SM: Can you give some examples of companies using these subscription or transaction models?
BJ: EBay and Travelocity are two. These are companies providing a service over the net to consumers but they are getting paid for the service. That was critical to us.
SM: You had a bias towards subscription service versus advertising, which at that point hadn’t yet ramped up.
SM: What happened next? How did the market respond? BJ: We concluded we were so passionate about this opportunity we were going to raise money even when others were unable to. It took us a little while to make these initial investments and also to prepare our story and our private placement memorandum for the new fund.
We started fund raising in late Q1 of 2003. While we were doing all of this preparation, there were a lot of things going on in the world that we were not really planning on. I believe we were invading Iraq in March 2003. This was not in our playbook, but we had already committed to make the fund a success. We had already left our jobs, had made these investments, and there was no turning back. Initially, the reception was modest at best.
SM: Can you talk about specific people and funds you went after and what the target fund amount was?
BJ: Our first target was $100M. We used our contacts to meet people who invest in venture funds. Typically they are University endowments, fund of funds, pension funds, and insurance companies.
SM: You didn’t go after anything out of whack in terms of whom you targeted?
BJ: No, we felt that what we wanted to do was to go after the best investors in venture capital. There are some investors who are new to venture capital investing business. There were a bunch of European pension funds which had not traditionally invested in venture capital and had just started finding US venture firms to invest in but they did not have a track record of supporting firms through decades, and if you talk to people who have founded other venture firms like Kleiner Perkins, Sequoia or Benchmark, most often they were initially funded by Yale, Princeton, and Stanford. These endowments have very long-term horizons. They are prepared to invest for decades. By establishing a base like that, we felt we would have the wherewithal to grow Emergence to an industry leader.
SM: How did they receive your investment thesis?
BJ: At that time there were hardly any new venture funds being formed. There was a flurry of new venture fund formations in the bubble, but most of them did not do well and by 2002 and 2003 there was little appetite for a new fund. We would not take no for an answer, and we kept coming back and explaining more and more why this thesis was different and why it would be successful. While we were fund raising, SalesForce.com continued to grow, and continued to get higher and higher visibility. It went public in the summer of 2004, around the time we closed our fund. It took us a year to raise the fund, and we stuck to it until we were able to raise $125M, which was more than our target.