Interview, Fireside Chat
Jake Saper, GP @ Emergence Capital: "We Sold Salesforce Early and Lost Out on Billions"
- Emergence Capital has returned over $8 billion in cash against $2 billion in deployed capital across 20 years.
- The firm analyzed its portfolio's graduation metrics: 9 out of 10 early-stage deals raised successful follow-on rounds; 1 in 5 raised rounds over $1 billion; 1 in 10 have gone public.
- A "what you have to believe" framework is used internally to identify 3-5 critical hypotheses required for an investment to return the fund.
- Every partner participates in reference calls for every investment to collectively "seek truth" rather than relying on a single sponsor's diligence.
- Emergence operates as a focused firm investing only in B2B software, with partners averaging one investment per year.
- The firm's culture includes retired founders forfeiting their carry to empower the next generation of partners, retaining talent and avoiding "merry-go-round" departures.
- Zoom was Emergence's first deal at the firm (2014), involving a $20M check (8% of Fund 3) at a $200M post-money valuation with $2M revenue.
- Due diligence revealed founder Eric Yuan miscalculated churn by counting upgrades and pauses as churn; correcting this showed the business was healthier than reported.
- Emergence won the Zoom deal by committing to help build an enterprise sales motion to layer on top of the company's product-led growth.
- SalesLoft was acquired by Vista for $2.3 billion, representing the highest multiple ever paid by private equity for a software company at the time.
- Chorus.ai was acquired for just under $500 million; the seed investment returned over 5X, though it did not materially move the needle of the larger Fund 3 which had a 16X DPI.
- Doximity, a "LinkedIn for doctors," was a winner-take-all market where the firm underwrote the thesis that a number two player would not exist.
- Bolt and Lovable represent the "no-code" era, potentially disrupting incumbents like Wix and Squarespace through consolidation or reinvention.
- The firm believes most companies raised in the last 5-7 years face an "existential moment" regarding AI adaptation, with many failing to pivot.
- Guru, a knowledge management company, restructured to include generative AI, cutting headcount to grow profitably and re-accelerating growth.
- The firm rejected an investment in a "business in a box" for fitness instructors post-COVID, realizing market pull was temporary; the founder subsequently returned capital.
- The firm is shifting its growth metrics from "triple, triple, double, double" to "quadruple, 120% Net Dollar Retention" as a benchmark for generational companies.
- Gross margins for AI application layer companies are expected to improve due to competition among closed-source models (e.g., OpenAI) and the viability of open-source alternatives.
- Emergence invested in Together.ai based on the belief that open-source LLMs will become a dominant part of the enterprise market.
- The firm's thesis on B2B software vendors remaining relevant includes their role as "opinionated" solution providers, maintainers of complex systems, and entities that provide a "throat to choke" for accountability.
- The firm underestimates the speed of incumbent adaptation, noting Adobe and Google are shipping AI features faster than anticipated.
- IBM is a potential short candidate due to its reliance on legacy mainframes and COBOL code, which AI enables to migrate to the cloud efficiently.
- Jake Knapp (founder of the podcast) notes that Emergence has never lost a deal to zero, attributing this to the recurring revenue models of B2B software and rigorous due diligence.
- The firm views "orphaned deals" (where investors leave and founders lose support) as a critical risk in the industry caused by standard venture capital partnership structures.
- Emergence treats seed investments as core bets with double-digit ownership targets to signal commitment and avoid signaling risk.
- The firm held public positions (e.g., Doximity) longer than lockup periods, generating an additional $2 billion in returns for LPs compared to selling at lockup.
- A $2 billion upside was foregone by selling at lockup rather than peak prices (e.g., 2021), though this analysis excluded the early Salesforce exit which was a strategic error.
- Emergence pairs early-stage AI verticals with their existing portfolio giants to create symbiotic distribution deals.
- Bridge rounds are sometimes necessary to save companies, as seen with Intact (acquired by Sage), though "bridge to nowhere" is a common risk.
- The firm's quick-fire round answers include: believing anyone can learn to sing; holding Microsoft stock for 10 years; and prioritizing teaching children "logic of thinking" and "human influence" over coding mechanics.