What do companies Salesforce, Veeva, Zoom, SalesLoft, Box, and G2Crowd all have in common? Besides being wildly successful B2B companies, they are all a part of the Emergence Capital portfolio. Emergence Capital is a top enterprise cloud venture capital firm that funds early-stage ventures focusing on enterprise & SaaS applications. Jason Green, Founder and General Partner at Emergence and Founding Board Member at Endeavor Global recently joined Endeavor Atlanta at the latest Scale-Up Breakfast. Polina Marinova, writer at Fortune Magazine, spoke with Jason about Emergence Capital portfolio companies, the biggest mistake he’s made in his career, and sectors of tech he’s especially excited about.
What are the common characteristics of companies Emergence Capital invests in?
When we invest in companies, we’re betting on the potential of individuals not the current stage of their companies. I try to understand the character, ambition, perseverance, and learning capabilities of the founder. We've seen entrepreneurs with high ambition and tremendous growth, but questionable character. I spend a lot of time trying to make sure that we assess the ambition and character of the individual.
When investing early, how do you differentiate between vision and delusion? Most recently, we’ve seen early-stage, charismatic founders that have misled media and even investors.
There is a fine line between genius and crazy. I've made the mistake of thinking somebody was a genius and they weren’t, they were crazy. It’s really painful because as an investor, once your money is in you can’t back out. I tell people, I’m not just giving you my capital, but I’m also lending you my reputation.
Are there any metrics to help identify whether or not a founder is a genius or a bit delusional?
Put yourself in lots of different circumstances with the founder. Founders are really good at pitching you, so take them out to dinner, meet their spouse, find opportunities to interact with them outside of the normal pitching environment. Look at little interactions, little “tells” that tell you more about their character. How do they treat their colleagues? How do they treat the waiter? How much are they drinking? This stuff matters because you only have a short period of time to make a very long term commitment.
Switching gears, back in 2014 you said that the startup ecosystem runs on a cycle of fear and greed. You said, “I think we're in the greed portion of the cycle right now.” Given it's been five years, and there's a lot more capital out there today, where in the cycle do you think we are now?
We're in the “super-greed” section of the cycle. However, I’m optimistic because, during the ‘99-2000 bubble, companies that weren’t real, with zero dollars in revenue and crazy pitch decks were getting funded. Today it’s harder to get funded without a product. Today, there are real companies producing real value for customers.
For example, when Salesforce went public in 2004 the market capital of it was $1B and we thought we had hit the grand slam of all home runs! Today (while acknowledging that a $1B is a lot of money) some may not even report that on in their term sheet.
Back in 2015 I talked with a colleague about “decacorns” and thought, okay, I'll come up with a term that’s crazy that no-one will ever reach. Just this year we've had dozens of companies reach $10 billion. [Jason jokes] Now we'll have to come up with another crazy term.
We’ve heard reports of a looming recession, how would an economic downturn affect your business and the companies you back?
I've been warning my partners about the recession. Not so much an economic recession, but a change in sentiment. This entire financial market is built on a sense of trust, and also this fear and greed cycle, it’s a psychological thing as much as an economic thing.
So when there is an economic downturn capital availability can dry up almost instantaneously. I advise companies to take advantage of the current financial environment. Raise the capital you need, but don’t run the company as if the capital is always going to be available to you. Do not presume that this current financial market is going to continue forever. WeWork is a great example of this.
What was the biggest mistake you've ever made in your career?
In the venture business, you mostly make mistakes, it's just the nature of the beast. Most startups don't achieve the kind of success that you hope for, and frankly, in our business, it's not just about achieving success, but it's the wild success that really delivers the returns.
The biggest mistakes you make in your career as a venture capitalist are not the companies you invest in that go badly, because that's just the nature of this. The biggest mistakes you make are turning down investments that end up becoming those huge home runs. I've got a wall of those, I call it my wall of shame. There are several companies that have gone public in the last few weeks that we had an opportunity to invest in and I turned it down because of valuation.
Also, the most painful mistakes are the ones where you make a bet on a founder and it turns out that they don't really trust you and they're not really high integrity people.
In Atlanta, there are quite a few unicorns, as those companies get acquired or IPO, do you see spinoffs of talent assisting in furthering the Atlanta ecosystem? What's your personal interest as an investor in the Atlanta area?
Success breeds success. It’s important that ecosystems help each other out, share information and share connections. That's what helped to build Silicon Valley. If everyone takes that mentality the ecosystem will accelerate much faster.
When you're working on a startup, typically, the message is to grow as fast as you can, and we've all heard this idea of blitzscaling. Do you think there’s a such thing as growing too fast?
Absolutely. I think culture is maybe the most important competitive advantage of any business and your culture can be destroyed when you grow too fast.
SalesLoft is a great example of a company that is growing very fast but is also dedicated to culture. SalesLoft is very intentional. They have intentional, expressed values and hire and fire relative to them. SalesLoft also rewards employees relative to culture and they do put constraints on growth because of that. They're still growing 100% a year, so it's not that you can't grow fast and maintain culture, you can do both. But, to say we need to grow 200% or 300% a year and blow up our culture in the meantime, I think that shows very short term thinking.
So, if you're executing your growth plan, how do you know that you're using the capital to grow and you're not just burning cash and achieving mediocre growth?
You have to understand the unit economics of your business. What does it cost you to acquire a customer? What is that customer worth to you at the end of the day and how do you make sure you retain that customer and sell them more? We call this kind of mentality “land and expand”. Reduce the cost of the land and then absolutely expand that customer over time, that's usually the sign of a healthy business.
For instance, Zoom, one of the best SaaS businesses in the world, has what you call net retention rates of 120% to 140%. This means every year Zoom is selling more to that same customer base.
Do you think that it's naive to think that a founder can lead their company through every single stage of growth or does it require a different person once it reaches scale?
When I first got into the business, I think the mentality was more along the lines of founders will cap out and you need to bring in professional management as the company scales. The industry has matured and as I've grown as an investor, I believe that the best possible outcome is for the founder to maintain their role. However, that doesn't mean you don't bring in people to help along the way.
For example, Marc Benioff brought in a lot of individuals to help him, as well as Aaron Levie, CEO at Box, he brought in a COO. The fundamental truth is it's really hard replacing a founder. You can't recruit the passion, ambition, and soul that comes from a founder-led company. Dell, for instance, is a great example of that, also Apple, Google, and Amazon. These are all founder-led companies that achieved the absolute pinnacle of success.
What is one sector or one company you're really excited about right now?
At Emergence, we've talked a lot about artificial intelligence and machine learning, and about how they’re both going to change the future of work.
Emergence has a couple of companies that are trying to marry the best of artificial intelligence and machine learning with the best of human intelligence and empathy. Textio is a good example of a portfolio company currently making this happen.