Last fortnight, Zenoti raised $160M, becoming a unicorn and the fifth software company to do so from India.
Booking a New Journey
In 2008, Sudheer Koneru found himself managing a chain of spas and fitness centers.
A seasoned enterprise software executive at companies like Microsoft and Sumtotal, Koneru was contemplating retiring at the time. He thought spending time at a gym or spa was a ‘fun’ way to pass time.
However, he underestimated the complexity that came with running a wellness business.
Early in his tenure, he donned multiple avatars of receptionist, shadowed personal trainers, trained with his staff, and performed mundane administrative tasks.
While playing these multiple roles, he realised that the biggest problem he faced was managing multiple outlets in a centralised way and standardizing services across his locations.
An easily integratable software that allowed multi-site wellness organisations to keep an eye on all of their outlets was missing. Further, there was no way to compare employee and salon performance across locations or keep track of billings in a single report.
Customer experience was unsatisfactory as well. For instance, if you were a regular at one salon outlet, but stepped into another of the same parent company, the service would be different, your profile or preferences were not stored, and any vouchers or loyalty points that you had collected at other outlets could not be used.
It sounds strange but that was the reality!
They also say history does not always repeat itself, but it does often rhyme.
A few years before Koneru’s encounter with these issues, Tobias Lütke, Daniel Weinand, and Scott Lake tried to start an online snowboarding shop in Canada.
They had a hard time with e-commerce functionality at the time and decided to build a solution that would make it easy to sell anything online. Today that company is known as Shopify and is worth $145Bn.
Koneru had a similar reaction to his hardships in running a wellness company. Surely, others in a similar position as his were facing similar roadblocks in the efficient management of their businesses.
With his experience at Microsoft and Sumtotal in the back of his mind, Koneru decided that he would sell his own chain and dedicate his time towards building software for the space instead.
The idea would be an all-in-one software solution that empowered wellness chains in a way that they hadn’t been served until this time.
Setting up a Slow Treatment
Contrary to the ‘Move Fast and Break Things’ mentality that many technology startups lived and breathed early in their journeys, Koneru adopted a strategy of ‘Crawl, Walk, Run’ at the beginning.
He already had a head start due to the confluence of his past experiences.
He knew how to build scalable and user-friendly tech products due to his time at Microsoft, and he was acutely aware of the ins-and-outs of running a wellness business due to his time in that very position.
With a laser focus on customer satisfaction and product-led growth, he called his company ManageMySpa and built a solution for spas and salons.
After a market assessment, he realised that companies were looking for a solution that could handle both back and front office operations.
With that in mind, ManageMySpa would provide everything from managing payroll, reporting, inventory and marketing to appointment management and billing – all in one interface.
However, the early days were not without challenges.
In 2010, many spas and salons had to be convinced to move from familiar, low-tech, manual methods of running their businesses to a technology based solution.
Even by 2012’s the market size for vertical SaaS was small and investors were not too keen to invest in the market. Add to that BookMySpa was operating in the salon and spa management space
A common assumption was that ERP and CRM needs could be better served by large industry agnostic horizontal players. But vertical players were able to understand the core needs much better and specialize in retail solutions to stand tall as obvious choices
BookMySpa had to focus on higher penetration, solid retention to make the LTV work while not restricting itself to the India market.
Adding as much incremental value as possible to clients was its USP which helped improve spend per client. It provided PoS platforms, analytics solutions, loyalty programs to clients apart from its core offering of CRM tools and ERP applications.
When salons noticed the increased efficiency that spas and salons achieved with a comprehensive and dedicated solution like ManageMySpa, it gave them the boost of faith required to make investments in overhauling their operational stack.
By making the product easy to understand and interact with, ManageMySpa was able to break through this barrier and gain a critical mass of initial adopters.
Most notably, ManageMySpa realised that the solution had evolved significantly since they started. The broadened service offering could serve the wellness, fitness and beauty industry as well.
In a ‘Drop the The’ moment, they rebranded to Zenoti.
