SM: What happened after you closed the fund? Did the thesis check out? What was happening in the marketplace, and how did you get your positioning and your thesis out there to solicit deals?
BJ: SalesForce.com went public as we were closing our first fund, and that proved to be a home run for Emergence. We had made a good bet and delivered a very significant return and we were able to tout that to investors and entrepreneurs. What we discovered was the theme we had chosen was very much taking hold in Silicon Valley and other places in the country. The term Software as a Service began to emerge as a new software company model following the SalesForce.com approach.
We initially were not well known, but we did get some press through our SalesForce.com investment, and a lot of entrepreneurs who were starting SaaS companies really wanted to partner with SalesForce.com and learn from their experiences of building that type of company. That helped us because many startup companies wanted to work with the venture firm that had helped SalesForce.com.
SM: The fact you were involved in SalesForce.com was well known in the entrepreneur community?
BJ: Even in 2004 and 2005 there was a significant contingency in the software industry that did not believe in the software as a service model. The conventional thought was that it was a fad, and not a big thing. There were only one or two conferences that had a focus around SaaS. Emergence was naturally drawn to those, and naturally asked to speak at those conferences.
The first one was sponsored by the SD Forum down in Santa Clara. They were not even sure if there would be enough people showing up to have a conference, yet when we showed up, there were lines outside the center. There was so much interest in this category there was standing room only. There was pent up demand for SaaS. Naturally, we were featured on a lot of the panels and we were able to spread our message.
SM: What was going on in the rest of the venture industry? Did other VCs start to position themselves around this?
BJ: For a few years we saw limited activity from other venture firms, yet there was still a lot of investment. There is typically one partner in each firm who had invested in services, and understood some of the opportunities we were seeing. We continued to partner with these individual partners.
SM: Would you name some? BJ: Sure. People like Bob Spinner at Sigma, Tom Blaisdell at DCM, and Kevin Efrusy at Accel.
SM: What strikes me is that most of the tier 1 VC portfolios do not have a significant amount of SaaS.
BJ: Part of the dynamic of what caused us to want to form Emergence is that a large venture fund needs to be diversified. It would be very difficult for a large venture fund with $1B to invest in one sector only. When you are managing a pool of that scale, you typically diversify and invest across sectors. You have partners with expertise in communications, healthcare, and so forth. Typically, there are one or two software people in each firm. Those particular partners that are following the trends in software and trying to be on the cutting edge are great, but they are outnumbered in their firm when compared to Emergence, which is 100% focused on one theme.