Microsoft acquisition gives Parature a shot at global reach

About 13 years ago, a group of five Cornell University undergraduates started a business out of their dorm, based on one simple product: a free Internet-based instant messaging service.

Today, the co-founders have spun the start-up into a multimillion dollar company called Parature, peddling customer service software to businesses and attracting the interest of Microsoft, which agreed to acquire the company last week. (The deal is expected to close within the next month. Terms were not disclosed.)

Based in Herndon, the 100-employee Parature develops software which lets businesses respond to customer service issues in real time from desktops and mobile devices. One of its flagship products, Parature Social Monitor, aggregates customer comments and questions from Twitter and Facebook. Microsoft plans to integrate Parature into its own customer relationship management software, called Microsoft Dynamics CRM. Parature’s current clients include IBM and The Washington Post.

Microsoft approached Parature last summer after the company started beating out larger companies for federal contracts, co-founder and Chief Marketing Officer Duke Chung said.

For instance, Parature recently won a contract to provide customer service software to the Social Security Administration, and regularly competes with Oracle, Salesforce and other software giants, according to Chung. “Microsoft started to take note.”

Redmond, Wash.-based Microsoft has been building up its customer-service offerings, acquiring three other customer service-related companies in the past two years. It bought social media analytics company Netbreeze and marketing software company MarketingPilot in March of 2013 and October of 2012, respectively, both for undisclosed sums. It also bought Yammer, which creates private social networks for employees, often used to manage responses to customer issues, for $1.2 billion in the summer of 2012.

Weighing an offer

Initially, Chung wasn’t sure Parature should agree to an acquisition — maybe the team was better off raising its own financing, or seeking another buyer. Even after discussions started, the team went on a road show, lining up potential investors in case Parature declined to be bought.

But association with Microsoft could raise awareness about Parature, Chung said.

“Our weakness was around our brand — companies didn’t recognize Parature like they do Salesforce, Oracle or Microsoft.”

And Microsoft excelled where Parature struggled — international distribution, the team noted. Parature lacked the capital to build out its sales team, and, as a result, was focusing on domestic sales. Parature accepted Microsoft’s offer earlier this month.

“For us, it’s a really huge opportunity to reach companies globally — we’ve always wished that would happen, but it would take us maybe another five to 10 years to make that a reality without Microsoft,” Chung said.

Still, customer service wasn’t always the plan.

The team’s first product — an Internet instant messaging service called Cyracle, released in 2001 — was designed to help students collaborate on assignments. But hundreds of small-business owners started signing up for the free service.

“We were quite surprised,” Chung said. “We called the companies, and asked them ‘What are you using our chat for?’ They said, ‘We heard Internet was the future.’ ... They were using our live chat as a way to answer questions for customers that came to their Web site.”

Small-business owners probably didn’t have the time or money to create their own customer service technology, the team thought; instead, they were more likely to license existing software. Backed by an early-stage investment from Ching-Ho Fung — the first investor in Blackboard and Parature’s current chief executive — the team expanded its suite of customer service software, and started charging a licensing fee. The team of new graduates turned down job offers from large software firms and moved their office to the Washington area, at Fung’s request.

By 2005, the company was generating $4 million to $5 million in revenue, which almost doubled by 2008. It raised a $16 million financing round led by Accel Partners, and $13.5 million from venture firms, including Vienna-based Valhalla Partners and Menlo Park, Calif.-based Sierra Ventures.

Though the company declined to share exact revenue numbers, it currently has about a $20 million revenue run rate and is profitable, Chung said.

A Maryland native who attended school in Potomac, Chung sees the acquisition as Microsoft’s vote of confidence in Washington area businesses, especially since Parature will remain in Herndon after the deal closes. “It means there’s a lot of great tech talent in this area.”

“For us, it’s a really huge opportunity to reach companies globally.”

Duke Chung, Parature

Mohana Ravindranath covers IT and small business for the Washington Post and its weekly Capital Business publication.
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