Waxing in the US market
As Zenoti became an increasingly relevant and popular solution, they considered multiple growth strategies to expand the market that they served.
Two compelling strategies emerged – providing their solutions to customers who were similar to spas and expanding beyond Asia into global markets.
Within the beauty and wellness industry, there are various sub-segments. Walk-in barbershop, appointment-based luxury salon, luxury day spa or resort spa to name a few.
Zenoti patiently spent time to understand the customer needs and nuances of each business model.
It focused on other niches such as tanning services, barber shops and nail salons. Doubling down on adjacencies quickly was a superpower it built for
The company initially focused on the Middle East and SE Asia market and signed up leading spa brands in each of these regions.
But the ‘cash cow’ was the US and European markets which were the biggest and most intensely fought market in the space in which it operated
Problems of PoS software and clunky desktop-based operations were the same for large full-stack wellness chains globally. Moreover, as the chains in US expanded globally, they faced the same limitations slowing their growth potential
Results started showing as they helped one of their partner clients Enrich to sell $11K in online memberships over a single weekend or signed Toni&Guy, a leading hair salon brand and went live in 600 locations in 45 days with barely any hiccups.
Zenoti had begun to walk, the days of crawling were over.
Know thy Customers
There was one thing that had repeatedly worked for Zenoti: they did not think twice about putting in the time to immerse themselves in their customers’ businesses to find what exactly worked for them.
Its role in the quest to conquer the biggest attractive market would turn out to be more crucial than expected.
The team had been making calls to US salons and spas to conduct deep-dives into the businesses and realized that they had to factor in full-service shops.
In the five years spent building Zenoti, the US salon market had seen a transformation. Many single-service salons had popped up, and business operations differed greatly between them.
Zenoti’s team immediately got to work. They tried learning as much about the customer base as possible through digesting demographic data and made phone calls to inquire about walk-in policies, appointment scheduling and wait lists, and outlet specific services.
The team also visited locations as customers to experience bottlenecks and pain points in the same way that their clients customers would. This helped them discover quite a few features important to US businesses.
While it may seem like designing niche vertical-specific strategies was not scalable, the exercise that Zenoti used to find the right PMF definitely was.
But like all else, Zenoti’s journey was not free of roadblocks.
Businesses that were led by their founders were observed to be much more willing to try Zenoti and help the product grow, as compared to others
Zenoti did not want to leverage the spray-and-pray approach – they wanted to be sure that they had profiled their buyers and their experiences thoroughly themselves.
Given that the team was sitting in India, they chose local sales professionals to launch the product in their first three months for the US market – only to realise that they had made a mistake. They had to keep a continued personal touch, and the first few acquisitions had to be secured by the founders.
Onboarding the first few clients to the Zenoti experience gave the team a higher level of clarity on the hiccups the businesses faced on a daily basis.
Zenoti was servicing and supporting their customers to the degree that was asked of them, in the US. The ask from Indian businesses was broader.
They wanted both integration and maintenance to be handled, while US businesses expressed the desire to be able to do this on their own. The great understanding and working relationship that Zenoti built with their clients was also a by-product of the heavy-lifting they did to understand each client’s business.
All this would help build a solid moat which would become unbeatable. By Sep 2015, it raised a Series A round
Stylishly Finding Price
Zenoti’s conscious efforts to scale aligned with a surging investor interest in vertical SaaS
By mid 2016, they had secured series B round from both new and returning investors which the company would use to expand its footprint.
They had spent the last few years building a strong foundation in customer experience and mastering the art of finding PMF for different geographies.
Zenoti had started marketing campaigns involving advertising through trade shows and exploring channel partnerships, but till 2015, most of these had involved understanding and acquiring customers.
Now, the founders felt that the time had come, to invest in talent acquisition, product innovation, and expand market share
Zenoti began with the quintessential tier based pricing model.
However it quickly realized that competing on price did not make sense because not only did they have much more value to add than any other competitor, they were also servicing a wide number of offerings.
