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Emergence invests in enterprise software companies and has funded Zoom, Yammer and Saleforce
Venture capital used to be a cottage industry, with very few investing in tomorrow's products and services. Oh, how times have changed!
While there are more startups than ever, there's also more money chasing them. In this series, we look at the new (or relatively new) VCs in the early stages: seed and Series A.
But just who are these funds and venture capitalists that run them? What kinds of investments do they like making, and how do they see themselves in the VC landscape?
We're highlighting key members of the community to find out.
Meet Jake Saper, general partner at Emergence Capital.
Saper got his start in venture at Kleiner Perkins, after which he joined Emergence, where he became a Kauffman Fellow. He’s passionate about using machine learning to help people do their jobs better and co- developed the firm’s Coaching Networks thesis. Saper serves on the boards of Textio, Guru, Drishti, DroneDeploy, and Vymo.
He earned his B.A., magna cum laude, from Yale and his MBA from Stanford, where he was an Arjay Miller Scholar. Jake also earned an MS in Environment and Resources from Stanford.
Saper is a singer and very mediocre guitar player, constantly in search of people to jam with.
VatorNews: Tell me about Emergence Capital. What is your investment philosophy or methodology?
Jake Saper: The most important thing to know about Emergence is that we are a focused firm, and we're focused in two ways: the first is in terms of what we invest in, and the second is in terms of how we invest.
On the “what” side of things, all we invest in is business software and that's all we ever invested in, since the firm got started two decades ago. The firm was actually started with the thesis that software would move from on-premise to the cloud and obviously that thesis has worked out nicely.
The very first investment that the firm made in 2003 was in Salesforce.com, which kind of set the stage for, obviously, the whole cloud sector. We were able, in the early days, to invest in some of the early cloud leaders like SuccessFactors then moving on to other companies like Box and Yammer and the collaboration and productivity spaces. We also helped pioneer what we call “industry cloud investing,” which is vertical software investing, so building software focused on serving the needs of users within specific industries. We were actually the only investor in the most successful industry cloud company today, Veeva Systems, a pharmaceutical- focused software company that’s somewhere in the $20 billion cap range.
Then from there we continued to invest and develop new theses, all within cloud as the theme, and I'm happy to tell you about more more recent theses as well, but before I do I can tell you about the other other way in which we’re focused, which is how we invest. We aspire to be the most important partner to our founders, and we take that phrase really seriously. It's actually one of our three core values as a firm. One way we try to do that is to make very, very few investments; there are six partners in our firm and each of us, on average, makes one investment per year. That's very intentionally done so that we have the time to spend with each of our portfolio companies to try to help them grow and succeed. We generally lead early stage rounds, often Series As and Series Bs, where companies have early product market fit but may want help on the go-to-market strategy and hiring side of things. We’ve invested in over 100 SaaS over the decades and try to collect best practices and, frankly, best people from some of those companies and then bring them to bear in our current portfolio. That’s how we try to deliver on that promise of becoming the most important partner to our founders.
VN: What is the opportunity you see in cloud software?
JS: At the highest level, there's two ways to think about what we invest in. To really pull it back for the most generalist audience, the very first thing to think about is just the way that people do their jobs is changing, and we need to make sure that we are giving them software to help them do their jobs better. So, obviously, the pandemic has changed the way that we work and we believe we'll continue to have more of a hybrid-style working going forward and that requires new software to help run effectively. Obviously products like Zoom have really helped us both adapt our work lives and our personal lives in this dramatic period and we have been lucky to be the very first institutional investor in Zoom back in 2014. We’re still very active in the company, we still actually serve on the board, and that journey has really helped us understand that helping people do their jobs better with better software can be a really transformational thing, both from a value to our investors’ perspective, but also in helping make an impact on the world. So, at the very highest level, the reality is it’s just a massive opportunity when you think about how to help people with better software.
