Google Ventures, Sequoia, Salesforce Lead $32M Financing Round for HubSpot
[Updated 2:00 pm ET with additional perspective from the investors] Three Bay Area organizations are behind a big $32 million investment in Cambridge, MA-based marketing software company HubSpot. The Series D financing round, announced today, was led by Google Ventures, Sequoia Capital, and Salesforce.com, with Hubspot’s existing investors General Catalyst, Matrix Partners, and Scale Venture Partners also participating.
The round nearly doubles HubSpot’s previous venture stake, which had totaled $33 million, and is twice as large as HubSpot’s last major venture round in October 2009. It seems to represent a consensus—among the company’s investors, at least—that with 4,000 customers and counting, HubSpot has a major lead over other marketing software startups such as Eloqua, Genius, Manticore, Marketo, Neolane, and Pardot.
HubSpot’s basic message to other companies is that going out and finding customers the old-fashioned way—using “interruption”-based methods such as telemarketing and unsolicited e-mails—is less effective than helping customers find you by creating compelling, search-engine-friendly Web content. The company’s subscription-based, online software helps small and medium-sized businesses manage blogs, improve their search result rankings, and create Web “landing pages” that persuade customers to take action, whether that means buying something or just signing up for a newsletter. HubSpot’s tools can also help with managing social media campaigns, measuring site traffic, capturing information about potential sales leads, and analyzing competitors’ performance.
Brian Halligan and Dharmesh Shah co-founded HubSpot in 2006. “The fundamental way that people shop, learn, and buy has changed radically,” Halligan asserted in a statement released today. “HubSpot helps transform the way businesses market from outbound marketing (cold calls, e-mail blasts, and direct mail) to inbound marketing (Google, blogs, social media, mobile, etc.).” In fact, inbound marketing—the title of a book Halligan and Shah co-authored in 2009—is a term coined and popularized by the company.
All three of the new backers indicated that they were moved to invest by HubSpot’s market-leading position in a business—marketing services for small and medium-sized companies—that’s being remade by Web and mobile communications. “We back companies that are transforming their industries,” said Sequoia general partner Jim Goetz in a statement. “HubSpot is the emerging category leader in the [software as a service] marketing sector. Their customer base exceeds that of all the other relevant marketing software companies combined.”
In a conversation with reporters after today’s announcement, Goetz acknowledged that it was unusual to see three Bay Area companies sending money back East to fund a software company. “It pains us to acknowledge that a company from Cambridge, a bunch of MIT engineers and Sloan grads, have managed to outmaneuver a couple of companies here in the Valley,” Goetz joked. “But as that became more and more clear over the last couple of years, we wanted to find a way to become shareholders, despite the fact that they are in Cambridge. Brian and Dharmesh have one of the hallmarks we look for in entrepreneurs—they have personal pain and passion around solving that pain. We think they will help us become shareholders in a company that is public and independent and massive in scale.”
Rich Miner, a Cambridge, MA-based partner at Google Ventures, said he’s been “continuously impressed” by HubSpot’s performance over the last several years. “Google knows and I know just how large the small- to medium-sized business marketplace is, and how underserved they are by tools that help them get from the world of traditional marketing to a world driven by Google and other ad platforms as well as the swell of social media…HubSpot delivers those tools and brings together support for search, blogging, and social networking and helps these SMBs start to understand that world.”
HubSpot says it plans to use the new cash to increase its lead in marketing software, though part of the money will also help to “provide liquidity to some existing shareholders,” according to today’s announcement. (This was evidently a reference to individual investors, as all of the company’s previous venture backers reenlisted for the Series D round.)
In 2009, after HubSpot’s $16 million Series C round, Halligan told Xconomy that the company hoped to go public and implied that it wouldn’t need much additional venture funding to get to that point. “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,” Halligan said then.
In remarks today, Halligan said HubSpot hadn’t been planning on raising more venture cash until he met Sequoia’s Goetz in December 2010. “He was very aggressive and spoke to me about the fringe benefits of being part of Sequoia’s portfolio, which includes a lot of knowledge transfer and mentorship. I got pretty excited about that, and then went and talked to my friends at Google and Salesforce. We weren’t planning on raising another round, but we have put the perfect trifecta of investors together to do this deal.”
In addition, Halligan said, the Web and software world is increasingly “winner take all,” with players like Google, Salesforce.com, VMware, and Zappos completely dominating their industries; HubSpot needed a big cash infusion to ensure that it can win in the software marketing world, he argued. With an annual run rate that’s still only at the $25 million level, the company isn’t big enough yet to go public, though that is still the eventual intention. “We are ahead in this interesting new market, and the terms seemed reasonable based on what’s going on in the private equity world, so we said let’s double down and take a round,” Halligan said.
Shah said that HubSpot currently has 192 employees, with 10 more coming on board in March, and that the company will “continue to be very aggressive” about hiring. The company is hiring in all departments, but the focus is on product developers, designers, and QA testers who can help “get the product even farther along,” Shah said.