Veeva’s IPO Isn’t Twitter-Hot, but It Should Make One Investor Very Rich

Photograph by Steve Cole

Veeva Systems, which makes Web-based software for pharmaceutical companies, is going public.

(Updates valuation in 2nd paragraph.)

Amid all the hype around Twitter’s initial public offering and the investors poised to strike it rich, one of the year’s biggest venture capital wins has nothing to do with hashtags.

Five years ago, Emergence Capital Partners made a $4 million investment in Veeva Systems, a startup that develops cloud software to help pharmaceutical companies manage their sales operations. Today, Veeva is set to debut on the New York Stock Exchange with a valuation of $4.4 billion. Emergence, Veeva’s biggest investor, will have a stake worth $1.2 billion, a 300-fold return on its original investment.

Assuming Veeva’s stock holds or increases its value until insiders can start selling in six months, the gains will be more than triple the size of the $200 million fund Emergence raised in 2007. That means big profits for the fund’s investors, including the California Public Employees’ Retirement System and the University of Michigan.

Emergence is based in San Mateo, California — halfway between San Francisco and the epicenter of Silicon Valley’s Sand Hill Road. The firm opened in the wake of the dot-com collapse in 2003, when technology investing had practically evaporated. It’s since raised $575 million over three funds.

Emergence’s partners were betting that businesses would move from paying for software licenses to buying Web-based services on a subscription basis. That was the only way business-software startups could generate revenue, because customers weren’t willing to pony up millions of dollars upfront, Brian Jacobs, one of Emergence’s three founders, said at a conference in July. “In the very tough times of the bust, we saw that there were companies that were succeeding and growing.”

For its first investment, Emergence bought a $1 million stake in at about 40 cents a share (on a split-adjusted basis) the year before founder Marc Benioff took the company public. The stock closed yesterday at $50.72. Salesforce pioneered the software-as-a-service, or SaaS, model, a term that didn’t even exist when Emergence was scouring the market for deals. The firm went on to back SuccessFactors, which SAP bought for $3.4 billion in February 2012, and Yammer, snapped up a few months later by Microsoft for $1.2 billion. Other companies still in the portfolio include, Box and Lithium Technologies.

“Emergence deserves credit for betting their whole fund on SaaS long before it was popular,” Yammer CEO David Sacks wrote in an e-mail.

Gordon Ritter, a partner at Emergence and the chairman of Veeva’s board, said the focus on a specific industry burdened by legacy systems had led to its rapid growth. “This company got to a substantial revenue rate on less time and fewer dollars than any other company I’ve experienced,”Ritter said today in an interview.

In March, Ritter likened Veeva to a Salesforce for the pharmaceutical industry. While Benioff’s company provides Web-based software for people in all industries to manage customer relationships, Veeva’s specialized tools have won over the drug market because they can track prescribing habits and comply with health-industry regulations.

“Marc Benioff and other general-purpose cloud leaders won the first round, but industry-specific companies will win the next,” Ritter said in the interview.

In its prospectus, Veeva lists Oracle, Microsoft and EMC among its competitors. Veeva is a fraction of the size of any of those companies. Unlike most software vendors at IPO time, Veeva is profitable, generating $6 million in net income in the quarter that ended in July.

Emergence’s second fund was profitable, too — even before accounting for Veeva’s IPO. As of the end of March, investors in the fund, which financed the Veeva deal, were seeing a 37 percent internal rate of return annually, according to an investor’s report. Venture firms across Silicon Valley and beyond have finally caught onto the potential for subscription-based business software.

“We had a lot more fun when everyone else was focused on the consumer sector,” Jacobs said in July.

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