Building a New Venture Firm: Brian Jacobs of Emergence Capital (Part 9)

SM: What is in your portfolio in those later two categories? BJ: We mentioned InsideView as an information service. We have a company called Krugle which provides a search engine for software developers. Most software developers start with a base of code, often an OpenSource project they download as the basis for a new project. It turns out that software developers often try to use Google to search code for pieces of libraries or snippets of code they want to use.

SM: It is a vertical search engine for software developers. What is the revenue model because those typically use advertising?

BJ: They have a public search engine that is advertising supported, but they also power the development communities of several large technology companies, so IBM and Yahoo! use Krugle to be there search engine to support their developer community. They are also selling an appliance that allows large corporations to search their internal spaces. That is on subscription basis.

SM: I think your investment thesis is also going contrary to the fact that the Valley has profoundly disliked selling to small and medium businesses.

BJ: That is correct, and that is one of the reasons we felt that a new venture firm could address some of these issues in the way that an established venture firm could not. There is no question that most VCs would state publicly that they hated selling to small and medium businesses.

Yet, what we observed was the more natural path for services was to start with small and medium businesses. If you think about ADP, they are a technology enabled business process outsourcer and it started years ago. Initially, their value proposition was that large companies had bought mainframe computers and were automating their payroll but small companies could not afford to do that. Having a company that could buy a mainframe and sell it on a service basis to small and medium businesses, they could automate the business process to an underserved market.

When we looked at Salesforce.com we saw a very similar phenomena. They were not selling to the largest companies at the time; they were selling to small and medium business. The service model allows serving companies that could not afford the old approach.

If you think about the problem of selling to a Fortune 500 as a startup, it is more natural if you have a product you can go do a transaction with a large company where they buy the technology and are no longer dependent on the provider. With a service provider that is not the case. I don’t think Cisco or HP would outsource a critical business process to a startup if they were the first customer. You never crack that problem, although that is the regular approach for product companies. Service companies need to start with smaller companies who are not going to hold the bar as high as a fortune 500 company. As a service company builds a larger and larger base of customers, they become suitable to sell to larger companies. That is exactly what ADP did and that is exactly what Salesforce.com has done and we see that all the time in the SaaS market.

This segment is part 9 in the series : Building a New Venture Firm: Brian Jacobs of Emergence Capital
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