Why this company’s IPO is a huge win for enterprise SaaS and health IT

Enterprise software is changing in many ways. It’s moving to the cloud. Profit margins are getting squeezed. Customers are cutting costs and demanding more. The onus is now on vendors to prove their value-add.

Sometimes the best way to build a big business is to target a small market. Veeva Systems, a software as a service company that focuses on the life sciences industry, is proving this as it plans to go public this week.

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The company is likely to be worth $2 billion by the end of the day tomorrow, putting pressure on the conventional wisdom that enterprise SaaS companies need to reach horizontally be successful. They are a great case study for how vertically-focused enterprise SaaS companies can succeed.

Background

Veeva Systems’ IPO (read its S1) is important for both enterprise and health IT companies, for entrepreneurs and investors alike. The company was founded in 2007 and has built cloud tools specifically for only the life sciences (pharmaceutical and biotech companies).

There are several things that are particularly interesting about their history:

• Its main product is Veeva CRM, which is responsible for 95 percent of its revenue. Veeva CRM started out very similar to Salesforce, but with special functionality targeted to life sciences companies.
• It struck a limited exclusivity partnership with Salesforce, where Salesforce doesn’t compete with Veeva in exchange for commissions. It built Veeva CRM on the Force.com platform.
• They primarily raised one institutional round of $4 million dollars in 2008, yet its revenue has been growing 100 percent year-over-year, with 2012 revenue of $130 million, and it’s expecting to cross over $200 million in revenue in 2013.
• It did all of this with only 170 customers.

Think about this. Veeva has only 170 customers, yet it’s crossing over $200 million a year in revenue in 2013 and growing 100 percent year-over-year. It did all of this on one institutional round of $4 million dollars. It’s focusing only on a vertical market, as compared to a horizontal approach that focuses everywhere. And its IPO is likely to value the company around $2 billion dollars.

If you are an investor or entrepreneur who finds it counter-intuitive that a vertically-focused company can be a phenomenal investment, you should rethink your approach.

What enterprise SaaS can learn from Veeva

A methodical approach to building an enterprise company can be a much more reliable path to success than others, such as consumer, that require rapid customer acquisition and are prone to high churn. Marc Andreessen said this weekend on Hacker News that he “tell[s] enterprise startups to look for the first five customers — if you can make them happy, then you can reference sell to the next 10, then the next 50, then the next 100, then the next 500, and then you are huge.”

Even the most conservative industries, like pharmaceutical companies, are modernizing and moving to the cloud. SaaS enables fundamentally different cost structures. For example, Siebel used to sell multimillion dollar CRM enterprise licenses, where 60 percent of sold-user licenses went unused. Salesforce came by and started selling SaaS CRM on a per-seat basis, so customers only pay for what they use. Guess who won.

What the health IT industry can learn from Veeva

Healthcare and life sciences are ripe for innovation. Veeva is definitely not the last multibillion dollar health-related company, both entrepreneurs and investors will win.

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But it’s about finding the right incentives. For example, focusing on hospitals is tough right now; they’re all struggling and the incentive structure is so out-of-whack that even if your technology is perfect and needed, you still may not be able to sell it.

You don’t need to focus just on the end patient, there are plenty of other areas that can provide immense value and still affect patients. Technology will change the healthcare landscape over the next couple of decades.

Companies in the health and life sciences space are being forced to modernize. In many cases, for example in the case of pharmaceutical companies, they were able to avoid it for too long. But that’s changing!

Where do we go from here?

Veeva is just the beginning. For example, our company, Comprehend, is working to not only modernize existing processes in the life-sciences industry, but also to fundamentally change the way new drugs and devices are brought to market.

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Also, there is room for multiple large, enduring companies. Healthcare is over 15 percent of the United States’ GDP. Public companies include Veeva (NYSE:VEEV), Medidata (NASDAQ:MDSO), and AthenaHealth (NASDAQ:ATHN). There are also an exciting number of up-and-comers like Comprehend and Medisas.

This is happening in other industries, too. Trulia, Zillow, and Redfin are changing real estate. Box is doing this for enterprise file sharing and RingCentral for phone systems. The list goes on.

Exciting times

This isn’t a zero-sum game; better enterprise software helps everyone win. The enterprises win because they’ll have more tailored solutions at a cost structure that matches their business needs. Investors win because they have more hits. Vendors win because they’ll be able to charge reasonable and recurring prices, which will sustain growth. End customers win by getting better products at lower cost from enterprises.

More importantly, since these enterprises are addressing big problems — medications, communications, more — by improving their technology solutions, we all win.

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Rick is the founder and CEO of Comprehend Systems, makers of cloud-based insights and collaboration tools for the life sciences industry. Rick has over 10 years of experience in writing software for clinical trials, including tools that are now used by the FDA and almost all of the top 10 pharmaceutical companies. Follow Rick on Twitter or email him: rmorrison@comprehend.com.