Reborn Model N finds life in biotech

The South San Francisco, Calif., company, founded in 1999 by technology entrepreneur Zack Rinat, has survived a brutal shakeout of the market for business-to-business e-commerce software. In 2001, Model N reinvented itself as a software supplier to the life sciences industry, a direction recently validated by an $11 million infusion of venture capital financing. The second round of funding, led by Meritech Capital Partners and announced last week, came four years after the company's initial round of $30 million in 2000.

Back then, Model N was one of hundreds of promising Internet start-ups that created virtual trading networks for business supplies. The so-called e-marketplace concept was supposed to revolutionize business and topple mighty companies, such as SAP and Oracle, from their perch on top of the market for corporate software.

But the e-marketplace arena collapsed in 2001, sending many of those start-ups out of business. As a final nail in the coffin, Covisint, the ballyhooed e-marketplace backed by DaimlerChrysler, Ford and General Motors, just announced the sale of assets to software maker Compuware.

To avoid such a fate, Model N has zeroed in on the growing biotechnology market, which has proved to be one of the more resilient industries in an ailing economy. The company also adopted a tried-and-tested strategy of the software old guard: turn to developing off-the-shelf software designed to solve painful, if unglamorous, business problems. A number of former e-marketplace luminaries, including Ariba, Commerce One and Verticalnet, have stayed afloat using a similar strategy.

The problem Model N has chosen to tackle is the management of rebate programs and volume purchasing arrangements. Companies routinely lose money by mismanaging these, failing to spot customers and distributors that don't honor the terms. Model N's software is designed to help companies keep track of complex pricing schemes and to adhere to them consistently. In particular, Model N's "work-flow" system is supposed to help companies to avoid fines and audits for bungling agreements with government agencies.

The software works by imposing strict reviews and approvals for all sales contracts. It requires a sign-off from marketing, sales and finance departments of a company.

Rinat, Model N's 45-year-old founder, said that a lack of coordination among those groups is the root of "revenue-leakage" problems and that companies collectively lose billions of dollars every year because of it. "They are managing from a file drawer," Rinat said of the disjointed, low-tech way many companies handle pricing and contract decisions.

Healthy prospects
Model N's revamped approach seems to be working out, and the company has signed deals with major medical device and pharmaceutical companies, including Pfizer, Medtronic, Guidant and two divisions of Johnson & Johnson. It recently hired a 10-year PeopleSoft sales veteran, Bill Pollak, to lead its sales team. It may expand into other industries, including financial services, consumer goods manufacturing and telecommunications, Rinat said.

Rinat said he thinks the fledgling market for software like Model N's could someday surpass the multibillion-dollar market for customer relationship management software (led by Siebel Systems) and the market for human resource systems (led by SAP and PeopleSoft). "The two biggest value creators to companies are revenue and profits," he said. "This software has the immediate ability to impact value and, therefore, I think it has a pretty significant (market) opportunity."

Analysts agree that there are profits in the business problems Model N is trying to solve, but say the market for so-called pricing and contract management software is more of a niche than an industry--at least for now.

In addition, the competition is growing, with major names like PeopleSoft and Siebel building Model N-like features into their massive application software packages. And alongside Model N are numerous smaller rivals--including I-many, Metreo, Determine and Vendavo--that are crowding the market. "That's what Zack (Rinat) spends his night staring at his ceiling thinking about," said Louis Columbus, an analyst at AMR Research.

As in other IT markets, a glut of suppliers will lead to price wars and acquisitions, Columbus predicted. The corporate software market is already undergoing a period of dramatic consolidation that's giving large established companies such as Oracle, SAP and IBM an upper hand. That makes Model N, which is not yet profitable, a prime acquisition target, Columbus said.

Rinat brushed off the competitive threat and said Model N will be profitable next year. "Over time, there may be more-heated competition, but we haven't seen it yet," he said.

He also envisions Model N, which employs a staff of about 75, becoming "a large, successful public company." Right now, the company is not for sale, though he doesn't rule out the possibility.

Yet Rinat has built his reputation doing that?-creating companies and selling them for a handsome profit. In the early 1990s, the Israeli native helped pioneer the billion-dollar-plus market for Internet application server software as the founder of a company called NetDynamics. Sun Microsystems bought the company for $180 million in 1998. He then founded another company, TradingDynamics, which was sold to software maker Ariba for $725 million the following year.

Describing the Model N business as a marathon as opposed to the sprints of the past, Rinat said he wants to break from the past and create something lasting. He admits, however, that he picked an unfortunate time to adopt a stick-it-out mentality. "I definitely didn't envision that it was going to be as difficult as it was the last couple of years. It's been more like an Iron Man (competition)."

Contradicting current thinking that consolidation will rule the IT industry, Rinat argues that many small software companies, including his, will ultimately flourish by out-innovating the giants. While Rinat may not need the money--he has amassed a personal fortune from other ventures--his reputation as an ace entrepreneur is on the line.

"If I didn't believe in this, I could have done a lot of other things--because I don't really need to work," he said.