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SaaS in 2021 and Emergence Capital's Deep Collaboration Thesis

ACQ2 Episode

March 5, 2021
March 5, 2021

Emergence Capital's Jake Saper returns to the LP Show to talk 2021 "state-of-SaaS" and Emergence's Deep Collaboration thesis. We cover how Figma changed the game for embedded collaboration within work tools, and why this theme represents a deep vein that Emergence is investing behind with companies like Ironclad and Jake's latest investment in Maze. Plus we cover the impact of the Zoom investment (undeniably one of the greatest venture investments of all time) on Emergence as a firm, and why investing in your partnership through coaching, peer groups and simply prioritizing dedicated time together is just as important after big successes as before.

Emergence’s Deep Collaboration thesis: 

Peer group resources Jake recommends for entrepreneurs:



We finally did it. After five years and over 100 episodes, we decided to formalize the answer to Acquired’s most frequently asked question: “what are the best acquisitions of all time?” Here it is: The Acquired Top Ten. You can listen to the full episode (above, which includes honorable mentions), or read our quick blog post below.

Note: we ranked the list by our estimate of absolute dollar return to the acquirer. We could have used ROI multiple or annualized return, but we decided the ultimate yardstick of success should be the absolute dollar amount added to the parent company’s enterprise value. Afterall, you can’t eat IRR! For more on our methodology, please see the notes at the end of this post. And for all our trademark Acquired editorial and discussion tune in to the full episode above!

10. Marvel

Purchase Price: $4.2 billion, 2009

Estimated Current Contribution to Market Cap: $20.5 billion

Absolute Dollar Return: $16.3 billion

Back in 2009, Marvel Studios was recently formed, most of its movie rights were leased out, and the prevailing wisdom was that Marvel was just some old comic book IP company that only nerds cared about. Since then, Marvel Cinematic Universe films have grossed $22.5b in total box office receipts (including the single biggest movie of all-time), for an average of $2.2b annually. Disney earns about two dollars in parks and merchandise revenue for every one dollar earned from films (discussed on our Disney, Plus episode). Therefore we estimate Marvel generates about $6.75b in annual revenue for Disney, or nearly 10% of all the company’s revenue. Not bad for a set of nerdy comic book franchises…

Season 1, Episode 26
LP Show
March 5, 2021

9. Google Maps (Where2, Keyhole, ZipDash)

Total Purchase Price: $70 million (estimated), 2004

Estimated Current Contribution to Market Cap: $16.9 billion

Absolute Dollar Return: $16.8 billion

Morgan Stanley estimated that Google Maps generated $2.95b in revenue in 2019. Although that’s small compared to Google’s overall revenue of $160b+, it still accounts for over $16b in market cap by our calculations. Ironically the majority of Maps’ usage (and presumably revenue) comes from mobile, which grew out of by far the smallest of the 3 acquisitions, ZipDash. Tiny yet mighty!

Google Maps
Season 5, Episode 3
LP Show
March 5, 2021


Total Purchase Price: $188 million (by ABC), 1984

Estimated Current Contribution to Market Cap: $31.2 billion

Absolute Dollar Return: $31.0 billion

ABC’s 1984 acquisition of ESPN is heavyweight champion and still undisputed G.O.A.T. of media acquisitions.With an estimated $10.3B in 2018 revenue, ESPN’s value has compounded annually within ABC/Disney at >15% for an astounding THIRTY-FIVE YEARS. Single-handedly responsible for one of the greatest business model innovations in history with the advent of cable carriage fees, ESPN proves Albert Einstein’s famous statement that “Compound interest is the eighth wonder of the world.”

Season 4, Episode 1
LP Show
March 5, 2021

7. PayPal

Total Purchase Price: $1.5 billion, 2002

Value Realized at Spinoff: $47.1 billion

Absolute Dollar Return: $45.6 billion

Who would have thought facilitating payments for Beanie Baby trades could be so lucrative? The only acquisition on our list whose value we can precisely measure, eBay spun off PayPal into a stand-alone public company in July 2015. Its value at the time? A cool 31x what eBay paid in 2002.

Season 1, Episode 11
LP Show
March 5, 2021

6. Booking.com

Total Purchase Price: $135 million, 2005

Estimated Current Contribution to Market Cap: $49.9 billion

Absolute Dollar Return: $49.8 billion

Remember the Priceline Negotiator? Boy did he get himself a screaming deal on this one. This purchase might have ranked even higher if Booking Holdings’ stock (Priceline even renamed the whole company after this acquisition!) weren’t down ~20% due to COVID-19 fears when we did the analysis. We also took a conservative approach, using only the (massive) $10.8b in annual revenue from the company’s “Agency Revenues” segment as Booking.com’s contribution — there is likely more revenue in other segments that’s also attributable to Booking.com, though we can’t be sure how much.

Booking.com (with Jetsetter & Room 77 CEO Drew Patterson)
Season 1, Episode 41
LP Show
March 5, 2021

5. NeXT

Total Purchase Price: $429 million, 1997

Estimated Current Contribution to Market Cap: $63.0 billion

Absolute Dollar Return: $62.6 billion

How do you put a value on Steve Jobs? Turns out we didn’t have to! NeXTSTEP, NeXT’s operating system, underpins all of Apple’s modern operating systems today: MacOS, iOS, WatchOS, and beyond. Literally every dollar of Apple’s $260b in annual revenue comes from NeXT roots, and from Steve wiping the product slate clean upon his return. With the acquisition being necessary but not sufficient to create Apple’s $1.4 trillion market cap today, we conservatively attributed 5% of Apple to this purchase.

