As with many startups, Zendesk’s origins began at a table with a few laptops, three co-founders and lots of coffee. But the founding of the customer service software company has an unorthodox twist: Zendesk started out of a loft in Copenhagen, Denmark, and not in Silicon Valley.
Mikkel Svane and co-worker and engineer Morten Primdahl, were implementing old-school customer service solutions in companies in 2006. As Svane explains, the customer tracking and incident reporting software they were advising companies to adopt was from a previous generation and extremely complicated to set up and use. So hard, that companies had to call in consultants to execute the implementations. Svane and Primdahl realized there was a problem to be solved in providing the antithesis to this technology, and started thinking through a new idea. At the same time, the web was seeing the rise of Salesforce.com and the SaaS model.
They called up one of Svane’s old designer friends Alexander Aghassipour and explained to him their idea for a new online software. Pitching the idea of reinventing customer service and the helpdesk is the most unsexy thing, recalled Svane, when you compare it to working at a hot consumer startup.
“Help desk software didn’t sound that exciting and I had no domain knowledge. I was a canary in a coal mine, but I was obsessive about clean design, and as I saw what existed I realized that companies were being underserved,” says Aghassipour.
But like Svane and Primdahl, Aghassipour saw the opportunity to create something beautiful in a world where design was an afterthought, and be an entrepreneur. Primdahl had worked with Svane previously, and knew the engineering challenges that could be solved online through the SaaS model. Aghassipour told Svane that he would help keep the software “beautifully simple.”
From A Loft To A Helpdesk
In late 2006, they all left their full-time jobs and set up shop in a tiny loft in Copenhagen. The loft had a single large table and a couch, and Svane, Aghassipour and Primdahl spent long hours figuring out what their software would look like, and how it would be a business.
They all decided that Zendesk would be the simple alternative to the complicated mess that customer service can be. From the start, Zendesk offered a web-based, SaaS-delivered help desk/support ticketing application that gives companies an easy way to manage incoming support requests from end customers.
We didn’t know what it would look like, and we were nervous when we flipped the switch on the server.
To make money (Svane had a family to support), each of them took individual consulting gigs on the side. Svane says there were periods of time where they would work intensively, but there wasn’t easy access to capital in Europe, so they had to be bootsrtapped and make money in other ways.
The trio began developing and creating the product but there were moments of doubt. By early 2007, no one else had really tackled the problem of recreating the online help desk for companies, and the team started to get paranoid. “I thought if this is really an opportunity, how come no one is doing anything in this space and validating my idea,” Svane says. In fact, he even applied for Zendesk to launch at TechCrunch 40 in September of 2007, but was denied.
Despite the challenges of no funding, and moments of asking themselves “why are we doing this?” the founders decided to double down on Zendesk and only focus on building and launching the product.
By the fall of 2007, they had soft-launched the help desk software as a service on the web. Svane and his co-founders were just dying to get people to try the product and emailed all of their friends and network to get anyone with customer service needs to try it. “We didn’t know what it would look like, and we were nervous when we flipped the switch on the server,” says Primdahl.
Within a few months, customers started to flock to Zendesk to try it out. The startup quickly acquired around 1,000 trial customers. “A lot of our early customers were websites that needed a simple way to manage inbound customer service and communications,” Svane says. “We realized by configuring a product for an audience that is web savvy, we were able to reach an audience that traditional type of software couldn’t reach, and this was our first validation.”
The Seeds Of Investment
Unlike the traditional consumer successful startup story, Zendesk’s path didn’t start with explosive growth. The company’s usage was mainly coming through word-of-mouth recommendations. By early 2008, Svane decided they could no longer bootstrap the company, and he started to reach out to European investors. But they received a bunch of polite no’s. “I was told that there was no money for us,” he says. But Svane and his team caught the eye of one angel, German investor Christoph Janz, who asked Svane what it would take for the company to go to the next level. Janz put around $500,000 into the company, marking its first outside funding, nearly two years after the founder began developing the product.
The voice of the customer got louder, and this change made 2008 a turning point in the market. Customer interactions online became more important to companies. With the rise of the social web, it was easier for customers to share good and bad experiences through comments, forums, Facebook and even Twitter.
Now that Janz joined as an advocate, he started helping Zendesk expand its reach in the investor world. He set up a number of meetings for Svane and the team in the summer of 2008 on Sand Hill Road, and the company began thinking through raising a Series A round. Svane even had a marquee new customer to tout to investors: MSNBC.
We were just a group of three guys in Copenhagen, and I had no idea that people in Silicon Valley had heard of us.
While Svane was in Silicon Valley, he was invited to the TechCrunch/August Capital annual party. As he walked through the party with his name and Zendesk written on his sticker badge, a number of people in the startup world approached him to tell him they were using his software.
