HubSpot Gets $16 Million to “Put Mass Behind SaaS”; Marketing Automation Company Has Plans to Go Public, CEO Says

10/19/09Follow @wroush

It’s a big day at HubSpot, the Cambridge, MA-based marketing technology startup founded three years ago by local investor-entrepreneurs Brian Halligan and Dharmesh Shah.

The company announced that it has raised a $16 million Series C financing round, led by new investor Scale Ventures, with existing investors General Catalyst Partners and Matrix Partners also joining in. That brings the company’s total venture pot to at least $33 million.

At the same time, a new book co-written by Halligan and Shah hits bookstores today. It’s called Inbound Marketing: Get Found Using Google, Social Media, and Blogs, and according to the website for the book, it’s all about the ideas that drive HubSpot’s own Software as a Service (Saas) offerings: that the best way for companies to generate sales leads and win customers is to optimize their websites and their social-media activities to attract “inbound” traffic, rather than marketing to potential customers directly through e-mail, telemarketing, and other “outbound” or “interruption”-based methods.

Halligan, HubSpot’s CEO, announced the funding round in a posting on the company blog. According to the post, the company was able to raise the C round on the strength of its recent revenue growth (350 percent over the last year) as well as the spreading conviction that outbound marketing methods are “fundamentally broken.”

The company has grand plans for the new funding: Halligan told me this morning that the goal is to go public, just as other SaaS companies have. But while there’s a common myth that Web-based companies can be built on the cheap, it actually takes serious money to amass a customer base large enough to justify an IPO, Halligan says.

“When you look at companies like SalesForce.com and NetSuite and Constant Contact and OpenTable, the average amount they raised [before going public] was $40 million,” says Halligan. “And there’s a reason for that: It takes real R&D, and you are essentially funding your customer with the SaaS model, so there are some big investments up front.”

SaaS businesses, Halligan points out, typically collect small subscription fees over time, rather than selling boxed software for a fixed price that would bring in big chunks of revenue up front. (HubSpot’s own services cost about $250 a month for small businessees and $9,000 to $12,000 a year for larger businesses.) That means “you are essentially financing your customer forever,” Halligan says. And since all of a SaaS company’s software lives on its own servers, “you also have to build a bullet-proof back end,” he says.

To do all of that, the 100-employee company plans to get “a lot bigger,” Halligan says. “To compete with our vision of this modern marketing platform akin to SalesForce.com, we need to invest in R&D…The sound bit is that we’re going to continue to invest in hiring in the Cambridge and Boston area across the board, with a lot of research and development heads but also some marketing heads, recruit and sales heads, and services heads.”

Halligan said HubSpot was attracted to Foster City, CA-based Scale Ventures in part because of the firm’s understanding of Software as a Service business models—the company was an investor in Web measurement firm Omniture, which was recently acquired by Adobe, as well as Exact Target, an on-demand email marketing startup.

Scale isn’t a name that you often see attached to Boston-area funding rounds. “The reason you don’t hear much about them is that they primarily do Series C type investments, where as the Sequoias and Kleiner Perkinses will do early stage investments,” says Halligan. “But they are becoming real SaaS experts out in the Valley, and they understand that you need mass behind SaaS to make the metrics work. They drilled deeper than anyone else when we met into our spreadsheets and our economic models.”

HubSpot has roughly 1,500 clients, and is located in the Cambridge Innovation Center in Kendall Square. Its most recent funding round prior to today’s announcement, a $12 million Series B round, closed in May 2008.

Halligan plans to discuss the Series C round in a live-streamed Internet session today at noon.

Wade Roush is a contributing editor at Xconomy. Follow @wroush

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