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A Month of Zen

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By Jules Maltz

IVP is proud to announce two exciting new investments last month: Zenefits and Zendesk. These names must make it seem like we either all recently started meditating or instituted a unique policy of investing in companies in reverse alphabetical order. Nevertheless, we feel incredibly fortunate to have backed two disruptive software businesses attacking large, distinct markets with products offering “zen-like” simplicity. Here’s why we invested in each of them:

Zenefits

Zenefits is a next-generation HR software provider that gives growing companies a solution to easily manage payroll, benefits, HR, and compliance through a single online dashboard. The product is amazingly simple and eliminates the paperwork and hassle of traditional HR management. And best of all – it’s 100% free. Zenefits has a unique business model where it makes money by serving as the health insurance broker for its customers and receives commissions from insurance companies. The health insurance brokerage commission market is well over $18 billion and is ripe for disruption. Zenefits provides better service and automated tools to create an exceptional customer experience. We also liked the following:

  • Zenefits is the Fastest Growing SaaS Company We’ve Ever Seen. IVP has a strong track record of backing leading SaaS companies including Buddy Media, Concur, Domo, Marketo, Mindbody, Omniture, and Yext. In our long history of investing, we’ve never met a software company growing as fast as Zenefits is growing at its stage. The company grew over 30% month-over-month last year and is on track for revenue growth of more than 1,300 percent this year. Despite only being live for just over a year, Zenefits is already working with over 2,000 companies and serving over 50,000 employees. As a late-stage investor, it’s rare for IVP to invest in a Series B (we’ve only done it a few times in companies like Snapchat and Dropbox), but all the metrics led us to get involved in Zenefits now.

  • The Market is Enormous. HR software has previously only been available to large companies who can afford to purchase expensive systems from vendors like Workday, SAP, and Oracle. Zenefits opens up the market to the millions of U.S. companies with less than 1,000 employees. The product is easy to use and saves companies significant time and money. Because Zenefits makes money as a health insurance broker, it can afford to provide this software to small businesses for free, while still making a significant amount per client in insurance commissions.

  • We’re Joining a Winning Team. Zenefits is led by Parker Conrad, a passionate founder who was fed up spending time on HR at his last startup and decided to automate all of the mundane tasks of onboarding employees and managing their payroll, benefits, and HR information. Along with his co-founder, Laks Srini, Parker is developing new products at a rapid pace and delivering incredible value to customers while building a strong culture and team at Zenefits. We also feel fortunate to get to work again with Lars Dalgaard, a general partner at Andreessen Horowitz. As the founding CEO of SuccessFactors (another IVP investment), Lars knows HR software better than anyone and is ideal for guiding a fast-growing SaaS startup.


Zendesk

While HR is often frustrating for companies and employees alike, the area arguably most in need of a “zen-like” attitude is customer service. Zendesk provides software to help organizations engage with their customers in ways that foster long-term customer happiness and retention. The product is beautifully simple and omni-channel, allowing organizations to interact with their customers over email, phone, chat, social media, and websites. Most importantly, Zendesk’s product is highly viral – with customer referrals and word-of-mouth references driving a significant percentage of the company’s business. We invested for the following reasons:

  • The Time Was Right: Zendesk has been a company that we’ve been tracking for nearly five years, since CEO Mikkel Svane moved the business from Denmark to the United States. Although it never worked out for us to invest in the company privately, we were able to purchase a significant position in the company’s IPO a few weeks ago. Ever since IVP started in 1980, we’ve been able to invest a meaningful amount of our fund in select public stocks – and have executed on this strategy particularly in times when public market valuations have been below valuations in the private market. We believe we are now in one of those times and were thrilled to establish a long-term position in a company that we’ve always admired.

  • Highly Efficient Model: Zendesk is a rare SaaS business that is growing revenues significantly, but is also highly cash efficient. The company is on a $100M revenue run-rate and growing over 80% year-over-year in its last reported quarter. More importantly, it has been able to achieve this rapid rate of growth without burning significant capital. Zendesk was operating cash flow positive in 2013 and spends just over 50% of its revenues on sales and marketing, compared to many SaaS companies that continue to burn tens of millions per year and often spend more than their revenue on sales expenses. Given some of the recent changes in public market valuations, we believe companies will need to exhibit both strong revenue growth and cash efficiency to achieve premium valuations – and Zendesk exemplifies both of these characteristics.

  • Future Growth Drivers: Finally, we’re excited about Zendesk because we believe the company is poised for additional growth beyond its core base. While Zendesk dominates customer service software for the mid-market, we believe there is a significant opportunity for Zendesk to move up-market and serve larger enterprises. Zendesk is investing heavily in this area and, we believe, has a better product than legacy vendors including Oracle and Microsoft. We also love how Zendesk continues to grow rapidly in its existing base with reported dollar-based net expansion of over 120% in the last several years.


Jules Maltz is a General Partner at Institutional Venture Partners (IVP), a later-stage venture capital firm based in Menlo Park, CA.

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