“It was an eye opener for us,” he says. “We were just a group of three guys in Copenhagen, and I had no idea that people in Silicon Valley had heard of us.” Visiting Silicon Valley that summer and attending the TechCrunch event was a reminder of what he was working towards. “I had the TechCrunch bug of wanting to build a tech startup, just like the founders I read about on the blog. I wanted to join this club,” he added.
While the team was in San Francisco, he did catch the eye of some Sand Hill Road investors. In fact, Zendesk got extremely close to taking funding from a well-known, undisclosed firm. The partner told them the deal was nearly done, and just had to be approved during the partner meeting. The investor said he would call Svane right after the meeting. But the call never came, and Svane, who waited in his hotel room for the investor to call, realized he would have to start his investor search over again. With a heavy heart, he left San Francisco for Copenhagen.
To The U.S.?
Not long after Svane returned to Denmark to join Aghassipour and Primdahl at the loft, Charles River Ventures partner Devdutt Yellurkar came across Zendesk as he was researching new investments in the SaaS industry. Yellurkar had a brief conversation with Svane over the phone, and while doing diligence, he realized that a number of the firm’s portfolio companies were already using Zendesk and loved using the product. “I had never seen that kind of love for an enterprise software,” he recalls.
One of these early users was Twitter (which was CRV-backed), who started using Zendesk for customer support. Primdahl recalls that when Twitter first started using Zendesk, traffic to Zendesk quadrupled. He says the company spent the next three months attempting to rid the software of the bottlenecks Twitter usage caused. “No other customer challenged our software like this,” he says.
After hearing the customers’ experiences, Yellurkar was determined to back Svane and his team, and promptly flew to Copenhagen in late 2008.
Primdahl (at table) and Svane working from the Copenhagen loft where Zendesk was founded in 2007.
The strength of the founder team also drew the firm to Zendesk, Yellurkar explains. “It was a trifecta – Mikkel understood the customer support domain, Alex has fabulous design aesthetic, and Morten was an extremely talented engineer.” By early 2009, a few million dollars from CRV was in the three-year-old SaaS company. With this new cash, Svane started to hire additional developers.
To be closer to Yellurkar, the trio started talking about possibly moving the company to the U.S. For Svane, he had always wanted to live in the U.S. at some point. Plus, they would be closer to investors, and their customers, which at the time, were mostly based in California. But the challenge of moving families away from home was daunting.
As Zendesk was contemplating the move, a bunch of VCs started calling. Many, including, Yelp, Twitter and OpenTable-investor Benchmark Capital, caught wind of Zendesk through portfolio companies using the customer service software. In a period of 10 days, three different Sand Hill road VCs flew in.
For Svane, Yellurkar had always felt like a member of the team since he joined, so the barrier to accepting another VC was high. It’s not that he didn’t trust institutional investors, but after being burned, he was wary of VCs who didn’t want to get their hands dirty. He knew Zendesk still had a long road ahead and he wanted a partner, not just an investor.
Customers were talking about Zendesk the way consumers talked about Facebook when it first launched.
One of the VCs who flew was Benchmark’s newest partner Matt Cohler. Svane says at the time he had no idea who Cohler, who helped grow LinkedIn and Facebook early on as an employee, was. Similar to Yellurkar, Cohler has actually heard about Zendesk from the firm’s portfolio companies that were using the software. “That is the most meaningful signal that we should invest,” he says. Also like Yellurkar, he had never seen people talk about enterprise software with such love. “Customers were talking about Zendesk the way consumers talked about Facebook when it first launched,” he adds.
Cohler ended up flying into Copenhagen to meet Svane and the team, and Svane took a liking to him, so he invested Cohler to come to his home for a dinner with his kids.
According to Svane, what made Cohler and Benchmark distinctive is that they felt like family from the beginning. Cohler had dinner at Svane’s home with his family and friends in Copenhagen, and Svane says it felt natural and easy to have Cohler around. At one point during the dinner, Cohler joined the kids in the family room of Svane’s home and watched the movie Pippi Longstocking with them (which was in Danish, Cohler says, so he didn’t understand anything).
A few months later, Svane raised the Series B round of around $6 million from Benchmark and Charles River Ventures. Benchmark partner Peter Fenton joined Zendesk’s board.
It was also around this time that Svane, Aghassipour and Primdahl committed to making the move to the U.S. Initially they decided to base themselves out of Boston to be closer to Yellurkar, but they quickly realized that they needed to be in Silicon Valley. Aghassipour adds that moving was a really tough decision, but it felt right to be closer to the heart of where everything was happening.
By late 2009, customers were flocking to Zendesk. Revenue was steady, and having large customers like Twitter early in the product lifecycle, had helped iron out some of the growth kinks. This was also when acquisition interest started coming in from incumbents in the space.
Primdahl, Svane, and Aghassipour (l-r) when they first moved to the U.S. in 2009.
