Three days ago, Silicon Valley-based Zuora filed for an IPO on the New York Stock Exchange, reporting an annual revenue of around US$168 million in its last fiscal year.
The software-as-a-service (SaaS) company provides billing and other financial services to companies with recurring revenues. It is backed by a quarter-billion of capital from investors like Benchmark Capital and Shasta Ventures – and was valued at around US$750 million as of its last round of financing in 2015.
That’s who Chennai-based Chargebee is competing with.
“Zuora going public is a great validation for the overall space and for us that the market exists. Zuora is a 10-year-old product going after SAP, Oracle, and the likes,” Krish Subramanian, co-founder and CEO of Chargebee, tells Tech in Asia, adding that subscription billing is still a largely untapped market. “We don’t have to be the first to market.”
Chargebee announced the closure of its US$18 million series C round of funding today. New York-based Insight Venture Partners, an investor in several high-profile SaaS companies like Shopify, NewRelic, and Wix, led the round. Chargebee is the firm’s first investment in India.
The latest funding round, in which Chargebee’s earlier investors Accel Partners and Tiger Global Management participated, takes its total capital raised to US$24.7 million.
Chargebee’s subscription billing and accounting products are mainly aimed at small and medium-sized businesses (SMB) that have recurring revenue. Founded in 2011, it claims to have over 7,000 customers in 53 countries.
Profitability is often elusive for SaaS startups serving the SMB market. “If you are a SaaS startup attempting to do that, you need to have the right model. Especially if you have a DIY product and your customers are all inbound. The unit cost of how you acquire your customers and serve them matters,” Subramanian explains.
Powering Chargebee’s business growth is the engine it has built over the last four years, which takes inbound sales leads from customers and converts them into product users without any handholding by the startup (thus DIY or do-it-yourself). Since most of its SMB customers are onboarding themselves, that frees up the startup’s resources to serve the higher end of the market.
The higher end, he says, is also inbound but the overall cost of acquisition, revenue, and other metrics look a lot better when the fundamentals are right.
While the earlier funding rounds were more of a bet on Chargebee’s market and the founders, the latest one is based on the company’s growth metrics. That’s something Subramanian and his co-founders – Rajaraman Santhanam, K.P. Saravanan, and Thiyagarajan T. – are proud of.
Chargebee had first met analysts from Insight Venture Partners a year ago at the SaaStr conference in San Francisco. They referred a few of their portfolio companies as prospective customers for Chargebee. “They used our product, were happy with it, and that was a good way for the fund to validate us,” Santhanam says.
Around the world, a subscription economy is catching on. Anything from software on the cloud to milk and eggs can be delivered on monthly subscriptions. That’s why even legacy software companies like Microsoft and Adobe are trying to transform themselves with new services offered on subscription.
As billing and accounting are crucial pieces for any business, many want to build their own in-house software. But financial service software is complex and requires specialization, given all the compliance requirements involved, including taxes, privacy issues, and data protection laws. For most companies, that would be a substantial investment away from their core business.
“For example, Amazon Web Services is so cost-effective that you don’t have to build infrastructure in-house anymore. We look at billing similarly,” Subramanian says. “Our core value proposition is that you want to grow your business, and so you don’t want to do anything but your core business in-house. That is where a plug-and-play billing system like ours will help you scale your business.”
A key strategy that worked for Chargebee was its decision to test the quality of sales leads that came its way, using pricing as a filter. Chargebee as a billing system is not for freelancers or individual consultants who can use a regular invoicing system to do recurring billing.
“While pricing our product at US$99, we are deliberately filtering out people who are looking at a comparable US$15 product. We want to be spending all our energy focusing on the right segment we want to grow,” Subramanian says.
It also had a freemium – a combination of “free” and “premium”- pricing model in the beginning, where basic features come at no cost but users pay for richer functionality. “In the early stages, the objection of a customer could be very irrational. Instead of a buy decision, they might choose build [the billing software in-house]. That’s why we had the freemium pricing model, which helps to change perceptions,” Subramanian explains.
He declined to reveal Chargebee’s revenue figures.
Chargebee and a big chunk of its customers have grown alongside each other. India’s best known SaaS startup Freshworks is an example. Chargebee began powering its first product, Freshdesk, in 2011 when it had less that 500 paying customers. Today, Freshworks has around 150,000 paying customers across its seven products.
Denver-based Craftsy, which sells videos of crafts classes, craft supplies, and kits, was also built on Chargebee’s billing software. It was acquired by NBC Universal last year. For NBCU, Craftsy opens up a new revenue stream.
Besides companies with a subscription model right from their inception, Chargebee targets any new revenue streams of big businesses. “We steer away from large-scale transformational enterprise projects,” Rajaraman says. Its rival Zuora does not.
In its S-1 filing, Zuora notes that it serves about 950 customers globally and is going after bigger enterprises. It pegs the market opportunity for its core billing and revenue recognition products at US$9.1 billion by 2022, growing at 35 percent annually. Though it clocks subscription revenue of around US$120 million in a year, Zuora’s “professional services” revenue is growing at a much faster rate.
“The way we differentiate ourselves is in terms of the total cost of ownership, with a faster implementation cycle and products that fit like a glove. We think of ourselves as a Stripe for subscription billing, where we deliver solutions that a developer can easily consume without external services help, implement in weeks, go live, and start making money,” Subramanian says. He points out that Chargebee’s billing system takes less than a week to implement compared to Zuora’s which requires onboarding, training, professional services, and so on.
We checked out reviews about Zuora on HackerNews for comparison.
Apart from Zuora, Chargebee competes with Recurly, BillQuick, FuseBill, Chargify, and others. It also competes with several internal billing systems where businesses build their own software on top of Stripe or Braintree.
But competitors are not what’s keeping the founders on their toes. “Our biggest challenge is to make sure that we continue to build a product that keeps pace with our customers’ growth,” Subramanian says.
For example, Singapore startup GuavaPass now operates in eight countries. It recently launched in China and Chargebee had to rush to enable WeChat and Alipay as payment methods. “We had to get out there fast enough and enable them,” says Subramanian.
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