Bucketing pricing tiers so broadly would not be the best idea, especially if a good number of their customers were single-service/single-outlet businesses. It needed to find a price point that didn’t offer features that weren’t needed by some of their customers.
As their customer base was incredibly diverse, Zenoti let go of the tier pricing model, and eventually moved to a single enterprise plan.
The process was iterative and the focus was yet again on customers’ satisfaction. With sequential trials, and not many errors, Zenoti was flourishing.
But seeing their success, competition was looming.
Hair Raising Competition
By early 2017 competition was heating up. Peers like Mindbody, Meevo, Vagaro among others were making aggressive growth plans
There were two key reasons that made Zenoti different from other players offering similar solutions. While it is easy to infer that others were mostly desktop based solutions while Zenoti was a cloud based solution but that wasn’t the key differentiator.
Remember, Sudheer first started as a founder for a spa and wellness chain. He faced the challenges of opening new centres, centralizing processes and multiple other variables that come into play while running this business.
They knew in each market, every geography they take their product, there will always be some amount of customization they have to do. It’s best understood from customers on what they want or don’t want.
This insight was ingrained in the company’s value system. It also guided employees, product and technology teams to make decisions to build the right amount of flexibility in the system.
This resulted in a tech architecture- scalable enough for any geography while flexible to manage multiple use cases around beauty, spa or similar businesses.
The ability to provide booking, inventory management and payment systems that operate on a ‘single source of truth’ is something which a lot of competitors are still struggling on. From a database lens, it means Zenoti has a robust centralized architecture which would be its main selling point to the salon chains with a higher number of locations.
The second reason was a strong playbook built for expansion built on top of their scalable product.
Whenever they went to a new market, they ensured they finetune the product with few clients, find PMF, intelligently target some big enterprises to build brand equity and then scale in the market with SMBs.
For instance when they went to the US market, they understood a new need to collect tips at checkout and built a solution around it. This wasn’t a need in the India market where they developed their first product. Before going for big enterprises, their US solution was almost perfect and that helped them scale really fast.
Overall Zenoti adopted a ‘product first’ approach than a greater focus on sales and distribution. It realized that the power shift was happening from the distributor to the customer globally and capitalized on it heavily
The Crawl, Walk strategy had been perfected. It was now time to ‘Run’
Delivering a Beautiful experience
By 2018, Zenoti was flying.
20% of Zenoti’s customers came in through referrals. 30–40% organic and inbound, while the rest came through direct sales and account-based marketing.
With almost 60% of customers coming in through limited marketing spend, Zenoti had discovered the flywheel of growth.
Years of building patiently were bearing results. As the flywheel started to gain momentum, Zenoti looked unstoppable. It grew 100% in 2018 with a target to hit 130% growth in 2019. Naturally this solid growth attracted investors
By May 2019, Zenoti raised a $50M series-C round. It now had around 300 employees present in more than 44 countries.
More than half of the company’s revenue came from the US market with India having only 20% of the share.
It is also worth noting that once a platform embeds itself to offer a full-stack solution to businesses, it becomes mission critical making it inherently sticky.
Zenoti drives more growth to already sticky customers thereby fueling its topline – a great flywheel on the back of premium product and infrastructure. The company clocked a whopping 100% Y-o-Y revenue growth in early 2020.
Another big advantage was its operational efficiency. Zenoti’s India office counts for almost 70% of its workforce.
It is rare to find a big vertical market free from regulations where a company offers a robust product offering while maintaining a low-cost expense base.They had the growth playbook and tech infrastructure to accelerate the pace as they wanted to.
But the smooth sailing was soon going to hit very choppy waters.
Manicuring the Beast of COVID-19
COVID-19 pandemic shook multiple industries and the beauty & wellness industry took a severe beating
Like every other business, the outbreak initially heavily impacted Zenoti as all its customers were shut for weeks. Zenoti also laid off a small percentage of its workforce to conserve cash.
