The early-stage pivot to find product-market fit
Growth strategy and sales efficiency
Hibob announced today that it has raised a $150 million Series C financing, with a $1.65 billion post-money valuation. Incubated in the Bessemer office, we take special pride in the company reaching this impressive milestone and couldn’t be more excited to double down on our investment at this stage.
Affectionately known by customers as “bob,” Hibob is a core HR platform aimed at small-midsize, multinational growth businesses with 100 to several thousand employees. With more than 1,500 customers around the world and growth of 160% year-over-year, Hibob is just scratching the surface of the market opportunity in HRIS and people management platforms. As companies outgrow their existing vendors, many companies at this size balk at the idea of adopting cumbersome enterprise solutions such as Workday. But enough about HR software.
I wanted to share a story as to how a strong and hardworking team grew rapidly in the shadow of its more prominent competitors that attracted all the industry limelight. It is also the story of how long-term planning and execution catapulted Hibob from one of Bessemer’s least efficient SaaS companies to one of the most efficient while accelerating growth.
In March of 2015, Ronni Zehavi unceremoniously started as an “Entrepreneur in Residence” at Bessemer’s Israel office. Ronni had most recently managed the security division of Akamai after selling his startup, Cotendo, to the tech giant for $300 million several years prior. In contrast with most serial entrepreneurs who return to the same well that produced their previous success, Ronni was determined to move away from security and infrastructure opportunities. He didn’t know what the product would be, but he wanted to build a business that functioned like “SaaS on steroids” (his words…for the record, Bessemer is a drug-free zone).
It was around this time that the venture community was agog about the phenomenal rise of Zenefits, which seemed to exemplify Ronni’s “SaaS on steroids” concept. Zenefits had grown like a rocket ship, rapidly reaching a then unheard-of valuation of $4 billion by providing free HR software to very small businesses in return for becoming the “broker of record” for employee health benefits. Gusto, then called ZenPayroll, had a similar concept providing free HR software in order to take over employee payroll for its small business customers. The original idea behind Hibob riffed on the Zenefits and Gusto models, adapted to the UK pension market, which was then undergoing reforms that would mandate all small businesses provide employees with a pension plan. Hibob wanted to provide small businesses in the UK with HR software for free as a hook into the seemingly lucrative pension management segment.
The curious leap for Ronni from cyber security to HR was not as extraordinary as it seems. Ronni’s first executive role in his career was Vice President of HR for the publicly traded Commtouch. (And we can’t overlook the fact that Ronni has a Master’s degree in organizational sociology.) Nonetheless, Hibob was a very different challenge from his prior company. By this time, Ronni welcomed on three additional co-founders, including his former Silicon Valley neighbor, Israel David.
The market opportunity may have been hazy, but the Hibob team was objectively strong, and so despite some consternation of some of our colleagues, Bessemer signed a term sheet to lead a $7 million seed round in September 2015.
Five months after Bessemer’s initial investment in February of 2016, Zenefits erupted in scandal, removing its founder CEO and admitting to bypassing state regulations. Then, in June of 2016, the citizens of the United Kingdom voted to leave the European Union, casting a cloud over anything related to the UK economy. The storm clouds were rapidly gathering around the original plan, but since the greatest asset of any young startup is its agility and maneuverability, Hibob launched its product, reasoning that it would need to engage customers as soon as possible in order to navigate the market opportunity. Within six months it had become very clear that prospective customers could care less about pension reform, but really needed a proper HR suite that could scale with their rapidly growing businesses.
Hibob recognized an untapped opportunity to sell an HR software to dynamic, growing small-midsize businesses, not the quaint small businesses that use Quickbooks. As most entrepreneurs know, the complexity of managing people grows exponentially as a small organization grows from 50 employees to 100, from 100 to 250, and so forth. Quickly changing and growing businesses have new departments, new processes, and new reporting structures to address. Plus, with employee expectations on the rise and additional offices opening around the globe, even smaller organizations need a sophisticated product to address these complexities. Hibob recognized that while tiny sub 50 employee organizations had several good options to choose from (even free options), small growth companies were left with little choice but to go with the old-school, expensive platforms offered by enterprise HR platforms.
This was much more than the proverbial pivot.
This was much more than the proverbial pivot. It was an immense product challenge moving from a barebones HR solution to a comprehensive HR platform that could meet the expectations and handle the myriad requirements of fast-growing companies, and the change in product strategy was therefore more akin to a restart. Undaunted, the founders said it would require a new four-year product roadmap, which industry HR software execs deemed ridiculously short and unrealistic given how much it entailed to cover so many product modules (e.g. time and attendance, on-boarding, benefits, surveys, talent management, compensation management, and more). In the meantime, Hibob would continue to sell its original product accepting the fact that this would create a ceiling on the company's ACV. The lack of a full product suite also meant lower customer conversion rates as some prospects were growing too fast to rely on Hibob’s product roadmap. The SaaS on steroids model would have to wait.
A sweeping change in strategy is not uncommon in today’s startups, but the current environment is also incredibly impatient and impulsive, and this is where Hibob stood out. Waiting out the product roadmap required a great degree of perseverance and determination because the company would have to contend with unattractive unit economics until the product had grown and matured enough to reverse that. Bessemer often publishes metrics guides for startups to better gauge where they stand relative to other SaaS vendors. While some use this to thump their chests and justify fancy valuations, others use it as a long-term north star to guide their business. For Hibob, it was always a distant north star.
Money can buy revenues, but it most definitely cannot buy efficiency.
In all fairness, Hibob was always a relative “fast grower” never dipping below 100% annual growth since launching in 2018. Most encouragingly, the company always had exceptionally low logo churn, indicating that they would enjoy high customer lifetime value if their product didn’t disappoint. But among their peers in the Bessemer portfolio, Hibob was an outlier in that it was demonstrating woeful sales efficiency metrics, which limited the company’s ability to grow faster or even maintain its growth without burning through its cash. In simple terms, Hibob spent too much to win a customer and received too little cashback from them. This was expected given the product limitations, but it was a frustrating reality for the company. Money can buy revenues, but it most definitely cannot buy efficiency. Hibob knew that product was the key to raising not only the average customer size but also the monthly average revenue per user (ARPU) for each customer, both of which would impact ACVs (average contract value). Raising ACVs was how Hibob would become the efficient business it aspired to be, but stellar products can’t be rushed.
Four years later, the resulting transformation is nothing less than startling. Hibob went from one of the most inefficient growers in the Bessemer portfolio to among the most efficient. The improved efficiency naturally facilitated accelerated growth,and suddenly Ronni’s “SaaS on steroids” dream seems real. To be clear, the sudden change was not due to a change in strategy, or in pricing or even an externality like COVID-19 and the work-from-home era. The ascent was entirely scripted: A result of a SaaS business meticulously planning to move upmarket in lockstep with product development and customer growth.
The difference between early-stage investing and growth investing is not simply in stage and check size, but in one’s willingness to see past the current product incarnation and business metrics and envision the exciting future that founders see clearly.
Relying entirely on the past to predict the future, we are liable to confuse anecdotes with trends and miss the obvious fact that a fast-moving startup is a machine in motion. We are grateful to our friends at Battery and Eight Roads joining us in this journey early on, as we bet on a team and product vision that demanded patience. And we welcome General Atlantic as our newest co-investor. Hibob didn’t always have the metrics that investors sought, but they always knew where they were going, which is why it’s so exciting for the company to have reached this milestone. We couldn’t be prouder of what Ronni, Israel, and the incredible Hibob team have accomplished.