% this year to $14.5 billion. By 2015, the SaaS market is projected to be worth $22.1 billion. North America remains the largest, most mature market in the industry. SaaS revenues from the continent are projected to grow from $7.8 billion last year to $9.1 billion. SaaS spending in Europe will also grow from $2.7 billion to $3.2 billion this year. While growth in the industry will be dominated by leaders like Salesforce.com, which is estimated to report revenues of $3 billion by next year, other players are also reaping in big.
Zuora’s Subscription Economy
Mountain View, California–based Zuora was founded in 2007 by co-founders K.V. Rao, Cheng Zou and Tien Tzuo, industry veterans from WebEx and Salesforce.com. Tzuo, now CEO, strongly believed in the possibility of a business model where “companies of all sizes would offer broad libraries of services via subscriptions.” The management believes that the new business model depends on businesses offering services instead of products. They are convinced that in years to come, consumers will shift from a single-use purchase of a product to a recurring, subscription-based use of the service that the product offers. For instance, instead of purchasing a movie CD, today consumers are subscribed to digital streaming options such as Netflix. Gartner also estimates that by the year 2015, 35% of the Global 2000 companies will be operating on a subscription-based services and revenue model. It is this belief in the “subscription economy” that led to the founding of Zuora.
Zuora offers SaaS solutions for on-demand subscription billing and payment services. The cloud-based offering replaces the organization’s existing invoicing solutions with a subscription service that is customized to the organization’s needs and scale. Zuora claims its platform is a full solution for commerce-as-a-service because it lets developers “plug in commerce, billing and finance management services with just a few lines of code – and start getting paid.” The service is focused on organizations that work on a subscription-based revenue model.
Recently, it also introduced Z-Finance, a financial system that helps financial accounting teams operating in subscription-based businesses. The platform uses multidimensional ledgers that spread amounts over multiple time periods, instead of ledgers that restrict the user to simple debits and credits and intelligent algorithms that can learn the treatment of one-time and recurring amounts. The platform also helps accountants calculate key subscription metrics like accounting rate of return (ARR) and total contract value (TCV). Users can define and manage accounting periods, run financial reports, and define revenue recognition rules.
Zuora charges an estimated 2% of all invoiced amounts from its customers. This percentage reduces as the level of payments being processed through Zuora’s platforms increases. Zuora keeps its financials away from public knowledge. Its customer list of more than 400 enterprises includes names such as Dell, HP, Qualcomm, Concur, and Informatica. It is among the fastest-growing private players and is expanding internationally, with offices recently being opened in Europe and Australia. During the first three quarters of 2011, the company reportedly signed more than $1 billion worth of subscription contracts, with more than 20% of the contracts coming from outside the United States. The market also believes that that company has been cash flow positive since early 2010.
To date, Zuora has received $82 million in venture funding from investors, including Benchmark Capital, Marc Benioff, Shasta Ventures, Lehman Brothers, Redpoint Ventures, Tenaya Capital, Index Ventures, Greylock Partners and Dave Duffield. In early 2011, its valuation was pegged at between $300 million and $500 million. The company aims to grow 100% annually over the next two years, after which it has plans to come out with an IPO.