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Innovation Economy

HubSpot looks to its second act

HubSpot is one of those rare local tech companies that has created so much buzz that plenty of people know its name but have no idea what it does.

Contrast that with the typical Boston tech company, which has zero name recognition — and no one knows what it does, either.

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Since it was founded in 2006 by two MIT business school students, HubSpot has grown to 600 employees, and last year did $52 million in sales. The Cambridge online marketing company frequently ranks high on both “best places to work” and “most likely to go public” lists, and next week holds its annual gathering of customers and business partners at the Hynes Convention Center. That conclave, known as Inbound, has doubled since last year, to an expected 5,000 attendees. When HubSpot published a presentation in March detailing how it cultivates a unique corporate culture, more than 850,000 people clicked through the slides.

Something special is happening on First Street, in the shadow of the CambridgeSide Galleria. “We want to build an anchor company here, something our grandkids will be proud of,” says chief executive and cofounder Brian Halligan. “Boston needs it.”

But dreaming about creating an anchor company is much easier than doing it.

Like a lot of software companies, HubSpot’s product exists entirely on the Web, and companies pay a monthly subscription to access it. (They can also pay extra to get training or assistance from HubSpot employees.) It helps companies master what the company calls “inbound marketing.”

Inbound means creating content on websites, blogs, and social media that pulls customers to you. A blog post comparing the pros and cons of various kinds of air conditioning systems, for instance, may do a much better job of bringing prospective customers to your website than a highway billboard. And once visitors arrive, HubSpot helps analyze what they do, like filling out forms to get estimates for new AC systems. HubSpot’s pricing starts at about $200 a month, but more advanced versions can head north of $3,000 per month.

“They were really the first to identify how out of touch marketing departments were,” says David Skok, a venture capitalist at Matrix Partners who serves on HubSpot’s board. “Even before Twitter came out, HubSpot understood how important social media was, and the company was showing how all these new channels were really important to the buyer.”

The company’s latest new feature, Social Inbox, helps employees track what prospects and customers are saying in social media like Twitter or Facebook. It’s a way of hearing what issues matter most to people who haven’t yet bought your product, as well as understanding complaints before they turn into crises.

HubSpot has helped spearhead a marketing revolution around creating useful content and spreading it via social media to attract customers, as opposed to writing clever ads. Halligan has also worked to make sure that Boston becomes a center for this new thinking, helping launch the annual FutureM event, a collection of conferences, workshops, and networking parties focused on the future of marketing.

When companies that sell subscription-based software have just one product — as HubSpot does today — the big challenge is managing the churn rate. That means bringing new customers aboard faster than older customers cancel subscriptions. But every company in HubSpot’s shoes dreams of attaining “negative churn.” That’s when your existing customers start spending more this month than they did last month, offsetting the revenues you lose from customers who drift away.

To try to get there, HubSpot will announce several new products at its Inbound conference this week. HubSpot board members and former employees tell me the products will expand HubSpot’s reach from marketing into sales and support. Former HubSpot engineer Dan Abdinoor refers to it as a “land and expand” strategy: once you land a customer, you increase the amount of money they spend by selling products that other departments can use.

Some of HubSpot’s competitors have already been scooped up by tech giants like IBM and Salesforce.com (which is also an investor in HubSpot). The two founders were also able to cash in some of their equity, in 2011, when investors put $32 million into the company. (HubSpot has raised about $130 million in total.) That deposit to their personal bank accounts should minimize any itch they might have to sell. At this point, Halligan says, “an offer would just have to be crazy” to convince him and cofounder Dharmesh Shah that they should turn over the keys. “I’ve said forever that we’re going to remain standalone,” Halligan adds.

Back in May, another marketing software company, Silicon Valley-based Marketo, went public, with $58 million in 2012 revenues and $34 million in losses. (HubSpot has only said that it lost “less than half” of what Marketo did in 2012.) Marketo’s market capitalization last week was around $1.4 billion.

So what is HubSpot waiting for? “I don’t think there’s any fundamental thing that is keeping them from going public,” says Skok at Matrix Partners. “But once you do, it can be hard to kick off new projects where you’re going to invest for a long period of time, and you may not see the payback for a while. That’s the biggest thing.” HubSpot wants to get those projects started before it has to report to shareholders, he says.

Former HubSpot executive Jonah Lopin says he’s confident that HubSpot will go public “in the near-ish future. The only question in my mind is whether they’ll be worth $1 billion or $20 billion.” The last two digital marketing companies around these parts to go public, Constant Contact and Unica Corp., ended up worth about half a billion each. That’s not chopped liver, but neither became a real industry leader.

Can HubSpot go from one-hit wonder to serial chart-topper? We’ll know part of that answer when we see the new products the company unveils this week — and the rest when we see how well they click with customers.

Scott Kirsner can be reached at kirsner@pobox.com. Follow him on Twitter @ScottKirsner.
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