Bootstrap First, Raise Money from Kleiner Perkins Later: William King, CEO of Zephyr Health (Part 7)

Sramana Mitra: You raised $15 million in this round?

William King: Yes.

Sramana Mitra: That’s all the financing that you have raised so far?

William King: Correct.

Sramana Mitra: Tell me a bit about how you framed TAM for your business. What is the TAM model that you’ve been using?

William King: I’ll just give you a couple of numbers here. The worldwide pharmaceutical market was worth $956 billion two years ago. It will be well over a trillion dollars now. We looked at the revenues from a cost standpoint. How are they being generated? In particular, what we looked at is a subset of all of the technology spend that exist in life sciences across the board. I looked at technology in two ways. One is the hardware and the other is the software, which is growing much more rapidly. You’ve got a $44 billion spend technology spend that exists for both hardware and software. Their rate of growth, particularly on the software side of things, is growing great. It’s growing 67% at least.

Sramana Mitra: This is too much of a top-down analysis. I’m more interested in the bottom-up analysis. How many customers are out there buying your kind of technology? What is the price point of your technology and what does that roll up to?

William King: Before I take the bottom-up, let me calibrate on something. Are you familiar with Dynamics Systems which is a CRM?

Sramana Mitra: Yes.

William King: They went public in October 2013. They had 170 customers, 30 of which, made up that vast majority of their revenue. They’re at about $150 million run rate. Their market cap is $4.8 billion. The important thing to know here is that a limited number of customers can go a very long way in life sciences. We looked at customers in four categories: major, large, medium, and small. We classify them from a bottoms-up perspective based on the number of brands they have and the spend on data. Our target is five major customers, 25 large, 50 medium, and 150 small, which is 230 customers. We think for very major customers, we should be able to achieve about $20 million a year recurring. The large is about $10 million. The medium is probably $5 million and the smallest are probably $1 million. If we achieve all of that on the 230 customers, that’s about $350 million run rate. What I just articulated is an important subset. That’s just our initial TAM.

Sramana Mitra: That makes perfect sense. The reason I wanted to go this direction is I want people to listen to a good TAM analysis. You presented a good TAM analysis. You started from top-down. Entrepreneurs always have this instinct of going top-down. As you know from fund-raising, VCs don’t care about top-down. What about competition? What is going on in the market around you? Whom are you seeing in deals?

William King: I am delighted that there is such enthusiasm for digital health, health IT, and Big Data in healthcare. There are so many different players who are interested in getting involved. We have established ourselves as the global leader in data intelligence for life sciences. I feel really good about that. Data intelligence is all about the wrangling and the presentation. There are a lot of people getting into the category. A lot of our customers are using consultancies or boutique data vendors. There’s this fragmentation. That’s a work flow thing. It might be odd to say that that is a competitor. It’s about enlightening people that there is a solution and getting them off their old habits.

From a company standpoint, we see really big companies like the IBMs and the Oracles of the world who are, increasingly, trying to become more nimble and get into this idea of data intelligence. One thing that’s important to note is, we haven’t positioned ourselves as competing against an Oracle. What we really try to do is not to say to customers, “Rather than spend your dollars on them, spend them on us.” What we say is, “We can accommodate so many different kinds of data. You can use both.” That’s been enormous for us because it’s not like we’re trying to build the next category. We believe that we can co-exist with all the incumbents. That is at the heart of our value proposition.

Sramana Mitra; From the 230 target customers, how many have you been able to land?

William King: We’ve been very successful. We look at the health of our business in a couple of different ways. One is at the logo level. The second is at the brand level. We look at both. Categorically, we’ve been able to penetrate the leaders in pharma, mid-tier pharma, as well as devices. We’ve also proven the model at the mid-cap level. We just started at the small-cap. We had one customer in 2014. What we focus less on is the expansion of the logos up until this year. It’s been more about expanding in the large accounts where there’s opportunity to expand and then proving out the model at the different levels so that we can replicate that with a great sales force.

Sramana Mitra: Great! It has been great talking to you.

This segment is part 7 in the series : Bootstrap First, Raise Money from Kleiner Perkins Later: William King, CEO of Zephyr Health
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