Jason Green (Emergence Capital): Why Startups Really Get Funded by Venture Capitalist

You.

I'm Malin Yen and I'm with a company called rpx. We offer a subscription service that helps companies reduce risk from patent trolls. We founded the company about six years ago and grew the revenue from zero to over 200 million in five years in 2011. We took the company public. Today, I'm absolutely delighted to be able to introduce this next session. We've all read in TechCrunch and elsewhere about all those venture rounds with high valuations of SaaS companies. But what makes these deals get done? As another. Well, we're extremely fortunate today to have two of the most active investors in SaaS to tell us why. So first up, capital. Take it away.

All right, thank you, Madeline. I'm going to stand up. So Jason co founded the firm back in 2003. We actually started the firm to focus entirely on the enterprise cloud. So we live, we breathe, we bleed SaaS, and we've been doing it for about a decade now. Trying to get this to. Oop, sorry, wasn't synced here. So this is our team. It's an amazing team. We're about 20 folks at emergence now, 10 of us on the investment team. And we all focus on enterprise SaaS. And so you can talk to anybody on the Emergence team. We operate very collaboratively. We try and kind of team tackle opportunities. We have what we call unanimous enthusiasm to invest in a new company, which is quite rare in the venture business. And the only reason we're able to do that is because we're all focused in the category of enterprise cloud. So we're all experts in it. We've been very, very fortunate over the last 10 years. Our first investment was salesforce.com, which obviously got our entire sector kicked off. Companies like SuccessFactors, Viva, Yammer and Box, they're now termed unicorns, I guess if they make the billion dollar threshold. And there was an article in Fortune recently about unicorns. There are now 80 private companies funded at a billion dollar or more market capitalization. But you know what? Unicorns are no longer enough, apparently. There are now eight companies valued at $10 billion or more. So if you want to get the attention of VCs, then you might want to think about how you position yourself for Decacorn hunting. So we're all hunting Decacorns, and the question is, how do you build a Decacorn? A unicorn's great, but how do you build a Decacorn? So we're going to talk a little bit about 10 examples of companies that actually got funded at Emergence over the last 10 years. I tried to pick a mix of some companies that were earlier on and then some more recent because the market certainly has changed. But I think what you'll see is a little bit of a pattern that starts to play out in the investments. And Mamun, I'm gonna ask to jump in on a couple of here because we're actually co investors in a number of these. So Box has gotten a lot of attention this last few weeks. Obviously we invested a little bit later than we typically get involved in a company. We invested back in 2011 in the series D round. Mamoon actually led the Series B and by that time the company was really had made its transition from a B2C company to a B2B company and was really on the rails in terms of a lot of the key metrics of the business. They had grown their revenues by about 3x year over year. They were at about a $15 million run rate, over 100 employees. So this is kind of on the. In the spectrum of where Emergence plays on the late stage of where we would play. We were really thrilled though to have an opportunity to invest in the company, even though it was a little bit later stage. And when I think back about what made Box really unique and special, at least from our perspective, was there's really the first generation of SaaS businesses were really focused, I think, on getting kind of clunky enterprise software into the cloud. What Box really revolutionized was focusing on the end user first, kind of an end user, you know, getting end users really passionate about using the product and then combining that with a freemium business model, so allowing the product to essentially do the marketing for it. So it was a combination of this product orientation as well as the disruption of the freemium business model. And then the team, I call them the triple threat of Silicon Valley. Aaron Levy, Dylan Smith and Dan Levin, these guys were amazing, very complimentary. And Dan had joined about, I think six months before we actually invested and was bringing a lot of expertise from having helped scale other companies, including Intuit. And then finally for a later stage investor, what you're looking for is still a venture return. So we were investing at that time. I think it was about $180 million valuation at the time. So we were clearly focused on could this thing be a two billion dollar kind of opportunity? As it turned out, it is, it was. And the reason was Aaron Levy and the team really were going big. They were going big or they were going home. And they were aggressive all the way around. So I'm going to put Mamoon on the spot a little bit because I know he's going to talk about some other examples and not Box, but Mamoon. What did you see at the Series B? Because it clearly wasn't as far along as it was when we invested.

I love that there were 50 other competitors. It was Aaron and just Aaron at the time. So, just kidding aside, really, it was this transition from file storage behind the firewall or in media in closets, moving to the cloud in the enterprise. And we were really just a B2C company at the time with the goal and the aspirations of being a B2B company. And we were just making that transition. This is in the beginning of 2008 when we invested and it was really, you know, if it comes down to it, it was the vision that Aaron painted and our belief in Aaron to actually build a really big company. It was really backing the entrepreneur who was going to stand out. Out of the 50 other file sharing companies that existed in 2008, like, really, there were like 50 other companies. So it was. Aaron would say it was luck, pure luck, that it for us as investors at the time, we should not have invested because there's nothing that suggested that we should invest.

