Emergence Capital's Gordon Ritter talks focus and customer intimacy on the eve of his firm's $335M fourth fund
Investors regularly tell entrepreneurs to focus on being world class at one thing. Yet, it's advice they rarely follow themselves, with most firms investing across disparate categories like consumer internet, mobile, enterprise, healthcare, hardware, and even cleantech.
Emergence Capital Partners, has been a model of focus, calling earlier than most the cloud revolution that would upend the enterprise software market. Today the firm announced its fourth fund, a $335 million oversubscribed vehicle that is a testament to the effectiveness of that laser-like approach.
“We did no travel, everyone came to us. When it comes to fundraising, this was as good as it gets,” says Emergence co-founder and General Partner Gordon Ritter. “It was similar to our last fund but this was a bit of a different environment.”
Emergence set out to increase its $225 million Fund III vehicle by 20 to 25 percent, according to Ritter. But with all of its existing LPs reinvesting at the same or greater levels, and with additional external interest, the $335 total was the happy medium in terms of a manageable fund size while also making room for desired LPs.
“Our strategy, which is something that we’ve been saying for a while now, is that venture doesn't scale,” Ritter says. “Growing too much too quickly isn't a recipe for success. We feel like this increase was the right size in this environment, without getting too caught up in intensity that exists in our industry today.”
Emergence’s reputation in the SaaS sector precedes it, in part because of the firm’s track record of investing in the category’s best deals – including, Salesforce.com, Veeva Systems, Box, SuccessFactors, and Yammer – but also by virtue of the expertise and guidance the firm’s partners are known to offer to their portfolio.
“My biggest piece of advice to founders is that you've got to make sure you're building a service and solution for your customers that had some defensibility to it,” Ritter says. “We’re seeing lots of companies today that we think will have a hard time defending their territory from other upstarts and from large incumbents. It’s easier than ever to start a software company, but it’s also easy than ever to be replaced. I’m looking more and more for a moat.”
Ritter’s firm has outlined three theses that it will use to guide its next phase of investment, although he’s quick to qualify that these are moving targets and could change quickly. The first is a focus on the industry cloud, meaning vertical-specific solutions like Veeva Systems which was one of the highest-returning investments in any category over the last five years. Secondly, Emergence is betting big on a shift toward mobile in the enterprise. Finally, the firm is looking to follow up its success with Yammer with additional bets on the future of business collaboration, as demonstrated by recent investments in Zoom and Cotap.
The thing that unifies the best companies across these various themes is a focus on knowing your customer. “I look for teams that major in customer intimacy – knowing your customer – and minor in software development,” he says. “Developing software is obviously important, but it’s so much easier to do now and there are so many people capable of doing it well. But knowing your customer intimately is at the front and center in our industry today.”
Not much will change between Emergence III and IV, according to Ritter. The firm is keeping its partnership the same, despite the increase in resources, with the exception of the recent promotion of Santi Subotovsky from principal to partner. “We believe strongly in promoting from within,” Ritter says. As an early stage investor, the firm is not overly concerned with the macroeconomic environment or variances in Wall Street appetite for SaaS business models and their often hyper-aggressive growth spending.
“The bottom line is to keep investing consistently, not faster or slower than you should. That is what produces the best results for everyone,” Ritter says. “On a more macro level, tech is one of the highest forms of return in a very low yield environment and I don't see that changing. We are seeing massive productivity shifts in our society from software. But we really try not to think about Wall Street because we’re early stage investors. We are focused on finding and backing the best companies of every generation. If we do that well, everything else will take care of itself.”