It is a well-kept secret that some of the leading companies arrived at the top without taking early venture capital funding. I sat down with Jaswinder “Jassi” Chadha, co-founder, president and CEO of marketRx, to learn how he created a company that achieved a remarkable 52x ratio of exit value to capital used.
Headquartered in Bridgewater, NJ, and founded in April 2000, marketRX Inc. has over 430 employees in the United States, India and Europe. It enables customers at global pharmaceutical and biotechnology companies to improve the effectiveness of their sales and marketing operations. Sequoia-backed marketRx has received many notable industry recognitions since its inception in 2000, including Deloitte’s fastest growing technology companies in North America for two consecutive years (2005 and 2006), PwC & Entrepreneur Magazine’s “Hot 100” fastest growing companies in the U.S. (2005), Inc. 500’s “Fastest Growing 500 companies” (2005) and SiliconIndia Magazine’s “si100 list of Top 100 technology companies formed in the U.S. by people of Indian origin.”
Venture Capital Raised/Used: Raised approximately $13.5 million / Used $2.8 million
Exit Value: $145 million
Exit Value to Capital Used: 52x
Having just completed PhD studies in operations research, and with a background in industrial engineering and optimization, Jassi Chadha began working for a small company that provided strategic consulting to the pharmaceutical, biotech and medical device markets. During his five years with this company, it became clear that companies in the life sciences market were not using technology advantageously to improve marketing and sales efforts. “They were doing it the hard way,” Jassi said, noting that most market analysis was handcrafted and the end results were quite dependent on the individual conducting that analysis.
Jassi believed there was a significant opportunity for using technology to automate much of the analytics, and began developing plans for a new company that would help pharmaceutical companies optimize online advertising spending. With about $750,000 from 30 investors – mostly friends and family – he started his company, marketRx, as a pure-play online marketing firm. The firm evolved dramatically, abandoning their initial focus after 12 months but using the intellectual property (IP) it developed to become a leading provider of analytics and related software services to global life sciences companies. Ultimately the company was purchased for $135 million plus cash by Cognizant Technology Solutions Corp. (NASDAQ: CTSH) in the fourth quarter of 2007.
Recently, Jassi explained how he built a company that achieved an exit value of $145 million and what he learned along the way.
Javier Rojas: Why did your business model change so drastically?
Jaswinder “Jassi” S. Chadha: We were so wrong. We eventually realized just how far ahead of the game we were – from the technology-adoption perspective – and that the pharma market was not only conservative but also not an early adopter of new technology solutions. During that first year, we developed a lot of intellectual property to support our concept. But after a year passed and we weren’t generating any revenue, we decided to leverage our past professional experience and pursue consulting work. We thought we could say that we had something new – all the IP we developed initially and were still using in our business today. Ultimately, five years after we started the business, no revenue came from our original online marketing business plan.
JR: What ultimately made your business model successful?
JC: With the use of our IP, we defined ourselves as a product-enabled service business. While customers were willing to pay for new products, we had to focus our services around the IP, tools and software we already developed. We wouldn’t take on any engagement for which we didn’t have a solution.
Our gross margins were between 45 to 65 percent, which showed that we had some serious IP coming out of the company. Additionally we evolved into a subscription business, which had strong carry over – anywhere from 90 percent to 110 percent.
JR: How many rounds of funding did you get?
JC: We raised three rounds. Our first angel round – $750,000 – was in June 2000. Ninety percent of my friends and family who invested didn’t understand our business model, but they believed in me. Then in October 2001, we received our second angel round of $3.2 million. At that time we had about $2.5 million in annual revenues, but had reinvented our business so what we did for the first year we abandoned completely. In many ways the service company we evolved to was similar to the consulting work I did previously, but it leveraged with the technology we developed so that it was more effective, profitable and scalable. We raised this money from a number of smart people and were fortunate to get a lot from an advisory perspective.
Our third round was Series C funding in November 2003. At this time we had about $1 million in monthly revenues and our model was well developed. In hindsight we did not need to raise this round, but at the time we didn’t know how the business/market would develop. Originally we had only set out to raise $3 million to $5 million, but in time we convinced ourselves that $9.5 million would a safer target. We thought we needed the additional money as a safety net. There were three things we wanted to do with this money – double up on R&D to build more IP, set up off-shore operations in India and focus more seriously on sales and marketing – and we did them all. We were able to be so aggressive because we knew we had the funding in the bank if things went poorly. They didn’t.
JR: What do you feel was the biggest mistake you made as an entrepreneur?
JC: In hindsight I took more dilution than necessary with my last round, but it allowed us to expand aggressively, rather than having to be too cautious. The business developed in such away that many of these investments were funded by profits. I believe I’m one of the luckiest persons you’ll ever meet, having been at the right place at the right time to build a business as successful as marketRx. But I still think entrepreneurs should think about how much money they really need. When considering funding, you have to ask yourself, “would your rather die of starvation or indigestion?” I’d personally choose to starve than overindulge with too much money.
JR: What other advice would you give individuals who are interested in starting their own business?
JC: We spent a lot of time picking our board. Our investors were very helpful and were a good sounding board for ideas and what we were doing. They were a great value add. Second, consider how much to spend on R&D. We had put about $17 million into R&D by the time we sold the company, and most of it was funded by profits. We needed some of it, but I’m not sure if we really needed all of it. But because we were successful and could afford it, we spent on R&D. I think we should have spent more on marketing or buying other businesses. But since none of us had ever done this before, we had no one in the trenches to say, “why are you spending so much money in R&D at a services company?”
Additionally, I think it’s important to grow as fast as possible while maintaining profitability. We were always conservative and I think that served us well.
Javier Rojas is a Managing Director of Kennet Partners in Silicon Valley. Kennet provides growth equity capital to bootstrapped companies in the US and in Europe. Kennet focuses on capital efficient businesses with annual revenues of $5M to $50M. Kennet works with founders to build high value outcomes and preserve equity value through capital efficient growth strategies.