NEWS

Zimbra Sells To Yahoo For 10x Return On Investment

VentureWire
9/18/2007
By Daniel Hausmann and Kevin J. Delaney

Zimbra Inc., a maker of software used for Web-based email, agreed to sell to Yahoo Inc. for $350 million in a deal that will give the two largest backers of the start-up a roughly 10 times return on investment.

Benchmark Capital and Redpoint Ventures, which helped seed the San Mateo, Calif.-based company in 2003, each own slightly more than 25% of the company after investing close to $9 million, according to Redpoint Managing Director Tim Haley and Benchmark General Partner Kevin Harvey. The two firms would receive roughly $90 million with this deal. Redpoint incubated the company for four months before its 2003 launch.

The deal consists mostly of cash and a little bit of stock, according to a Zimbra spokesman.

Harvey said Zimbra had passed on offerings from various undisclosed suitors in the past few years. "I think Yahoo came in and made the management team an offer they couldn't refuse," Harvey said.

Haley said the sale price was just as important as the management team's comfort with Yahoo. Chief executive Satish Dharmaraj will continue to head up Zimbra after the deal is completed.

Benchmark and Redpoint are the company's oldest investors, but Accel Partners joined the syndicate in a $15 million second round in 2005 and Duff Ackerman & Goodrich, Inventures Group and Presidio STX invested in a $14.5 million third round last year. All told, the company raised about $35 million.

Yahoo and Google Inc. are making new pushes into Microsoft Corp.'s turf, with Web-based offerings such as email and presentation applications that encroach on Microsoft's traditional business and product strongholds.

Zimbra's software is used by over 1,300 organizations such as universities, Internet service providers and small- and mid-sized businesses. Yahoo, of Sunnyvale, Calif., says that deal is aimed at increasing its bet on email - an area where it already has 250 million Yahoo Mail users - by extending into the university and business markets Zimbra addresses. Zimbra, which has paying customers for 9 million email accounts and offers related functions such as group calendar and document sharing offerings, has made some inroads with companies as a cheaper alternative to Microsoft Exchange.

Google separately plans to release within the next few days its Web-based presentation application, which will compete with Microsoft's PowerPoint software, according to people familiar with the matter. The service, whose arrival Google had announced earlier this year, is part of its growing suite of Web-based productivity applications, which also includes email, calendar, word processing and spreadsheet applications.

Like Yahoo, the Mountain View, Calif., company is aggressively going after the market for Web-based email and other applications by providing free and fee-based services to customers including universities and small- and mid-sized businesses.

One risk for all of the players is the intense competition in that area of Web-based applications. The Internet companies also generally have to invest more in sales and customer support staffs as they tackle the business and university markets, given higher expectations for the level of service than for equivalent free consumer offerings.

Competitors to Microsoft's Office productivity applications have existed for years and largely failed to crack its market share. But recently a growing number of Internet companies have been trying to pick away at the business, which is part of a unit that generated $16.4 billion in revenue for Microsoft in the fiscal year ended June 30.

Working in favor of these Internet companies is a continuing shift by businesses and consumers to software used over the Internet. Microsoft, of Redmond, Wash., has said in the past that is building online services designed to work with Office, a strategy that would tap the benefits of online programs without cannibalizing Office. Microsoft officials weren't immediately available to comment for this story.

"Microsoft really has to step back and see what its enterprise strategy is for messaging and productivity tools now because there clearly is competition that has never been there before," said Rebecca Wettemann, vice president of research at Nucleus Research Inc. in Wellesley, Mass.

Yahoo's agreement to buy Zimbra comes as new Yahoo Chief Executive Jerry Yang undertakes a review of strategy at the company, which in July lowered its financial outlook for the year. Brad Garlinghouse, a Yahoo senior vice president for communications and communities, said the Zimbra deal was indicative of the company's efforts to increase its bets on specific strategic priorities.

"We think this is a way to expand on our strength," said Mr. Garlinghouse, who attracted attention last year when The Wall Street Journal reported on an internal memo he wrote titled "The Peanut Butter Manifesto" outlining problems at the company, including a failure to focus.

The core of Zimbra's offering is software that runs on computer servers to provide email and related services that users can access with a Web browser. Businesses pay about $28 annually to Zimbra per user - though universities and Internet service providers benefit from steep discounts - and either run the software on their own servers or pay a third-party hosting company to do so. Starting early next year, Yahoo plans to also offer Zimbra customers the option of having the software hosted on Yahoo's servers. Garlinghouse said Yahoo was focused on helping Zimbra benefit from Yahoo's experience and resources in the area of sales and customer support.

Zimbra cofounder and CEO Satish Dharmaraj said that Zimbra could imagine offering a free, advertising-supported version of its products by tapping Yahoo's online ad expertise. He declined to comment on the roughly 100-person company's finances, though the company was not profitable at the time of this buyout agreement.

The acquisition is expected to close before the end of 2007.

Haley said he worked with Zimbra's management team at OneBox.com; that company was sold to Phone.com in 2000 for $850 million in stock.