Svane declined to name which incumbents gave Zendesk offers but we heard from sources Salesforce made a very lucrative acquisition offer to Zendesk around this time. “It’s really hard to say no to a lot of money, especially money that can be life-changing to you and your employees. And because you can’t talk to anyone about acquisition talks, it’s an incredibly isolating experience,” he said. “But creating Zendesk was never just about the money.” He adds that it was a tough decision to turn down high acquisition offers, but he and his co-founders felt strongly that the company wouldn’t be the right fit within another company. They feared joining a large enterprise giant and being unhappy or, worse, that their product – which they had spent so much time working on – would be shelved.
So they passed on Salesforce and others that came their way. In that moment, they knew that the path for Zendesk was to be independent. Salesforce did end up buying a customer-service SaaS – Assistly for $50 million in 2011 – and rebranded it Desk.com.
In the meantime, Zendesk doubled down on hiring engineers and a strong in-house design team. And because Aghassipour had his own agency in a past life, design of the product and ease of use has always remained paramount to the product. As the founders all explained, if the product aimed to add simplicity to an otherwise complicated industry like customer service management, the product couldn’t be complicated and cluttered. The company has steadily added bells and whistles to its product, but each move was methodical, and with an eye for design and integration.
Primdahl says that Zendesk didn’t start establishing an actual product team in 2010. But over the past two years, it has added a VoIP system, an iPad app, Twitter integration and more. Last year, Zendesk debuted an application framework, known as Zendesk Apps, designed to extend the company’s functionality with internal and third-party systems.
“Innovation is a tricky thing to balance,” Primdahl says. “It’s easy to get caught up in the next product roadmap, but we need to keep driving efforts outside the roadmap as well.”
Sales was also something to come late to the company when you compare traditional enterprise sales models. Primdahl says that the company didn’t add a sales team until 2010, and the first 10,000 customers came completely through word of mouth and light advertising via AdWords. The company now has 30,000 customers and 450 employees worldwide, including 100 engineers.
With an eye on staying independent, last year Zendesk raised another $60 million led by Redpoint Ventures with Index Ventures, GGV Capital, Goldman Sachs, Silicon Valley Bank, Charles River Ventures, Benchmark Capital and Matrix Partners all participating, bringing the total funding to $86 million.
“We want to go public but it’s a tough challenge,” Svane explains. “But you can’t live in your parent’s basement forever. At some point you need to go out and get your own house.” Right now, it looks like the company will file its paperwork around mid-year in 2014. And because of the JOBS Act, Zendesk will likely file confidentially.
When the company announced its funding last September, it also revealed that monthly recurring revenue had increased 500 percent since the previous financing. The company wants to double its business in the coming year. But without revealing numbers, it’s tough to measure the its potential financial success on the markets. Right now, Zendesk is not profitable, but we hear that’s something the company could accomplish in the not-too-distant future. Profitability will be one metric investors will be eyeing when evaluating Zendesk for a potential IPO.
You can’t live in your parent’s basement forever. At some point you need to go out and get your own house.
International is a huge opportunity for the company, and Zendesk has been steadily expanding its presence in both engineering and sales with offices in Dublin, Copenhagen and Melbourne. In fact, half of Zendesk’s customers are outside the U.S. And having engineering hubs abroad is also a good way to attract talent that is outside the U.S., says Primdahl.
Svane, Primdahl and Aghassipour don’t see a strong competitor in the market, though there are smaller ones like Salesforce’s Desk.com, and Freshbooks who are attempting to tackle the market. As Svane says, the focus has always been on the customer and not the competition. Cohler reinforced this point–”Most great companies focus on their own mission, not the competition,” he adds.
While an IPO is near, early investor Yellurkar sees Zendesk’s path as more of a marathon as opposed to a sprint to being a public company. Zendesk still needs to continue to execute on the product and create demand and love from both new and old customers.
In a world where we see tech startup founders battle over power and strategy (à la the Twitter story), it’s unique to see a group of founders stick together from the start of a company to its eventual IPO. The trio admits that they fight (and fought hard in the early days), but they have been able to separate work from personal. Primdahl says that all three have strong opinions and “sparks fly,” but having big disagreements as three founders was helpful because there was also someone to settle the tiebreakers. But there were occasions when the battles got so heated that they would stay away from the loft for a few days and things would blow over, he recalls.
Svane adds that the strength of the founding team and staying together has been partly buoyed by the fact that they have been able to hire the right people around them. There have been some departures, but most of the company’s early lead engineers are still with Zendesk.
Though it sounds odd when talking about founders of an enterprise company, Svane, Primdahl and Aghassipour are mission-based entrepreneurs. It’s clear that they are working at Zendesk out of the deep belief and conviction in the problem they were trying to solve back in that small loft in Copenhagen in 2007.
Article courtesy of TechCrunch