Well, clearly it was a good decision in retrospect. So we're very proud of Box. So Yammer's another example of a company that we funded. This one we funded a little bit earlier stage in the Series B. And Yammer was really a perfect, kind of, I'd call it, sweet spot for us for emergence. So they had spun Yammer out of another company called Genie, which is interesting because there's also a B2C story here. So they were started as a B2C company. They spun out this project called Yammer from Genie. David Sachs, the founder, was really a consumer Internet guy, so he was very focused on product and again, you know, the end user kind of focus. So the company had raised some money from the existing investors in Genie, but it just started really monetizing the enterprise and the B2B side of it. But what we found really intriguing about the company at the time, it was about 25 people, was the user growth. So it had gone from essentially zero to about half a million users in a year. And what was interesting, while this is a linear growth chart here, the time to get to that next whatever million users was starting to shrink. We could see it in the numbers. The second most compelling thing about Yammer was the conversion rate. So, like Box, they had a freemium business model. But most freemium business models are low single digit conversion rates. Yammers was in the double digits and it was increasing. So if you. Those are what I call the money slides. You know, when you think about raising money from a venture capitalist, like what one or two things are they just going to get so excited about that they can see and they can capture the imagination of the potential for this business. And to me it was this amazing viral growth of the users and the conversion rate to monetization. Those two things really closed the deal for us. The third thing was the team. This is the PayPal mafia. Many have gone on to found incredibly successful businesses after PayPal, LinkedIn and Square, among others. But David clearly had again a mindset of very, very big ambitions. When he started Yammer, he was running that business to win. I remember one quote from David which really resonated and a lot of people sometimes criticize companies for being so aggressive in the market. They raise a lot of money, they hire very aggressively, they're spending aggressively. The question is, should they be doing that? Is it really prudent? And from his perspective, he thought that it was the least risky thing to do, the least risky thing. And I think if more entrepreneurs kind of understood that the market they were going after was kind of a winner take all, had these network effects and really could attract the capital and the talent to really win in the space. The market leader gets about a 10x valuation increase over the next guy and Yammer was clearly the leader. So KOTAP is another favorite of ours at emergence and this one was on the other side of the spectrum of box stores. This was a pre revenue business. We don't typically invest in pre revenue companies. But what was special about KOTAP was two things. One was they were going after a very big idea and this was to be the WhatsApp for business. So just like Yammer was Facebook or Twitter for business, Kotap was trying to be the mobile equivalent or WhatsApp for business. So we knew that was gonna be an absolutely huge opportunity. The second thing, and probably more compelling to us, was the team. So both Jim and Zach were literally like the first dozen folks over at Yammer. Zach was the first engineer and Jim was really David's right hand man on the product side. So two of the best product visionaries and product executors that we knew. So you pick a very big target like WhatsApp for business, you pick a team that can build a product and you're off to the races. Obviously that's still a Very early stage business. They're doing incredibly nicely on track to hit a million users this year. We hope it has a similar WhatsApp kind of outcome. Steelbreak is another really interesting company. I think it's a great example of kind of, I'd call it two X factors coming together. So one X factor was this company was bootstrapped by a technical founder named Max Rudman. He had built the company to 100 customers without any outside capital. And they were raving fans. They were just raving fans of this product. Then he partnered with a team out of a company called Big Machines that had gotten bought by Oracle. And Big Machines was the leader in enterprise CPQ solutions. I don't know if many of you know what CPQ is, how many use a CPQ solution in the audience. If you don't, you should be okay. Take a look at Steelbreak. But it is an amazing company. So we had a team that basically had built the enterprise software leader from a go to market strategy combined with the best cloud product that Max had built. This company has scaled from five people to about 50 people in the last nine months and is off to the races. In fact, this week I think they just announced a follow on financing. So for us again, that was kind of the sweet spot. It was, you know, I'd say less than a million dollars of revenue, had early product, market fit, great customer adoption. But then this kind of X factor of the team coming together with our capital and their expertise that could really accelerate the business. ServiceMax is a company that was really early on building on top of the Force.com platform. So we had actually sponsored an event with Salesforce to, to find the best applications built on Force. We'll talk about another company later called Viva Systems that was similar to that. But ServiceMax was really trying to automate field service applications built on Force, also a bootstrapped business. They had about a dozen customers, maybe 20 customers, less than a million dollars of revenue. But what was the X factor here, in addition to betting on the cloud platform was we had a guy in our hip pocket, a guy named Dave Yarnold. Dave was the former VP of Sales globally at SuccessFactors. One of the few guys that had actually built a SaaS business from pretty much the ground all the way up to a billion dollar public company. And Dave was ready to be CEO of his company, of this company, ServiceMax. He also had quite a bit of domain expertise, having been in a company called