Enterprise software company Veeva Systems had been a relative unknown in broader venture capital circles since it was founded with $7 million of angel and venture capital in 2007. Six year later, Veeva has reached a peak market capitalization of close to $5 billion and has turned into a massive jackpot for its early investors. Here are some observations on the strategies the team and its investors used to bust the bank.
1. Keep cost of customer acquisition low by focusing on a concentrated industry
Focusing on one industry allowed Veeva to quickly reach a tipping point and generate $129.5 million in revenues in year five of its existence. At the time of the IPO in August 2013, they served approximately 170 life sciences customers, including 33 of the top 50 pharma companies. Since the pharma industry is highly concentrated, it has been estimated that it only takes 80 customers to dominate the market. In fact, in 2013, Veeva’s top 10 customers accounted for 54% of total revenues.
2. Lower the execution risk by signing up industry experts
There was nothing generic about the Veeva board of directors: Two angel investors provided more than 35 years of deep software life sciences expertise gained at Siebel, Oracle and Pharmasystems. They also brought in the future president of the company, and their inside knowledge helped significantly increase the deal win rate and shorten the sales cycle. The CEO and the lead investor both gained deep Software-as-a Service experience at the platform businesses of Peoplesoft and Salesforce.com.
3. Focus on the application by leveraging existing technology platforms
Veeva decided to build its sales automation software on Salesforce’s force.com platform. Leveraging Salesforce’s investment allowed Veeva to replace upfront platform development efforts with operating expenses linked to revenues. However, the non-compete agreement prevents Veeva from selling sales automation to other industry verticals: Veeva is only allowed to use the Salesforce platform to sell sales automation solutions to drug makers in the pharmaceutical and biotechnology industries. Veeva had to develop their proprietary Veeva Vault and Veeva Network to expand their offering beyond sales automation.
4. Play in an industry with high barriers to entry for horizontal software providers
The life science industry’s highly regulated environment requires industry specific functionality for areas such as sales and marketing, new drug submissions,and quality management, which in turn limits the attractiveness and raises the barriers to entry for horizontal software providers. As a competitive analysis has shown, the sales automation market for life sciences was dominated by products and services from Siebel and Cegedim. Veeva essentially replaced Siebel with a product that offered a more features and a mobile app at a lower price.
Using these four levers, Veeva was able to achieve profitability after year three. Gross profit margins were 58% of revenues in 2012, and net income reached 14%.
Can other start-ups replicate this strategy? Veeva's success in life science sales automation was likely a one of a kind event. While there may not be any opportunities left in sales automation, there may be other lines of business in global, complex and heavily regulated industries where on premise legacy software is ready to be replaced by on demand applications built on a general technology platform.