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Zuora's Tien Tzuo Had A Big Idea For Software To Drive The Subscription Economy -- He Almost Blew It

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This story appears in the November 22, 2015 issue of Forbes. Subscribe

In 2011 Tien Tzuo was worried. He was the CEO of a hot tech company with an idea whose time seemed to have come. Zuora makes business software that lets companies of all kinds sell their products by subscription. In recent years one company after another has embraced the "subscription economy," signing up customers online to long-term contracts that generate the business owner's holy grail: recurring revenue. Meals, movies, clothes, toothbrushes, cosmetics, software, textbooks, yarn, snacks, flights--you can buy them all by subscription now.

But Tzuo, born in Taiwan, raised in Brooklyn, N.Y., and equally at home with finance and technology, was not an experienced manager. His intense style--high on drive and focus, low on tact and empathy--had some employees fleeing. At the request of one of his board's directors Tzuo submitted to a 360-degree review by an organizational psychologist, who found that of the eight characteristics he believes a great leader must have, Tzuo possessed two.

Remembering it now in his Foster City, Calif. office, Tzuo, a slim and serious man who looks younger than his 47 years, talks rapidly. His gelled hair is cropped close. He doesn't smile much. "It was humbling," he says, pointing at the hefty report detailing his failings. "I have high vision, but I'm really bad at building relationships. I was walking around for a few days going, 'What does this mean? Should I even be CEO?'"

Four years later Tzuo is still CEO, and Zuora is hotter than ever. The business of helping companies manage subscriptions is more complicated than it might seem. For customers, buying by subscription is meant to be simple, but the businesses need complex yet flexible software to package and price their offerings as well as to acquire and bill customers. Not only does Zuora sell that software--by subscription, of course--it also helps its clients gather a huge stream of data that lets them get to know their customers and sell them even more. (Here’s what happened to one small business that adopted a subscription  model.)

Since Zuora's founding in 2007, competition has heated up, with giants such as Oracle and SAP, as well as numerous startups, vying for a piece of the market. But Zuora was early to the party and has annual revenue of $100 million, with more than 800 customers worldwide. Its fees range from $25,000 a year for a startup to more than $500,000 for a large corporation. While the company is not yet profitable, its investors--Benchmark, Greylock Partners, BlackRock and Marc Benioff, Tzuo's old boss at Salesforce, among others--have anted up $250 million. When Zuora raised money this past March, it was at a valuation approaching $1 billion, making it a near-unicorn.

Not surprisingly, Tzuo is a born geek. He grew up in the 1970s in the gritty Flatbush section of Brooklyn, where as a teenager he managed to build a simple accounting application for his father's insurance brokerage. He studied engineering at Cornell, worked at Oracle and got his M.B.A. at Stanford. In 1999 he joined Salesforce, the maker of customer-relationship-management software, as its 11th hire and rose to chief marketing officer and then chief strategy officer.

The idea for Zuora came during a meeting at Salesforce between Benioff and a founder of online-meetings firm WebEx. Tzuo tagged along, as did former WebEx engineer K.V. Rao. Instead of talking about what Benioff had planned, the group spent 45 minutes talking about what a headache billing was for subscription companies like theirs. At the time they all had to build their own billing software and upgrade it continually.

Months passed after the meeting. Unbeknownst to Tzuo, Rao and Cheng Zou, also a WebEx alum, had put together a prototype and approached Benchmark Capital partner Peter Fenton for funding. After talking with CFOs at a number of portfolio companies that used subscriptions, Fenton invited the two to give a presentation. It did not go well. "His comment to us was that we gave the worst presentation," says Zou, now Zuora's chief technology officer, "but he was still interested."

Fenton knew he'd get his partners' okay to invest only if he found a CEO. So he invited Tzuo, who had a reputation as someone to watch, to breakfast. He figured Tzuo wouldn't want to leave Salesforce to become an entrepreneur. "It was a complete long shot," he says. To his surprise, however, Tzuo was interested--in part because he already knew the concept and the cofounders. "If it was just Peter saying, 'I met these guys,' I don't know what would have happened, but it was this idea we had hatched in Marc's office," Tzuo says. "I just felt this sense of karma, serendipity."

Almost as soon as Tzuo signed on, investors started circling, eager to bet on both the subscription economy and Tzuo. "Poof, I've got five term sheets," he says. In March 2008 Zuora accepted its first round of funding, $6.5 million, led by Benchmark. The timing was fortuitous. Not only did Zuora get the funding in boom times, it also lined up a second round, for $15 million, just before the financial crisis hit and the funding spigot closed.