Clarify, which is in the. For those of you who were in the software business in the 80s and 90s had a lot of field service applications. So combining a really new disruptive platform with an amazing guy and a track record of building a SaaS business was the company's now on its sixth year, I believe of 100% compound annual growth. And we're incredibly excited. So let's change gears a little bit. One of the areas that we're really excited about at Emergence is healthcare. And we've invested in a couple early stage businesses which, you know, I think are gonna are fairly risky, but I think if we win, we win big and it's back to, you know, creating these unicorns or Decacorns. So Augmentix was a C investment of ours. Again, probably early than our sweet spot. But the value proposition was so compelling. So this was about physicians wearing Google Glass during a visit with a patient and being able to essentially improve the way they were able to capture all that information while they had that visit. So the question was, first of all, would physicians accept this, would patients accept this and would it provide a significant value proposition? So we were able to see the business kind of do about, I don't know, three or four key pilots in significant healthcare organizations and see dramatic, dramatic impact. Physicians loved it. Patients actually felt it was a better experience because they were one on one with the doctor instead of the doctor sitting there typing on the computer. And we knew that if they could actually make this thing scale that it was going to really change the face of healthcare. So it's still early days with augmedx. It's betting on a fundamentally new platform which is Google Glass. We don't know if Google Glass is going to be successful yet. It's still to be determined. But we know Google is investing very heavily in that platform. We've seen some of the Google Glass 2.0 early looks and it's pretty amazing. So one of the things you really get attracted to as a venture capitalist I think are not just me too kind of ideas or point solutions. You're looking for companies that build applications, solving really big problems that are somehow enabled by a really new compelling thing. And that's what I love about Augmentix. So Viva Solutions. Viva is one of the most incredible SaaS businesses ever built. So this is a company that raised $6 million of capital all the way to a public offering. They're valued at about three and a half billion dollars today, several hundred million in revenue. How did they do that? Well, Veeva discovered early on the sales efficiency of focusing in on a very specific industry vertical. So we Call it the industry cloud model. Industry cloud has become now one of our most exciting new investment opportunities. We're literally going through every major industry, hospitality, real estate, transportation, and looking for SaaS leaders that are going to dominate it. And what Viva figured out is it could own, unlike, you know, let's say CRM, which is a huge market, but you can only own a fraction of a percent of the market. Even Salesforce has less than 10, 10 or 15% of the market today. Viva potentially could own 80% of the market. So that has tremendous, tremendous sales and marketing efficiency associated with it. They've also come out with new products that they can sell into those existing customers. The other factor here was the team and Viva. It's really hard to find technology folks and domain experts when you back an industry cloud company. And what was really magical about Veeva was we had Peter Gassner from Salesforce.com, a guy that we knew quite well who understood the platform. And then Matt from Siebel who ran the healthcare practice there, had a lot of the domain expertise selling into life sciences. So you combine that domain expertise with the technology platform and those two just created really magic together. It's been a remarkable company. Probably our best investment. Maybe it will be our best investment ever. So Civitas Learning is also an industry cloud focused company. They're focused in on education. Similar thing using predictive analytics to really help dramatically improve ROI for matching for tracking students, basically in online education. This was a team that had deep domain expertise, kind of half a dozen early pilots with great roi. And again it was took advantage of our ability to kind of get involved in the company when they had early product market fit and really accelerate the sales and marketing. I'm running out of time here, so I better go quick. We'll skip Doximity for a sec. Let's talk about Zoom because they just announced their financing yesterday. It's our largest check to date for emergence. Initial check. And what we loved about this company was a couple things. First of all, they had this tremendous user growth with $0 in marketing. So they had that early customer market product market fit. Secondly, the team was an incredibly domain specific team here. The guys had founded WebEx and built that product. It's an incredibly hard product to build. Well, if any of you don't want like we were talking about travel earlier, if you want to reduce your travel, try Zoom. It's an amazing product. We're already using it in emergence for board meetings and other things. So this is a company that's a little later stage than we would typically get involved, but we were able to still write a significant check, be an important contributor to the company. And now it's about building that go to market team. So I would ask you to just ask yourselves when you're talking to a venture capitalist, our risk profile is the same for every deal, which is zero. Okay? The only thing that matters is the upside for taking the risk that we do. So what is your X factor? If you have one X factor, that's great. If you have two X factors, you're gonna get a second meeting. If you have three X factors, you are gonna be having people knocking your door down. And some of these companies can have four or five X factors, and then it tends to be a little later stage. But I would ask you to think, what is your X factor? And how do you build a company that people will die to invest in? So I'd like to hand it off to Mahmoud.

Thank you, Jason, for that fascinating look behind the scenes of why you invest in companies.