The more granular answer to your question on why specifically cloud software, it's a bit of an answered question at this point, given that the vast majority of software built is now built in the cloud. But there are still a lot of legacy deployments on-premises, particularly in legacy industries where cloud has an opportunity to take over. So, that's the super high level. We have a specific investment thesis within cloud software, and I'll be happy talk about any of those, but the highest very highest answer to your question is the opportunity to help people do their jobs better with great software has never been more exciting given the fact that the way we're working is changing.
VN: It would be great to hear your investment thesis within cloud software.
JS: There are a few subthemes, or theses, that we are excited about, under the cloud software umbrella. One is the concept of the deskless workforce. So, the reality is something like 85 percent of workers in the world don't work a desk and, if you think about the software that’s been built today, the Salesforces of the world, those are primarily built with a deskbound user in mind. And so, the many hundreds of billions of dollars in market cap that exist today in cloud software is almost exclusively focused on helping that 15 percent of the workforce do the jobs better. It's very clear that there's lots and lots of opportunity in serving at 85 percent with a software that is built with the deskless first in mind. So, that's the big, big theme for us, and we had some early success there. We were investors at a company called ServiceMax which is software that helps field service workers do their jobs better. So, folks who are out in the field, technicians fixing broken machinery or delivering goods or what have you, software that helps them figure out how to do their job effectively. We were the very first investor there, and the company was sold to GE for a billion dollars a few years back, and it was at the time, and it still may be, I’m not sure, the only billion dollar software acquisition by a non-software company. So, there's definitely some validation around the concept of building software for the deskless workforce.
A second core theme is something that we call coaching networks, and the concept here is using data and machine learning to help coach workers on how to do their jobs better while they’re doing them. Just to give you an example, let's just take this conversation: imagine if there was a piece of software that could coach you in real-time on how to ask the very best questions of me and the very best follow-up questions in order to answer the question of how you create a great interview. You don’t have a clear answer to that, which makes a lot of sense, because you don't have the data on that. If there was software that was listening in on this conversation and could analyze the elements of how you ask the question and how long I talked and how many follow-up questions you asked, what types of questions you asked, and then correlate that with some objective metric of success, let's say number of readers, then it could coach you on how to interview more effectively. That would be a really, really powerful concept. I don't know of anyone building that specific version of the software yet, but we’ve invested in a lot of companies solving related problems, like there’s a company called Chorus, which does this with sales conversations. It listens to sales conversations and then will compare the performance and the conversation to the outcome: did the person who buy the product? And then it will coach other people having similar conversations on how to have them more effectively, based on that data. There's another company that we've invested in called Guru, which has a similar concept with knowledge management. So, if you're a support rep and you're having a conversation with a customer, this software will analyze the conversation and give you suggestions in real-time on the knowledge you may need to have a more effective conversation with a customer.
Then our most recent emerging thesis is one that we call deep collaboration, and the core idea here is that the tools we use to do the core work we do, the productivity tools, so to speak, and the tools we use to collaborate with each other about the work, have increasingly been divided into lots and lots of different applications. So, you may use Google Docs to take notes, and then you pop over to Slack to chat with your colleague about an article you're working on, and you pop in to Zoom to actually have the interview with someone or you may make a phone call. And all of that data is scattered across lots of different places, when the job you are really trying to do is write an article. So, imagine if there was a piece of software that was specifically created for that job to be done, the job being writing an article, and it combined the productivity tooling, the word processing and everything else, with the collaboration, both internal and external, so that all the data lives in the same place. The comments around the article will all live in the article, the conversation you have with various sources, like myself, would also live within the article, so you don't have to go to seven different places between productivity and collaboration and scatter that data. This is a concept we call deep collaboration and, again, I'm using these kinds of reporting examples because they’re hopefully the ones that might resonate with you, but there’s a number of companies that have been built with this in mind in different domains. One would be a company called Figma in the design space, which combines the productivity tooling of actually doing design with collaboration with lots of other people, in real-time, kind of like a multiplayer experience so that the collaboration and productivity is all in one place. There’s another company on whose board I serve called Ironclad, which uses the same concept in legal contracts, where software helps companies draft and negotiate and collaborate on contracts. It’s a similar concept to pulling together productivity and collaboration tooling in one place to get a job done.
