Index Ventures gambles on shift to subscription sales

Zuora logo The subscription service aims to generate half of its revenues from Europe within the next three years

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Index Ventures has placed a bet on subscription services overturning traditional sales models.

The Geneva-based tech investor has bought a stake in Zuora - a firm that sets up and runs billing services.

Zuora's software helps its clients offer flexible subscriptions. Customers gain greater choice over the length and substance of the service taken out.

For example, a magazine could offer a digital delivery of its sports section every other month of the year.

Zuora's current clients include newspapers, cloud-based service providers and business information publishers.

However, Index believes the model is applicable to a much wider range of sectors.

"We don't see an end or a limit in sight," Index Ventures partner Michelangelo Volpi told the BBC.

"On the consumer side there isn't a big large up-front outlay of cash which is favourable to the consumer, and on the business side there is an ongoing long-term relationship... which can potentially be more lucrative.

"It wouldn't be crazy to think that more than half the things we consume are going to be some kind of a subscription-based relationship."

Index has not disclosed the size of its investment beyond the fact it was the lead investor in a $36m (£23m) deal.

Growth plans

Zuora is the brainchild of Tien Tzuo, a California-based veteran of the business software subscription service Salesforce.

He set up the company four years ago and has since attracted customers including the Financial Times, News International, Hewlett Packard, Dell, Thomson Reuters and US internet radio provider Pandora.

Mr Tzuo believes that within the next three years, Europe will account for 50% of his firm's revenue.

Zuora chief executive Tien Tzuo Tien Tzuo says Zuora's service helps its clients offset the risk of credit card hacking attacks

"The world is moving away from a manufacturing economy to a services or subscription economy," Mr Tzuo told the BBC.

"[So] flexibility in how you package, price and figure out what the customer really wants becomes really critical."

Customisation

Zuora offers clients the ability to offer adaptable subscription plans - whether that means renting a car for irregular periods of time or selling certain sections of a newspaper rather than the whole publication.

It then automates the collection of payments and, if the client permits, allows customers to make changes to their subscription package when they want.

Businesses have access to their subscribers' details, aiding marketing and advertising sales.

This is popular with publishers who are unhappy that Apple has refused to share information on users signed up via its Newsstand and app store subscription services. The iPad maker only makes an exception if customers give it permission to pass on their data.

Zuora's clients takes on the responsibility for storing customers' credit card details. Its clients therefore avoid the risk of an embarrassing hacking attack or theft by a corrupt employee.

"The credit cards never touch their systems, they never touch their servers, they never touch their disc drive, they never even have to touch their network," Mr Tzuo said.

"So we handle it all, and we invest a ton on security on our side".

Small and large

Zuora is targeting companies of all sizes. One of its smaller customers is the London start-up Social Go, a social network software designer.

Chief executive Alex Halliday said he had had teething problems with Zuora's service and had to work to make their systems compatible. However, he said it was still the best subscription platform on the market.

"We were looking for a platform that would let us avoid having to build our own, and would scale as our business grew, allowing us to solve a variety of complex billing problems that we were facing," he said.

"There were simpler offerings that would have done what we needed today, but probably wouldn't have done what we needed tomorrow."

Index Ventures needs others to follow Social Go's lead if it is to cash in a profit after its typical four-to-six year investment timetable.

The firm's previous success stories include the online gambling website Betfair, the movie rental service Lovefilm and the webchat provider Skype.

It also took a recent stake in Dropbox - an online storage rental company - with the same 500m euro ($674m, £428m) fund it used to invest in Zuora.

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