SM: There was a piece of the services industry that is well known, which is consulting services. That is not what you have in mind when you say services.
BJ: Correct. We are talking about technology companies that use their technology to provide a service and usually they are using a network to deliver that service. It is really the advent of networks that allows an automated service to exist. Without the Internet or mobile networks you do need people to travel to a customer site in order to provide value. With the advent of worldwide networks you can have a small startup in Silicon Valley serving customers all around the globe from a simple server setup . It is very cost effective because the distribution of that service is now literally free.
SM: What did you call this model? BJ: We agonized over how to describe this, but we finally concluded the right term was Technology Enabled Services. They are service companies, but they are not labor based service companies, they are technology service enabled companies.
SM: What type of investor did you go after and what was the reception of your thesis?
BJ: Before we started fundraising, I mentioned that we spent months making sure we had the right fit amongst our team. We knew that if we did not believe 100% in ourselves that we would be successful, then no other investors would either. Before we started raising money we concluded one of the only ways to test our partnership and how well we would make decisions together is to make actual investments, and they had to be real investments. We pooled some of our personal money together and we decided to make some investments. The first investment we made was in SalesForce.com. We negotiated the deal in December of 2002 and the deal closed in the first week of January 2003.
SM: What stage was SalesForce.com at?
BJ: They were a private company; they had grown nicely and were in the $40-$50M revenue range. We knew some of the executives there through Gordon Ritter’s relationship with Mark (Benioff), and we negotiated to buy some shares at $1.67 per share. Today it is about $55.
SM: Was there any other company that was on your radar that you thought would be successful which you could show to potential investors?
BJ: There were a handful of companies that were typically formed in the bubble and had survived when many others had failed. What we found was a lot of the companies that failed were these technology product companies that could not get anyone to buy their product after the bust.
The service companies had advantages in down economic times. It is not a big capital expenditure, it does not take a long time to implement, and companies can try it first. We had seen a number of these companies and we invested in some but we had a few others we pointed investors to. WebEx was already doing well at that time and they were one of the few other companies we could point to as successes.
We also included some of the consumer services in our category of technology enabled services. Many of the companies that failed in the bust were either content companies or e-commerce companies. We were more supportive of companies that had subscription business models or transaction-based business models.