1Mby1M Virtual Accelerator Investor Forum: With Brian Jacobs of Emergence Capital (Part 4)

Sramana Mitra: What stage do you recommend people to make that shift in your orbit? Are we talking about getting to a million and then moving to Silicon Valley? We see all kinds of permutations and combinations of this behavior. I’m curious what your thoughts are on this.

Brian Jacobs: Rather than a revenue number, I think more in terms of product-market fit. If you’ve got a product that is clearly meeting the needs of your customers and you believe that it’s time to put your foot on the gas and grow your sales and marketing capabilities, then that’s a good time to do it. We see some companies which, for instance, are offering their products on a freemium basis. They are getting no revenue from those customers, but you can start to see if the product is meeting the customer’s needs. That’s more important to us than a specific revenue number.

Sramana Mitra: There are two issues with the freemium business model. We deal with that in our activities all the time. It’s very difficult to bootstrap freemium businesses. You don’t have investors, and you don’t have customer cash. How do you get these companies off the ground unless you have money from previous exits? Somehow, the bootstrapping stage has to be managed.

Brian Jacobs: That’s true. A key part of a freemium business is not just the free part but the premium part. The really hard part is getting the right dynamics to have a viral spread of the free product while also figuring out those levers which create conversion to premium.

I admit that if a company with a free product comes to us and they have no paid users, I’m not sure I would call that a product-market fit. I do believe that you don’t need a lot of premium users to prove the value proposition. You can have mass adoption of the freemium products that demonstrate a product-market fit that is so critical to justify additional investment.

Sramana Mitra: Question about a slightly different business model that we have seen. You have invested in companies in this business model actually. Let’s use the example of athenahealth. This is a very large public company. It’s a SaaS company, but it’s not just SaaS. They outsource the entire business process of collection on behalf of physicians’ offices to collect money from the insurance companies. It’s a very successful company. It’s really hot.

This model of not just software but what I call software-enabled business process outsourcing, how much of this are you seeing out there?

Brian Jacobs: I like your term better than the one we use. We use the term technology-enabled business process outsources, which is a mouthful. We see that trend. Purchasing a SaaS application is a way of outsourcing the management of that application. You don’t need to have world class IT. You don’t need to have the infrastructure. You can let someone else manage that. You can let the company who does it best manage your application for you. It is a form of outsourcing. It’s outsourcing just the IT portion of managing the application.

There is an opportunity to outsource even more than that. athenathealth is a great example of this concept. It’s a software-driven company but what they’re delivering is not software. They’re delivering the output of a business process. That is typically a much larger opportunity than just selling the software, but it’s a harder business to manage.

Sramana Mitra: It’s operationally intensive.

Brian Jacobs: Yes. In some cases, the market will want just the SaaS piece of it. In other cases, the market doesn’t want the IT portion of it. We always look at ADP as one of the original companies in this category. They are driven by software, but their end product is a paycheck. There’s a lot of additional work that goes into creating that end product.

This segment is part 4 in the series : 1Mby1M Virtual Accelerator Investor Forum: With Brian Jacobs of Emergence Capital
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