Emergence Capital Partners is betting its entire strategy around corporations’ growing desire to consume software as a service (SaaS).
The San Mateo, Calif.-based firm recently raised $200 million in commitments for its second institutional fund after just six weeks of fund-raising, easily beating its $175 million target. LPs are hoping Emergence will repeat the performance of its first fund, a friends and family fund, which invested just under $1 million in CRM heavyweight Salesforce.com (Nasdaq: CRM) prior to its IPO.
The firm’s first institutional fund hasn’t had the stellar returns of the friends and family fund that backed Salesforce. In fact, it still has yet to exit one of its portfolio companies. Still, the $125 million it raised in 2004 is carrying a positive value. The fund posted a net IRR of 1.8% as of Dec. 31, 2006, according to a report from the California Public Employees’ Retirement System, an Emergence LP. The report shows that Emergence has called down half of the $15 million committed by CalPERS and that the value of its stake is now $7.7 million.
“We’re going to look at the Salesforce.com model for every other segment of the enterprise software market,” says General Partner Gordon Ritter, who, along with co-founder Brian Jacobs, is on the Forbes Midas List of most successful VCs in 2007, even though Emergence has yet to have an exit from its first institutional fund.
Prior to founding Emergence, Gordon was co-founder and CEO of Software As Service, a Web services platform company he created with Marc Benioff, chairman and CEO of Salesforce.
‘Salesforcing’ the enterprise
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.
Gordon Ritter, General Partner, Emergence Capital Partners
“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.
Among its investments, Emergence has backed Santa Clara, Calif.-based Ketera Technologies, a company that allows corporations to buy office products online from a variety of sources and automatically track spending. It also backed San Mateo, Calif.-based SuccessFactors, a company that hosts human resource applications.
There are also some processes that are critical to corporations but that few companies want to do in house. These areas are ripe for technology service companies, Ritter says. Irvine, Calif.-based HireRight may be a good example. The company sells technology-enabled background screening services to large corporations. Jacobs funded the company while he was at St. Paul Venture Capital. Emergence lists it as part of its portfolio.
Emergence isn’t limiting itself to enterprise software applications. It backed consumer service company DVDPlay, a Los Gatos, Calif.-based provider of automated movie rental kiosks, for example. The firm also backed San Francisco-based Visage Mobile, which offers services for companies looking to launch branded mobile phone services.
“Most of the venture industry is risk averse, but having a big, diverse portfolio comes at a cost,” Ritter says. That cost, he adds, is lackluster returns.
Emergence Capital Partners
LOCATION: San Mateo, Calif.
NEW FUND: $200M
PRIOR FUND: $125M
TEAM: General Partners Jason Green, Gordon Ritter and Brian Jacobs; Principal Kevin Spain; CFO Margot Giusti; and Venture Partner John Dillon.
FOCUS: Early and growth stage software as a service (SaaS) companies and other technology-enabled companies.
LPS: Undisclosed for second fund. Investors in first fund include California Public Employees’ Retirement System, Fairview Capital Partners, Morgan Stanley Inc., University of Michigan and University of Minnesota.
NOTABLE: The firm’s first 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.
Source: VCJ reporting