VN: You mentioned COVID earlier. What effect is the pandemic having on the cloud software space?
JS: With respect to collaboration software, obviously we've now become insanely reliant on tools like Slack and Zoom to get our jobs done, but what was interesting is that a lot of the collaboration tooling that has been built was really built for a lighter weight collaboration, like check ins and task management and just like, “Hey, how are you doing?” or even sharing cat GIFs. The really deep intense collaboration, if you're doing a deep brainstorming session, you would do that in person. That was the way the world used to work, where this tooling was really useful for quick information sharing, but anything really deep, complex or robust, you’d often do try that in person. Obviously that’s no longer a possibility given COVID. Frankly, even post-COVID, we're moving more and more towards a distributed workforce, where that in-person deep collaboration isn’t going to be possible, so you're going to have to find software tooling that is focused on creating that ability to go deep and focused. That's part of why we're so excited about this deep collaboration software category that we're describing here, because the idea is that it we have the place to do the work, the productivity tool, and the place to talk about the work, all in one place. That should allow you to focus more on the job to be done versus being scattered across multiple applications. It can replicate the experience and, in some ways, even improve the experience of an in-person brainstorming session.
An example of a major technology acquisition that I think typifies this, and may not have happened were it not for COVID, is Salesforce’s decision to purchase Slack. Part of the reason why Salesforce decided to purchase Slack is because Salesforce has realized that their productivity tooling is increasingly causing information fragmentation because the collaboration and discussion around the productivity stuff is happening in different pieces of software, namely Slack. So, the idea that they would try to bring that together is something I think that Marc Benioff has wanted to do for a long time and COVID really made that need acute. That’s a big part of the reason, in my opinion, why this acquisition took place.
VN: What is the size of your current fund?
JS: We’re investing out of our fifth fund, which is a $435 million fund.
VN: How much do you invest in initial checks?
JS: It ranges a ton, because we do anything from a really early A to a late B. On the smaller size we can go down to a $4 or $5 million initial check, and on the larger side it can be between $20 and $25 million.
VN: What kind of traction does a startup need for you to invest? Do you have any specific numbers?
JS: What we’re looking for in general is what we call early product market fit and the reality is that that is a subjective definition. There's increasingly some methodologies to assess quantitatively if you’ve achieved product market fit by asking questions like, "how disappointed would you be if this product was taken away from you?" But, in terms of how we think about it from an investment perspective, what that often means to us is generally to have a solid number of customers, and that will vary based on the size of customers you're selling into. So, if you're selling really big enterprise contracts maybe you only have a handful of customers, or if you're selling more mid-market then you may have a dozen or 20 customers. You have that bulk of customers that have been using the product long enough to get meaningful value out of it, and to pay full price for it. And then, ultimately, you want to understand that there's rabid user love, that people are just insanely passionate about the product and that requires understanding usage behaviors. So, we often look at what have been traditionally consumer investing metrics; things like what percentage of monthly active users use the product every single day and understanding how that trends over time is a good proxy for us in terms of how important is this to the people using it.
Then we do a lot of conversations with customers. One of my favorite quotes to hear, and you don't hear it that often but when do you know you've got something really exciting, is when you talk to a user and you ask them, “what do you think about this product?” and she’ll respond and say, “if they took this product away from me, I would put it on my own personal credit card,” or, “if they took this away from me I would quit.” If you hear that level of user passion then you know there's something really serious going on here.
The reality is there are times where you're not going to have that many customers that have used it, but we can still get excited if we have passion about the market, passion about your team, and the product usage is just so phenomenal.
VN: So it should be "gotta have" rather than a "nice to have."
JS: Exactly. Another way to think it is revenue is really nice to understand the value created. The reason why revenue matters is because it's great if someone is using the product, but if they're not willing to pay for it then you may not actually have something that you can build to a large business. But revenue is a bit of a lagging indicator. Revenue comes after you've able to deliver value, typically, and that's why understanding things like product usage, as more of a leading indicator of success, can be really important as an early stage investor.
