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As the first significant infusion of capital, Series A investment marks a pivotal moment in the life of a startup and can accelerate entrepreneurs toward their vision. At Emergence, we evaluate over 1,000 Series A pitches from enterprise cloud entrepreneurs every year. This means that we’ve logged our 10,000+ Malcolm Gladwell hours over the last decade and can safely say we are experts at evaluating early stage enterprise cloud companies. This is our 5M framework for how we evaluate enterprise Series A opportunities and why these attributes matter for long term startup success.
Powering every promising company is an exceptional management team. At Emergence, we look for teams that possess the five superpowers of successful entrepreneurs: intense passion, deep focus, super speed, charismatic vision and accelerated learning. We often find these superpowers in teams that have strong team-problem fit, where management has deep expertise within an industry or market opportunity. Strong team-problem fit gives startups a huge advantage in focusing on the right vision, iterating quickly (and even pivoting completely), and securing early customers and key employees.
Our early investment in Veeva Systems was entirely based on the strong team-problem fit of the founding team. Veeva is a cloud platform for the life sciences industry started by Peter Gassner (CEO) and Matt Wallach (President). Peter’s experience at PeopleSoft taught him how to build a foundation for a scaling company and his role at Salesforce exposed him to the cloud platform that would power Veeva. Matt had deep industry experience within the life sciences industry which he gained as GM of Siebel Systems’ pharmaceuticals and biotechnology division. Their complementary expertise formed the cornerstone of what is today a $12B public company and one of the best venture investments of all time.
Why is your management team uniquely positioned to capitalize on a market opportunity?
Unicorns need ample room to run and that means startups have to target large enough market opportunities. For Emergence, we look for startups that have a near term $1+ billion revenue opportunity within the US. In addition to size, we also look for positive market dynamics. For example, we avoid highly competitive markets with low barriers to entry. We actively seek out markets undergoing dislocations that can provide the fertile ground for a startup to disrupt the status quo. Finally, we look for market tailwinds that can accelerate a startup’s go-to-market adoption.
When we invested in videoconferencing platform Zoom, we knew they were targeting a very large replacement market in videoconferencing software (WebEx) and telepresence hardware (Polycom). For market sizing, IDC projected these markets to be $7B. In addition to the large size of the opportunity, Zoom took advantage of two key market dynamics. First, mobile was a key wedge into the market – users wanted smartphone video conferencing and IT wanted cheap tablet based hardware to control conference rooms. Second, Zoom was able to leverage a freemium business model in their market to rapidly accelerate go-to-market as each Zoom user introduced the product to twenty-two new users on average simply by using Zoom for meetings.
How big is your market opportunity? Why is now the right time and what tailwinds can you harness to unlock your market opportunity?
Metrics can provide important validation for early stage startups that assure teams that they are on the right path. Enterprise startups should expect every investor to diligence basic operating and financial metrics. Here are some quick guidelines for Series A:
Unfortunately, these metrics are often lagging indicators or not indicative of future success. Thus, at Emergence we focus on sub-metrics that are predictive indicators of the future. Here are a few examples of predictive indicators we diligence:
■ Time spent in product: We want to see an upward trend and we benchmark versus similar products.
■ Engagement frequency: Weekly active user % / monthly active user % > 50%
■ NPS: 40+ (Gusto was 60+ when we invested)
■ Pipeline Health: Win rates > 25%; > 3x weighted average coverage; increasing pipeline with steady CPL
■ Sales Team Velocity: Ramped quota attainment vs. expectation > 80%; new rep ramp time improving
■ Customer Cohorts: We look at engagement and revenue retention. In general, newer cohorts should perform better than older cohorts, larger customer cohorts should outperform smaller customer cohorts and customers with multiple products should beat one product customers.
We invested in sales engagement platform SalesLoft only months after they launched their platform (and before real revenue traction). We identified three key metrics that were off the charts: one, users were spending more time in SalesLoft than Salesforce and their corporate email combined; two, SalesLoft customer cohorts showed increasing retention rates over time and size of customer; and three, SalesLoft could concretely show end customers that they were creating more pipeline using SalesLoft in the 90 days post-implementation versus the 90 days prior to SalesLoft. So even though SalesLoft did not meet the criteria for the traditional metrics, we were able to build unanimous enthusiasm to bet early on an amazing team.
What product strategy and go-to-market assumptions have you proven with data and how can you scale what’s working today into a repeatable machine?
Iconic companies that stand the test of time must have a moat – a deep defensive trench that protects their core business from disruption and competition. We have identified the three types of moats that are most effective for enterprise cloud companies: network effects, platform of record, and proprietary data/intelligence.
True network effects are incredibly rare but extremely powerful. Project44 is a logistics network that enables freight shippers like General Electric and freight carriers like FedEx to connect via one API platform integration. Every shipper and every carrier that joins the network increases the value to every other member by expanding the network’s reach. As a result, project44 has grown into the dominant data platform for logistics while experiencing less than 1% lifetime churn.
When we invested in Salesforce in the early 2000s, we had no idea that Salesforce would evolve from a system of record for sales data into the platform of record for customer data that it is today. Salesforce’s true moat is created by the hundreds of other software providers that have built integrations into Salesforce’s platform. These integrations and the resulting workflows that customers build on top of the platform are now nearly impossible for competitors to replicate.
The final moat is proprietary data and the resulting intelligence (particularly for AI companies). For example, our investment in AI recruiter Mya was based on the incredible data moat they were building. Mya’s conversational AI powers millions of annual hiring conversations (in multiple languages) for over 120 of enterprise customers. Each conversation and outcome trains Mya and pushes the AI engine further ahead of competitors who have less proprietary data.
What is your long term moat?
We meet hundreds of amazing startups each year. Many of them meet our criteria for the first 4 M’s and would make solid investments. However, at Emergence we want to invest our time and capital partnering with exceptional teams going after truly world-changing opportunities. That’s why we look for what we call the Emergence factor (or M-Factor for short). The M-Factor is the unique attribute of a startup that makes their success an inevitablity. The M-Factor can be a mind meld with an entrepreneur’s vision where you just know their future vision is inevitable (like our investment in Aaron Levie of Box). It can be when you know that a startup’s value proposition is so strategic that it will command a 50x multiple because an incumbent will HAVE to buy it (like our investment in Yammer). It can be a unique channel partnership or unique source of demand generation that creates an unstoppable go-to-market engine (like our investment in Doximity).
What is your M-Factor that will catapult your startup’s vision into an inevitable conclusion?
At Emergence, we aspire to be the most important partner to companies that change the way the world works. While there’s no one-size-fits-all recipe for success, we’ve found our 5M’s to be a powerful predictor of success.
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