But the Beauty & Wellness industry eventually thrived because people still need to “feel good” as rightly predicted by the founder.
As the rubber hit the road in March 2020, only businesses that are built on first principles, with resilient infrastructure and agile functioning could survive and eventually thrive.
Zenoti was one of them
Zenoti had the luxury to choose its own customers and hence focuses more on the organized tier in the market with the large enterprise(y) and SMB’s having more than 10-20 centers and doing more than $100,000 in monthly revenue.
During the pandemic, Zenoti announced partnerships with large salon and med-spa chains such as Toni&Guy, Skin Laundry. This while its biggest competitors in the space (Mindbody, Vagaro, Shedul) still focused more on smaller standalone businesses while trying to make a mark on the larger customers.
This became possible because Zenoti planned for unknown consequences that might come while building a platform for the beauty and wellness industry.
The wellness chains were yearning for an integrated solution across every touchpoint of the customer journey at a time when hygiene took paramount importance
Imagine the ease of doing business if your stylists can take up appointments at any location in the city depending on demand and convenience along with being able to log-in attendance and receive salary as working for a single outlet– high satisfaction to salons’ customers and employees and eventually high satisfaction to salons (Zenoti’s customers!)
The pandemic started badly but ended up providing strong tailwinds to Zenoti.
By Dec 20, Zenoti became India’s first vertical SaaS unicorn with a monster $160mn series D round.
A Sunny Valuation Rising From the Shade
Zenoti is a category creator in India, but it is bogged down by its space.
While the global Beauty & Wellness software management space has seen good activity from a consolidation and fund-raising perspective, Zenoti has certainly benefited from public SaaS multiple expansion trends along with leaving a large room to expand.
Mindbody buying Booker, Vista equity buying the combined entity has parked the Enterprise Value in the 6-8x range of the next twelve months (NTM) revenue.
SaaS companies usually report the annual recurring revenue (ARR) rather than recognized revenue (which is a 30% gap on average). This means we can assume a discount of 30-40% to this number.
Given Zenoti grew 100% annually for the current year, it is safe to assume that it is expected to grow at least 90-100% in the coming year, which makes the NTM revenue for the company to be ~$70mn.
At a well beyond $1Bn valuation, this lands Zenoti at ~17x multiple on revenue. To put this into perspective, the multiple for publicly traded SaaS companies having a 30%+ annual growth rate is greater than 30x.
Nevertheless, this kind of multiple in the beauty and wellness software market is unheard of and a great benchmark that Zenoti has set for itself in the years to come.
With great multiples comes great responsibility but with execution moat built over the years, Zenoti could well deliver on its future milestones
With an eye out for an IPO in the next 2-3 years, Zenoti has started setting milestones on what it wants to capture next
This means doubling its revenue consecutively for the near future. The vision is not far fetched given the growth forecasts for Zenoti. Vertical SaaS companies typically IPO at ~a $150-250mn revenue range which is way lower than horizontal SaaS, consumer or other internet companies due to strong margins and low client churn.
In the next phase, Zenoti can harness the invaluable data capital to elevate guest experiences for its 12K customers. The company will leverage AI to integrate data on its deep tech stack to pull insights and automate decisions for its clients.
Company aims to double its employee base by 2022 with an emphasis on R&D roles. This will mean making the GTM team more cost efficient while developing a mature self-served product for the market – a lever every SaaS company wishes to win.
Zenoti also plans to accelerate acquisition efforts.
Two themes could be of interest. Startups that bring supreme data analytics and AI capabilities and second which have solid distribution and presence in the newer markets of physical therapy, fitness, and pet grooming where it plans to expand offerings.
Benefited by the pandemic, and having built from first principles, Zenoti could well be on its way to become the Wellness’ Default OS globally
By Shiraz, Keshav, Bhoomika, Abhinay, Saniya, Omkar and Aviral
Audio Version: Behind the Scenes with AJVC
As usual, we have done a behind the scenes format with the writers and host Mazin
Tune in below: