Emergence Capital late last year unveiled a major new investment theme it dubbed “Coaching Networks” and which it believes will fundamentally change software investing. Given the firm’s recent record, it is worth paying attention.
In much the way software-as-a-service and cloud tipped the market away from client server, Coaching Networks is to transform enterprise software by harnessing the power of artificial intelligence and machine learning.
“Coaching Networks is basically the opportunity to combine the best of humans and machines to make people 10x, or 100x, more productive in their jobs,” said General Partner and co-founder Jason Green.
Green stressed the idea is to not automate humans out of the process, but enhance them in their business roles.
“You can’t take humans out of the process and be effective over the long term, in our opinion,” said Green, who’s 15-year-old firm has zeroed in on enterprise software and the cloud rather than take a generalist’s approach and benefited recently from investments in Veeva Systems, ServiceMax and Box.
Green also hit on another favorable development for software investors: The mounting interest private equity firms have shown for buying and rolling up SaaS companies.
“The combination of private-equity buyers as well as these new industrial players getting into the mix only bodes well, frankly, for exit opportunities,” he said.
What follows is an editing version of VCJ’s recent interview with Green:
Q: Describe what you mean by Coaching Networks?
A: Coaching Networks came out of our combining the emerging machine learning and AI trends that everybody is seeing with our particular lens and filter on how we like to see technology be applied to helping business people solve business problems.
Our insight there was on the argument: Will the machine eventually take over? Our belief is machines will help automate a lot of the pedantic parts of the jobs of most professionals and allow humans to do what they are best at, which is come up with creativity and empathy and ideas around how to move the ball forward, and to share that best practice with others trying to execute a similar job.
Q: How is Coaching Networks guiding your investing?
A: When we founded the firm, the cloud was similar to where AI and machine learning are now. It was not fully appreciated. The same thing is true with Coaching Networks.
It’s going to rip through pretty much every functional area of enterprise software. The way software was designed in the last 20, 30, 40 years, in terms of very form-based inputs from humans and getting a dashboard, is going to fundamentally change, in terms of how we interact with software. It will be more real-time, in line with your job. It will be based on input from not just a keyboard, but it could be voice.
To me that’s where the opportunity lies. It’s going after large, existing, incumbent markets with a fundamentally new value proposition and architecture and maybe business model, too.
Q: So a new business model is possible?
A: When we moved from client server to cloud, we moved from a license business model to a subscription business model. I think the next generation of companies will probably be more oriented toward transactional, or business models that leverage the specific value they are bringing to the table.
Today, Salesforce might generate $150 a user a month. But if you could fundamentally transform a sales person’s effectiveness by 10 times, maybe its $10,000 a month you could potentially extract from that situation.
We actually think the kinds of companies you could build going forward are going to be even more transformative and significant than the ones of the last, say, 10 to 15 years.
Q: Do venture investors recognize this opportunity?
A: What most investors have recognized is the power of machine learning and artificial intelligence to essentially automate a lot of decision making and data analysis. But what they fail to fully appreciate is that it is the constant iteration on that data – the real time learnings from behavior – that gives you an edge in the market.
Q: Startups working with AI and machine learning are raising $1 billion a quarter in the United States. What do you make of this level of funding?
A: We’re probably at about the right level of activity. I think it is going to be harder than people think to actually execute on these strategies.
AI and machine learning applied broadly are actually really tough to do. What we’ve tried to do is to focus in on very specific business functions or business processes where the data is very clear on what’s the input on the data and what’s the output and how you build the feedback loop that gets you learning.
Q: So you don’t see over funding?
A: Where I think things are maybe overhyped is the administrative assistant that you’re going to have that does everything. That to me seems like a little over hyped and over-promised in terms of delivering value.
Q: Is the SaaS market saturated from an investment perspective?
A: If you look overall we’re probably at $100 billion in cloud spending, exiting 2017. That’s projected to be $200 billion or $250 billion in the next three or four years. And it’s taken 15 years to grow that $100 billion.
So actual growth opportunities in the next three to five years, we’re just hitting the sweet spot of the market. Companies are going to have to really figure out where they play longer term. A lot of companies seem more like features or add-ons to an existing platform.
What we like to think about is, ‘Are you building a new platform of record or platform of engagement as opposed to a feature?’
Q: Private equity firms have shown a lot of interest in buying, rolling up and investing in SaaS companies. Do you see this trend accelerating in 2018?
A: I do. It’s a new phenomenon. Folks like Vista Equity have raised (a reported) $11 billion fund. Or Silver Lake, which raised a $15 billion tech-focused fund. They’ve come to realize how powerful this recurring-revenue business model is at SaaS companies.
Historically, they only were able to buy companies based on EBITDA multiples. Now I think they’ve recognized these are incredible cash-flow businesses. It’s going to be a continuing trend.
In a perfect world, we would love to take these companies public and have them be independent companies. That’s still our preferred approach to backing these companies. But it is super nice to have another serious buyer in the mix.
Q: I think many GPs would agree.
A: The other interesting factor to me is ServiceMax, which we sold this past year to GE. GE typically has not been a buyer of software companies. It’s an industrial manufacturer.
Literally every company is thinking about how to transform into a software company, a digital company. We’re going to see a lot more interesting new corporate entities in the mix, which we wouldn’t have considered to be natural buyers in the past.
Action Item: To contact Emergence Capital at its headquarters in San Mateo, California, call 1 650-573-3100.