To make the cash last, Tzuo requested Zuora customers make two or three years of payment up front. Some early clients failed as the economy cratered, but Zuora was able to replace them with larger ones, including Reed Information and Sun Microsystems. One early adopter was Box, the fast-growing file-sharing company. As Box began selling to large corporate clients, it found it had trouble changing its pricing and processing credit cards fast enough to respond to consumer demand, and it struggled to handle order changes. "It was a headache," says Aaron Levie, CEO of Box. "It would be like if we had to build our own customer-relationship-management software or our own e-mail technology."

But even while Zuora was winning customers, problems were surfacing. Zou recalls there were brownout periods, where the whole system would slow at the beginning of the month. Zuora's early marketing efforts brought on customers too fast without thinking about whether they fit the company's capabilities. Meanwhile, Tzuo's management style had started to grate.

He became notorious among his staff for his late-night, bullet-point-laden e-mails. "He can find holes in your proposal in two minutes," Zou says, which was fine, but his approach was so blunt and so critical that staffers took his comments personally. "His involvement in certain things was quite taxing for myself and for other people," says Zou.

By 2011 Zuora employed nearly 200 people, four times more than Tzuo had managed at Salesforce. Morale was low, and people had started leaving. Zuora surveyed employees and found they thought the organization had become siloed, with departments fighting one another for resources. "Things started breaking," Tzuo says. "I thought, 'I've got to change my leadership style.'" But he wondered what that really meant.

That's when, at Fenton's suggestion, Tzuo brought in executive coach Richard Hagberg--a psychologist who has worked with Twitter, Dropbox and other firms--to help him figure it out. For a few weeks after the distressing results of Hagberg's 360-degree review, Tzuo was angry and in denial. He tried to come up with excuses and shift the blame. Then he attacked the problem, methodically and relentlessly. He made a list of ten areas to work on, including building better relationships. He tried to remember to praise employees who did good work. He also began assembling a management team whose strengths would balance his weaknesses. He brought in Steve Umphreys, with whom he'd worked at Salesforce, as h.r. chief in 2012, and appointed Guillaume Vives, a personable Frenchman, as chief of product in 2013. He's also tried to be open with his staff about his own flaws. "People are more forgiving if they understand it," Tzuo says.

Big Data is the next big step. After Zuora raised $115 million in what is expected to be its final round of funding before going public, it acquired Frontleaf, a consumer-usage analytics provider, and it is launching Z-Insights, which will allow customers to dig deeper into subscriber behavior. The goal, of course, is to use the data to help subscription companies figure out how to bring in more subscribers and get more out of their existing ones.

That can be helpful even for publishing companies--such as Zuora clients Financial Times and Australia's giant Fairfax Media--that have been selling more traditional subscriptions for a very long time. The trick is to get their customers to stop sending checks in the mail and move those subscriptions online so the publishers can learn more about them and generate even more revenue. That recurring revenue, says Tzuo, "is what lets me sleep at night."

Selling online by subscription is a big idea in sales right now. Here are some of the best known companies doing it:

Netflix: One of the first of the new wave subscription businesses, Netflix changed the way we watch movies by offering viewers lots of movies for a low monthly fee, first for DVDs and then online. It took some time, but the Netflix model eventually destroyed industry leader Blockbuster--and persuaded many other businesses to give subscriptions a try.

Graze: Believe it or not, this company sells boxed snacks by subscription. Sound silly? Its annual revenue now exceeds $100 million. Like the spicy chickpeas but not the mixed nuts? Part of the appeal is the ability to try things you wouldn't otherwise hear about. Graze will learn from your preferences--and those of others with similar profiles--and make suggestions.

Surf Air: The first all-you-can-fly airline, Surf Air, based in Santa Monica, Calif., began flying to cities in that state in 2013. It now has 2,000 members who pay a $1,000 initiation fee plus a monthly fee that starts at $1,750. It flies single-engine turboprops to destinations that include Los Angeles, Oakland, Sacramento, Napa and Palm Springs. And it also now has imitators offering subscription plans, including Rise and Beacon.

Adobe: Time was you had to buy software. No more. Adobe, like the vast majority of software companies, from Microsoft to Zendesk, now sells its offerings by subscription. Want its Creative Cloud suite of products, including popular applications Photoshop and InDesign? Or maybe you just need one app? What you pay depends on what you want, and whether you're a business or an individual--or qualify for student discounts.

GM's OnStar: Once you've bought your car, you need to outfit it--by subscription. GM's OnStar division sells subscriptions (starting at $19.99 a month) for protection, navigation and security services. If your vehicle is stolen, for example, OnStar will use GPS to help the police find it. You can add data or hands-free calling by subscription.