Zenoti CEO Sudheer Koneru.
Subscription-based software may be the norm today but that was not the case in 2011 and certainly not in the niche salon and spa business. Few multibillion-dollar companies were paid for specialised software solutions but that’s what Zenoti CEO Sudheer Koneru wanted to change. In the week gone by, Zenoti was valued at a billion dollars when it raised $160 million led by private equity firm Advent International.
The deal that made Zenoti the newest Indian unicorn is also a sign of the frenzy in the software-as-a-service (SaaS) industry, where startups are raising funds at a valuation 20-30 times their revenue. Zenoti, too, has benefitted from this boom. Of the $250 million it raised since 2011, more than $200 million has come since mid-2019 alone.
In a video interview with Moneycontrol’s M Sriram, Koneru opens up about contrarian decisions, what makes the salon and spa business unique, IPO plans, and more. Edited excerpts:
Why did you start Zenoti? What was the thinking?
I finished my previous startup, also in enterprise, after running it for eight years and took a break for a couple of years. I spent a lot of time on yoga, meditation, and general wellness. I wasn't planning to go back to work but I invested in a chain of fitness chains, spas and salon centres called Latitudes. I was just an investor. But after two years of them being operational, I realised that if you want to run a multi-store outlet, it is very challenging. There was no software system for that.
And before I knew it, a lot of people wanted to join me in doing this. So that made me take it seriously and actually start this, although I hadn’t planned to do so.
Verticalised SaaS businesses weren’t as common in 2011. So what was your thesis to build this?
Even in 2011, these spas and salons were using desktop-based specialised software. It wasn’t some generic software solution. Generic point-of-sales software doesn’t meet the needs of the spa industry. Managing appointment books, chairs and spa rooms is a complex problem. Some rooms can be used for facials, some for nail care. So there was a need to transform them into cloud computing and the large businesses were really struggling.
Every day a store manager would export data and send it to the head office. An accounting team at the head office would put that data into (Microsoft) Excel and give it some format. All of it is back-office work and nothing is automated.
The other reason to build a big enough company is that it is a complex enough problem and we do the entire tech stack—from booking an appointment online to using the software at the front desk, employee payrolls, purchasing products—these companies do retail too. You can buy shampoo from there. So, there is a chance to monetise the entire value stack.
In this full stack, how do you prioritise services that are most important to you?
Initially, core operations had to be streamlined, that was the priority. We help companies that have more than 20-30 outlets to streamline business—that was our original pitch.
After that it was, now let's elevate the guest experience because initially even after we streamlined the business, the guest experience was exactly the same as earlier.
We wanted to make it Starbucks or Uber-like, where you book from your phone, when you walk in the salon is notified and when the service is done, the stylist just marks on their phone. The customer’s phone says you have been charged for this amount and you walk out.
The third phase is using artificial intelligence and data to automate decisions such as how many people or who should come to the office, what all products to buy, optimising store efficiency. We think machines can do this and do it better than humans.
You have raised nearly all your capital only since mid-2019- from Tiger, then Steadview and now Advent, though the company is much older. Has anything fundamentally changed since 2019?
That’s a fair observation. We grew at about 75-80 percent in 2019 and slightly slower in 2018.
When you sell only to large businesses, it took time for us to mature our software. Even there, haircut salons, parlours and spas all have varying customers, varying propositions and different needs. And there are nail salons exclusively. It took us time to mature our product enough so it works beautifully for all these niches and where we can pick up velocity. The year 2019 is when that started happening.
The good part is that there is nobody to compete with us to serve large businesses. I can tell you that if a salon or spa chain has looked at going for a software offering, it has to be Zenoti.
So we raised only $21 million in our history until we got there.
And COVID-19 was a big reason for this round. It has accelerated change in this industry by three-four years. Earlier, we would pitch to someone and they would say, “Okay, maybe I’ll consider this next year”. Now when businesses were reopening, we said they didn’t just reopen with more sanitation and hygiene but should also fix their IT infrastructure.
