Emergence plans to raise $175M

Emergence Capital Partners expects to launch fund-raising for its second vehicle at the end of March, aiming for $175 million, VCJ has learned. The San Mateo, Calif.-based firm raised an inaugural fund of $125 million in 2004.

Emergence has staked its future on business models that deliver technological developments as a service, rather than as products. The Emergence partners have already established credibility in this space. They invested just under $1 million in customer relations management company Salesforce.com (Nasdaq: CRM) in 2003 prior to raising their first fund. A year later, Salesforce launched a $100 million IPO.

Limited partners in Emergence’s first fund include the California Public Employees’ Retirement System (CalPERS), Fairview Capital Partners, Morgan Stanley Inc., the University of Michigan and the University of Minnesota. The first Emergence fund has called down $6 million of $15 million committed by CalPERS, according to public documents. The cash out and remaining value of CalPERS’ stake is estimated at $6.16 million, yielding a 2.8% net IRR.

The success of Salesforce.com was enough to propel Emergence’s co-founders and General Partners, Gordon Ritter and Brian Jacobs, onto Forbes magazine’s “Midas List” of most successful VCs in 2007. But Emergence has yet to have an exit from its first institutional fund. The partners are undaunted. Ritter expects the firm will have an easier time raising its second fund compared to its first, which took 15 months.

At your service

“We’re betting our entire strategy around the customer’s need to consume technology as a service,” Ritter says. “We’re going to look at the ‘Salesforce.com’ for every other segment of the enterprise software market.”

For example, Emergence invested in Ketera Technologies, which allows corporations to buy office products online from a variety of different sources and automatically tracks spending. It also backed SuccessFactors, which hosts human resource applications online.

“Certain segments of the enterprise software space are ripe for being ‘Salesforced,’ such as applications that are used by a traveling salesmen, and applications where less behind-the-firewall data are used,” Ritter says.

There are also some processes that are critical to corporations but that few companies want to do in house, Ritter says. HireRight may be a good example. The company sells technology-enabled background screening services to large corporations. Bringing the right people into a company is critical, but checking their backgrounds can be time consuming and costly for non-specialists. Emergence General Partner Brian Jacobs funded HireRight while he was at St. Paul Venture Capital, and Emergence lists it as part of its portfolio.

Emergence isn’t limiting itself to enterprise software applications. It backed consumer service company DVDPlay, a provider of automated movie rental kiosks. It also backed Visage Mobile, which offers services for companies looking to launch branded mobile phone services.

“Most of the venture industry is risk adverse, but having a big, diverse portfolio comes at a cost,” Ritter says. That cost, he adds, is lackluster returns. —Alexander Haislip