VN: What do you look for in terms of the team when you want to invest?
JS: One other important thing to understand about Emergence is that we invest as a full team, so the full partnership, the full team, will actually spend time with every company that we are getting to know as part of the diligence process. Then I, as the deal sponsor, will ask my colleagues, and ask myself, a simple question: is this a team, is this a founder, is this a CEO, that I would work for? Is she a person I could see myself reporting to? There's two reasons why that question is such a critical one. The first is that, ultimately, that’s what I'm doing. With early stage investing, you’re effectively reporting to the CEO in many ways; you're trying to do everything you can to help him or her grow their business and so you are doing lots of different kinds of serving. So, you want to make sure that you're energized by the process of serving this person.
The second reason is a lot of what we try to do is introduce and try to persuade world class people to join our portfolio companies. I've learned that it's not enough for me to develop that network of world class operators; I have to make sure that I'm introducing them to founders where I can look at them with a straight face and say, “I'd work with them if I were an operator.” If I can, then the odds that the founder is going to be able to woo this person, retain them and motivate them, etc. and recruit a really world class team are going to be a little higher. So, it's an admittedly very subjective metric, but it's one that I've used for a number of years now.
VN: What do you think about valuations these days? How have they been affected by COVID?
JS: At the beginning of COVID there was just kind of a pause and valuations definitely dipped for deals that got done in the March-April time frame. There was a massive uncertainty tax, so to speak, and there were fewer deals that got done in that period. As we were coming out of the summer, and people got accustomed to COVID, and the virus case counts had gotten a little bit lower and more under control, people started to go back to work, and people started going to sell cloud software, and the numbers started to recover. You saw that in the public markets these companies started to report quarters that were actually much higher than they feared they would be, and that drove a great deal of interest in the public markets. That came down to the private markets as well and valuations have cropped up through the course of COVID.
There’s a number of reasons for that. Part of it is the attractiveness of these businesses, for sure, but there's a macro element at play here as well, which is that interest rates are so low, really across all central banks around the world now, that there's not a lot of places to invest money and get a meaningful return. The bond markets aren't as attractive and a lot of folks feel like the public stock markets are a little overheated. What that's driven is more investment into the private private equity markets and venture capital in particular, and we're seeing an influx of supply in capital which is having another impact on valuations, increasing them.
VN: Now that COVID is raging again, are valuations once again dipping?
JS: COVID has only been reraging for a month or so and a lot of deals got done in December. We don't know yet, obviously, so we’ll see because deals won’t be public for another few months until they close. So, I don't really know, to be honest with you. I think it also depends on the vaccine rollout and the mutation questions; there's still a lot of uncertainty out there, but I wouldn't say I've seen a major cooling yet in the private markets.
VN: There are many venture funds out there today, how do you differentiate yourself to limited partners?
JS: We're in a very fortunate position to be able to choose the investors we work with. The performance of our funds has been really, really strong, amongst the highest performing venture funds in the history of the industry, and so we get to choose. Frankly, we spend a lot more of our time these days figuring out how to prioritize what type of LP base we want and the main decision we made is that we are motivated to invest on behalf of causes that we care about as people. What that means is that the majority of our investor base are nonprofits; they’re foundations and endowments that are pursuing causes like social justice and climate change mitigation and adaptation, drug development, and other scientific research, that we find really motivating. That's a really amazing experience. As we've been able to deliver many billions of dollars of returns to our LPs, and that's having really meaningful impact on drug developments and all these initiatives I described. It’s the part of the job I find most meaningful.
VN: So are those different LPs than most other VCs go after?
JS: I would say that we're in a very small group of firms, based upon our performance, where we have the ability to have conversations with the investors that we choose to have, without much limitation. I can't speak for other firms, but we made a very explicit decision internally to focus on these nonprofit groups and try to allocate really heavily toward them. Again, I don't know how other firms manage their LPs; I think we're in a fortunate position to get to choose, and this is the choice we made because it’s motivating to use personally, and frankly, it motivates the founders. When I talk to a founder who has a choice of taking money from lots of different firms, one of the reasons they would consider working with us is because they know that the money that we're investing is coming from great causes and they can be proud of the things they're doing.