So now salons are using us for that top-class experience, which wasn’t as important earlier. Enough brands today are offering that Uber-like experience, for everybody to feel like they should have it too.
What were the early pandemic months like?
Oh, it was definitely bad. March-April everyone was shut down and laying off employees. Our own customers weren’t talking to us, let alone potential new customers. We were still important because all these companies’ data is on Zenoti, so they can't just pull the plug on the contract or something, but we did give some customers a discount, deferred payments for some, saying you pay half when you reopen. But in the US, it was less of an issue because the fees they are paying is relatively small, given the size of their business. They pay us about $500 a store (a month).
We built a lot of features for online retail. So even if your shop is closed, customers can buy products online. For large stores, 20-30 percent of their revenue comes from retail. We also tweaked our gift card system a little, linking it to a specific stylist. They are also suffering, but if you are open to it, why don't you use this gift card and go to this stylist whenever we reopen. We will pay the stylist that money.
And mainly, we worked a lot on our messaging. We said that if you’re anyway shut down and free, why don't you look at upgrading your software? It was a good time to catch them because many of them now had time to talk to us. Some of the owner-driven businesses moved very fast, recognising that this is a good time to implement our solution.
What percentage of your revenue is from the US?
Sixty percent is from the US, 15-20 percent is from the UK followed by Australia and New Zealand with about 10 percent. The rest is India and the Middle East.
And how did you deal with the pandemic internally?
We laid off 15 people, mostly in our Seattle office. We froze hiring for some time. Travel, marketing, all budgets were frozen and we controlled costs big time but in three months, we started hiring again and had to go back to everything. Since July or so, we must have added at least 70-80 people.
How is the India market for you?
We serve most of the large stores in India but the revenue per store is lower. Our costs though are the same, since it is hosted via AWS (Amazon Web Services) and our offering is the same. If a store in the US will give us $500, in India it’ll give us $150 (a month).
Do you expect the US' share in your revenue to come down?
Not for some time at least. The US and the UK are our big growth markets. More broadly, the US represents 50 percent of the market opportunity we are chasing. And I think the US will be 50 percent of our revenue for the foreseeable future.
We understand your annual recurring revenue (ARR) is about $45 million. Could you confirm that?
We don't disclose ARR, so I won't comment on that. We grew 100 percent this year and will grow at least that much next year.
What has been your biggest challenge this year?
People. Making sure that people are able to work from home and be productive. We have invested a lot in employee well being but people working virtually can be chaotic. It is a bit easier in the US but in India, people don’t necessarily have the space for a home office. So we have sent them chairs and desks, so they have some equipment at home.
It's about people’s capacity and how much people have been stretched. We’re also in this unique situation where customers want our software but we don’t have enough people to deliver that software. So we’ve had to stretch quite a bit to make this year’s results and numbers happen.
Have you thought of an IPO?
Yes, in two-three years.
What do you need to do to get there?
If we definitely grow 100 percent each of the next two years, we will be within striking distance of preparing for a listing. We also have to still innovate our products and have more mature technology. It is about maintaining the velocity we are seeing in the market today.
How do you view the IPO timing? Now seems like a great time to go public with valuations soaring?
Yes, it is, and my thesis is it will stay this way for a few years. There may be some minor correction but that is fine. But, in general, people are realising SaaS business models are very strong.
More so, we also come up with new products to sell to the current base. So we get 20 percent more revenue from that and you add new clients to that. So people are realising that these models are in fact sustainable.
And when will you be profitable?
We might have been EBITDA profitable (a metric of operating profits) earlier but then we hired so much and growth is the main priority. Maybe Q1 of 2022 is when we will be profitable.
What has surprised you the most in your journey with Zenoti except COVID?
I think how well our choice of customers has worked for us has surprised me. The value proposition of really focusing on our market has surprised me. This thesis of serving only large companies and believing that we choose the customer, not the other way around. Because of this, our product became better, our customers are healthier—there is less churn, and our financial metrics are better. Even when COVID happened, the customers we chose were the ones who had no problems reopening, as opposed to saying, we decided to shut down for good. Focusing on who we want to cater to worked really well for us.