Emergence Capital: The Sequoia of SaaS, aka the House that Salesforce.com Built

5/25/11Follow @wroush

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mobile analytics firm Ground Truth and Doximity, a mobile social network for doctors. But the preponderance of the Emergence portfolio is in cloud-based business services.)

Regardless of whether any of these companies end up as part of the Salesforce.com empire, they’re already benefiting from the SaaS expertise that Ritter and his three fellow general partners—Jason Green, Brian Jacobs, and Kevin Spain—bring to the table. That’s the real advantage Ritter and Spain talked about when I visited them recently at Emergence’s San Mateo office.

“What makes Emergence different is that we are willing to focus,” says Ritter. “We decided that we’ll have one area where we are going to be the best in the world. We wake up in the morning thinking about things like retention rates and how the virality of one solution is going to be different from the virality of another.”

Pricing is another typical topic of conversation when Emergence partners see their SaaS entrepreneurs at board meetings. As it becomes less and less expensive to build and deliver Web-based applications, there’s a temptation to give it a lot of it away—but freemium models “can be a rapid road to the bottom,” says Spain. “You have to build products that end users love and will find it hard to live without,” he says. “If Salesforce.com knows how to make my salespeople more effective, that is something I can’t part from. We’re always encouraging companies to add enough value that they can substantiate a real price point.”

Kevin Spain, general parter at Emergence Capital Partners

All this focus has a cost, of course. For one thing, it means Emergence, which is investing out of a $200 million second fund, has to resist some very tantalizing opportunities, including almost every deal relating to consumer-facing products and services. “Zynga, Twitter, Facebook, these are all beautiful investments, but sometimes it’s like a bunch of 7-year-olds going after soccer balls—the [traditional VC firms] all swarm around the same three or four consumer investments,” says Ritter. (Some of Emergence’s portfolio companies might have interfaces that look consumer-ish—think document-sharing company Box.net, for example —but that’s only because today’s business apps “need to speak to people the same way Facebook speaks to them,” says Spain. “Increasingly the first user of an application is the individual making the buying decision,” not the CIO or the IT department.)

And the firm’s focus on Series A or B investments of at least several million dollars, rather than earlier, smaller seed-stage investments, means it misses out on a few legitimate SaaS deals, too. Okta was one recent case. Back in January, I wrote about the hot San Francisco startup’s cloud-based service for managing access to other cloud-based services. CEO and co-founder Todd McKinnon shopped the company to Emergence “just about before he went to any other venture firm,” says Spain, but Emergence had to say no. “Our sweet spot starts at the Series A, when they have a product and some customers and we can invest a lot of time and energy to scale the business. It was a really tough decision because Todd is such a compelling individual, but we ultimately decided we had to stick to our stage.” As a result, Andreessen Horowitz was able to swoop in with seed funding—which gave it the inside track for the $10 million Series A round a bit later.

But there’s no shortage of other SaaS startups to invest in these days. Despite Salesforce.com’s remarkable success getting businesses to … Next Page »

Wade Roush is a contributing editor at Xconomy. Follow @wroush

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