VN: Venture is a two-way street, where investors also have to pitch themselves. How do you differentiate your fund to entrepreneurs?
JS: The industry is very different than it was 20 years ago, where you sort of waited to have someone pitch you and you got to take your time and perhaps be not be as customer service focused. The best venture capitalists at this point are extraordinarily proactive because we have to serve entrepreneurs, which also means that we have to be proactive in finding them and winning them.
For Emergence, in particular, there's a few things that allow us to have a pretty high win rate. The first is our focus, the fact that all of us exclusively in enterprise software means that all of us have a level of insight into how these companies operate that I think a lot of founders are eager to get access to. So, we helped build out Zoom’s go-to-market strategy; that’s a level of knowledge and an access to people that a lot of founders are really eager to have. So, that focus is really, really important. A second reason why we may stand out is this concept of our LP base, which I described before; a number of founders I’ve spoken with are excited to work with a fund that is working on behalf of nonprofits.
Lastly, and perhaps most importantly, this is a people business and, ultimately, our reputation from our existing founders is by far the most important thing. I mentioned that our second core value is that we strive to be the most important partner to our founders, and we encourage folks we’re getting to know to talk to our founders. Not just Eric from Zoom, because obviously that has been a good ride, but particularly founders who have more of a bumpy journey. Folks who have been up and down and up again, down again and up again.
A good example of a company like that is Bill.com. We invested over a decade ago, and that company has had lots of ups and downs on the way to becoming what is now amongst the most highly valued, on a multiple basis, public software company. So, we’re extraordinarily proud of the relationship that we built with Rene Lacerte, the CEO there. A founder talking to him about the role we play in the ups and downs, I think it's a really important testament to why they should work with us.
VN: What are some of the investments you’ve made that you're super excited about? Why did you want to invest in those companies?
JS: I can talk about the Zoom experience because I was actually the person who led the diligence effort on that deal shortly after I joined the firm in 2014.
As I mentioned, we’re a fairly thesis-driven firm and we had done a lot of work in the video conferencing space, and we came to the conclusion that there was a real opportunity to replace what were then the incumbent players in the space that folks assumed would continue to dominate. There were a whole variety of next generation competitors. When we met Eric, the CEO of Zoom, there were two things that really stood out as different, and the reason we chose them as our horse, so to speak, in this race. The first thing was the product usage. Even in the early days, and we were the very first institutional investors in Zoom, there was an insane amount of product usage amongst their existing user base; people would spend days and days of time on the product and they just loved it. My partner, Santi, who sits on the board at Zoom, is from Argentina and part of how he got to know the product, and fell in love with the product, is he would use it to call his family back in Argentina and have a conversation. Skype wasn’t great and WebEx wasn't great, but Zoom just worked. Ultimately that helped him and us build the conviction to invest. So, the first thing was kind of the product performance.
The second thing was Eric Yuan, the CEO. Eric was formerly the VP of Engineering at WebX, so he knew everything about the space technologically and he knew exactly how to build a product from the ground up that would address the flaws in the existing systems and take it much, much further. He had a better technological innovation, a product called a codex that underlied it. Eric himself is an unbelievable human who has insane grit and deep humility. He was born in China but he's an American citizen; he applied to come to America and get a visa nine or 10 times before he was granted one, which is just a really clear indication of his grit and commitment. He’s also insanely humble, and he was humble back then, even though he already had some success in his WebX days. I will tell you right now, I believe Eric Yuan is the technologist who has had the biggest impact on everyone’s life in the world over the past 12 months and he is as humble now as he was when we met him seven or eight years ago, and probably before if you talk to folks who worked with him then. He’s just an extraordinary, special human and that was the second reason why we invested in the company and I’m incredibly grateful we made that decision to be on the journey with Eric.
VN: What are some lessons you learned?
