Let's Take a Good Look at the Latest SaaS IPO 'Poster Child'.

The Facebook & Twitter IPOs set the pace for how public markets value social media driven opportunities. These IPOs reveal something about the perceived market valuation of these gold mines but less about the value of the other vendors which benefit from the social media gold rush.

David Carratt
June 11, 2014 - 5 min. read

The May, 15th IPO of Zendesk (ZEN) – the SaaS customer service platform – provides the first glimpse of how public markets will value enterprise SaaS vendors, where a substantial part of future growth will be driven by social media adoption and usage. The initial verdict is markets like what they see. ZEN raised $100.0 million by offering 11.1 million shares at $9 per share, giving it a market value of $712 million. Consistently high stock price gains in the following weeks saw shares hit an astonishing $17, valuing the company at $1.3 billion and creating a value of 12 to 13 times the firm’s run rate revenues, based on its last reported quarterly results.

Customer Service versus Sales & Marketing

Founded in 2007, in Copenhagen – like Falcon Social – ZEN too facilitates customer communication through multiple channels such as email, social media, voice and chat. ZEN’s heritage supporting customer service was initially focused on web and email channels; it came late to the social media party. Falcon Social and our competitors, such as Hootsuite, Sprinklr and Spredfast are children of the social media revolution and embody the zeitgeist to a much greater extent than ZEN. Hootsuite started as a personal productivity tool for managing tweets, while our focus has always been a unified platform for managing multiple social network touchpoints for enterprises. Customer service does impact on revenue and profitability for large corporations, but nowhere near as much as sales and marketing. If a company has the same financials as ZEN but a sales and marketing, and customer services background, it would be able to deliver the increased business value that sales and marketing brings, including its capacity to address and reach a larger number of potential end users. A company focusing solely on customer service has a reduced market opportunity and could run out of growth. In the medium term, I see the need to integrate customer communications across sales, marketing and customer service in many industries – much like Falcon Social does – and inevitably we will come across ZEN more in the market, either as an incumbent vendor or as a competitor.


International distribution is a given for a SaaS business and ZEN, like ourselves, is no exception. It now has more than 40,000 customers across 140 countries, providing a platform in over 40 languages from its San Francisco base. With annual revenue growth rates of 80 – 90 percent and a revenue run rate of about $100 million, but operating losses of 26 percent for quarter ended December 2013, management and investors are expecting revenue growth to continue well into the future. ZEN’s average revenue per customer, per year is $2.5k – giving a good indication of the sweet spot in the market and the price point for other SaaS businesses to aim for.

Headcount growth

It looks like the SaaS dream of “utility computing” – investing in a platform with fixed costs and then scaling revenue without adding proportional headcount, like a telecoms company – is not happening yet. For the year ending December 31, 2013, ZEN’s employee numbers almost doubled from 287 to 473, growing pretty much in line with revenue growth. The same can be said for some of our competitors, where headcount growth appears dramatic. Hootsuite’s staff grew from 280 to 602 in the nine months to end March 2014. Meanwhile, Sprinklr’s employee numbers increased from 180 to 274 and Spredfast’s staff almost doubled from 100 to 196 in the same period. We have seen similar headcount growth rates as demand for Falcon Social’s platform increases.

Zendesk employee count almost doubled in 2013

Zendesk employee numbers almost doubled in 2013

Sales Leads & Models

Seventy percent of ZEN’s sales leads at the end of Q4 2013 were free, but this may not turn out to be the benefit it first seems. Potentially ZEN could be more like a hit film or computer game – where much of the initial interest is generated by word-of-mouth and fashion. If ZEN’s current sales strategy turns out to be a brand franchise, it could be great for them. Eventually however, the market will mature and perhaps a predictable marketing & sales engine, that produces demand and revenue with predictable costs, will be preferable. At Falcon Social, we believe we have such a successful and scalable marketing & sales machine in Europe already, and we are starting to replicate it in New York.

Profitability & Losses

The stakes are very high because what is up for grabs is both the market opportunity for enterprise, represented by social media adoption and the complete redefinition of the traditional CRM landscape – a market with an annual value of $15 billion to $20 billion, depending on which definition you use. Salesforce (ticker symbol CRM) is the incumbent pure play vendor and has a market cap of $32 billion. Investors see the opportunity to create another Salesforce and running losses to invest in future growth is seen as essential. We see this in ZEN’s profitability numbers and also the capital raised by our direct competitors. Sprinklr and Spredfast have raised $78 million and $64 million respectively. If these firms don’t raise much more capital then their losses at any prospective IPO will be similar to ZEN’s. Hootsuite has raised $187 million to date, so could run much larger losses before going public. In comparison to these other SaaS businesses, ZEN is not particularly capital consumptive. Some media companies however, when comparing ZEN to more traditional companies like Microsoft, are shocked at the level of losses the company runs.

Market Concerns

Luckily, technology capital markets are currently very supportive of capital raising and it is possible to raise capital to pursue these aggressive growth strategies. Given the prize at stake, I think we’ll see several other competitors aiming for an IPO to raise capital to support these ambitious plans. Despite claiming they are “building a company that looks like an IPO company”, Hootsuite has said it is “not in a rush to get there. Market speculation suggests Sprinklr is gearing up for an IPO in April 2015 and if Spredfast is to meet its intention of becoming a consolidator in the marketing technology space, it will need to raise capital through an IPO or further funding. Meanwhile, we are focused on building a great company for the long term, regardless of what the M&A and public market futures bring. It is very helpful to have the example of ZEN as a new public SaaS business, where demand is partly driven by social media adoption. The main decision-making factors lie ahead however, as the traditional CRM landscape is turned on its head and distinctions between marketing, sales and customer service blur. Simultaneously, there will be significant changes in the way business sales are driven by consumer empowerment and it remains to be seen how the competitive strategies adopted by ZEN, ourselves and our competitors will play out in the market. Expect lots of twists and turns in the next few years as new entrants become stars and well-established vendors take wrong turns or react too slowly.


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