JS: The thing that is perhaps most surprising to people who come to venture for the first time from some sort of operating role, or even from a consulting job or a banking job or anything else, is just how long the feedback cycle is. If you're doing a job like consulting or banking or reporting, or anything like that, you work on a project and then you ship the project. In your case, you work on an article, you ship the article and you see how much viewing this article got. In consulting you work a lot on a project, you present it to the board, and then you see if the board takes the recommendation or doesn’t and you see if you are hired to implement it. So, the feedback cycles are days, weeks, months. The feedback cycles in this business are years or sometimes decades and that is something that can make the job really stressful, it can cause a lot of self doubt.
That’s part of the reason why our third core value as a firm is that we all win big in the long run. We're very focused on this concept of the long run, and trying to be long term value maximizing, and not making short term financial value maximizing decisions, because we know that the feedback cycles are long, and that if you get it right, and you stay with the long run, you can create a tremendous amount of value for your investors. One example of that is this company Veeva that I mentioned, which is a pharmaceutical-focused software company, which we invested in back in 2009. The company went public in 2013 at a $3 billion valuation. The company is now, as I mentioned, I'm not sure what the number is today, but it’s in the $20s or $30 billions and my partner Gordan still serves on the board there as the chairman. The idea that, over the long run, these companies can create a tremendous amount of value for their customers and for their shareholders, it's something that helps to mitigate some of the stress of the feedback cycle, but it can still be really frustrating because you don't know for a long time if you’re good at it.
VN: It also depends on the space, right? A healthcare company is going to take longer to show value than a consumer company, for example.
JS: It definitely depends. Zoom, from the day we invested, was profitable and growing extraordinarily quickly and there was never really a moment where Zoom stumbled in terms of its growth or performance. So, that one was up and to the right and so we knew, shortly after we made the investment, that this was going to be a really special investment. Bill.com did well out of the gate and then had some stumbles along the journey, and ended up taking well over a decade to go public after we invested, but since it’s been public it's become one of the most successful software companies today. If you had asked the question five or six years after we invested in Bill.com, “is this a good investment? Should we feel good about ourselves for doing it?” the answer may have been, “no.” We stuck with Rene, we actually doubled down and helped fund the company through some of the hard times because we believed, but it takes a while sometimes. Not all companies are up and to the right.
VN: What excites you the most about your position as VC?
JS: The thing that gives me the most energy is the relationships that I get to build over a very long period of time with our founders and with my partners and colleagues. Ultimately, because we think so long term and not on a project basis, you ride through insane ups and down with these people, with the founders you work with. You're on the journey with them, you're riding shotgun, and when things go well you celebrate with them, and when things go badly you're there to pick them up and pick yourself up. It’s the same thing with your partners and with your colleagues in the firm; we're all on this journey together, it takes a long time. It’s a marathon. The relationships you build along that journey are incredibly rich; you’re able to get to a level of richness that I think is pretty rare in the working world because the relationships are so focused, and so long term.
VN: I’ve heard from some VCs who compare those relationships to a marriage. You’re committing to this person, you’re going to be together for 10 years, you better work well together.
JS: Just as an example, I want to get energy by spending time with people as people and vice versa. I have a Slack channel with a number of founders I work with and I was Slacking with one of them about a potential candidate we're gonna recruit. In the same Slack thread, we were giving each other band recommendations of stuff we were listening to at the moment. This founder and I, his name is Rick Nucci at a company called Guru, we had a tradition, pre-COVID, where he and I would go to a concert together right around every board meeting. I so deeply valued that, not just as his board member, but just as a friend. It’s relationships like that, it’s experiences like that, that makes me really, really grateful that I get to do this.
VN: Is there anything else that you think I should know about you or the firm or your thoughts about the venture industry in general?
JS: I feel really grateful that I get to do this, to be honest with you. I feel like I'm in flow doing this job, and I feel like it's a great honor to get to work with the founders I get to work with, with my partners I get to work with, and on behalf of the nonprofits that we get to serve. I am incredibly lucky and grateful to be in this position.
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