Season 1, Episode 23
LP Show
March 5, 2021

4. Android

Total Purchase Price: $50 million, 2005

Estimated Current Contribution to Market Cap: $72 billion

Absolute Dollar Return: $72 billion

Speaking of operating system acquisitions, NeXT was great, but on a pure value basis Android beats it. We took Google Play Store revenues (where Google’s 30% cut is worth about $7.7b) and added the dollar amount we estimate Google saves in Traffic Acquisition Costs by owning default search on Android ($4.8b), to reach an estimated annual revenue contribution to Google of $12.5b from the diminutive robot OS. Android also takes the award for largest ROI multiple: >1400x. Yep, you can’t eat IRR, but that’s a figure VCs only dream of.

Season 1, Episode 20
LP Show
March 5, 2021

3. YouTube

Total Purchase Price: $1.65 billion, 2006

Estimated Current Contribution to Market Cap: $86.2 billion

Absolute Dollar Return: $84.5 billion

We admit it, we screwed up on our first episode covering YouTube: there’s no way this deal was a “C”.  With Google recently reporting YouTube revenues for the first time ($15b — almost 10% of Google’s revenue!), it’s clear this acquisition was a juggernaut. It’s past-time for an Acquired revisit.

That said, while YouTube as the world’s second-highest-traffic search engine (second-only to their parent company!) grosses $15b, much of that revenue (over 50%?) gets paid out to creators, and YouTube’s hosting and bandwidth costs are significant. But we’ll leave the debate over the division’s profitability to the podcast.

Season 1, Episode 7
LP Show
March 5, 2021

2. DoubleClick

Total Purchase Price: $3.1 billion, 2007

Estimated Current Contribution to Market Cap: $126.4 billion

Absolute Dollar Return: $123.3 billion

A dark horse rides into second place! The only acquisition on this list not-yet covered on Acquired (to be remedied very soon), this deal was far, far more important than most people realize. Effectively extending Google’s advertising reach from just its own properties to the entire internet, DoubleClick and its associated products generated over $20b in revenue within Google last year. Given what we now know about the nature of competition in internet advertising services, it’s unlikely governments and antitrust authorities would allow another deal like this again, much like #1 on our list...

1. Instagram

Purchase Price: $1 billion, 2012

Estimated Current Contribution to Market Cap: $153 billion

Absolute Dollar Return: $152 billion

Source: SportsNation

When it comes to G.O.A.T. status, if ESPN is M&A’s Lebron, Insta is its MJ. No offense to ESPN/Lebron, but we’ll probably never see another acquisition that’s so unquestionably dominant across every dimension of the M&A game as Facebook’s 2012 purchase of Instagram. Reported by Bloomberg to be doing $20B of revenue annually now within Facebook (up from ~$0 just eight years ago), Instagram takes the Acquired crown by a mile. And unlike YouTube, Facebook keeps nearly all of that $20b for itself! At risk of stretching the MJ analogy too far, given the circumstances at the time of the deal — Facebook’s “missing” of mobile and existential questions surrounding its ill-fated IPO — buying Instagram was Facebook’s equivalent of Jordan’s Game 6. Whether this deal was ultimately good or bad for the world at-large is another question, but there’s no doubt Instagram goes down in history as the greatest acquisition of all-time.

Season 1, Episode 2
LP Show
March 5, 2021

The Acquired Top Ten data, in full.

Methodology and Notes:

  • In order to count for our list, acquisitions must be at least a majority stake in the target company (otherwise it’s just an investment). Naspers’ investment in Tencent and Softbank/Yahoo’s investment in Alibaba are disqualified for this reason.
  • We considered all historical acquisitions — not just technology companies — but may have overlooked some in areas that we know less well. If you have any examples you think we missed ping us on Slack or email at: acquiredfm@gmail.com
  • We used revenue multiples to estimate the current value of the acquired company, multiplying its current estimated revenue by the market cap-to-revenue multiple of the parent company’s stock. We recognize this analysis is flawed (cashflow/profit multiples are better, at least for mature companies), but given the opacity of most companies’ business unit reporting, this was the only way to apply a consistent and straightforward approach to each deal.
  • All underlying assumptions are based on public financial disclosures unless stated otherwise. If we made an assumption not disclosed by the parent company, we linked to the source of the reported assumption.
  • This ranking represents a point in time in history, March 2, 2020. It is obviously subject to change going forward from both future and past acquisition performance, as well as fluctuating stock prices.
  • We have five honorable mentions that didn’t make our Top Ten list. Tune into the full episode to hear them!


  • Thanks to Silicon Valley Bank for being our banner sponsor for Acquired Season 6. You can learn more about SVB here: https://www.svb.com/next
  • Thank you as well to Wilson Sonsini - You can learn more about WSGR at: https://www.wsgr.com/

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Transcript: (disclaimer: may contain unintentionally confusing, inaccurate and/or amusing transcription errors)

Ben: Hello Acquired Limited Partners and welcome to the latest episode of the LP show. We have repeat superstar guest Jake Saper, Partner at Emergence Capital, with us today. We’re going to talk deep collaboration. We’re going to talk enterprise SaaS. We're going to talk about a lot of things, but before we do, I just want to thank Jake.

David: Wait, I think we've got an emergency update though since the last pod. Jake is no longer a Partner at Emergence. He is a General Partner at Emergence, big congratulations.

Jake: Thank you.

David: Get a party parrot going.

Jake: That's right. Thank you.

Ben: Jake, I think we did your background last time so you can do it yourself this time. Give us your quick bio. You're a General Partner at Emergence. Tell us about before, tell us about some of the companies you're involved with, and then we'll dive in.

Jake: Cool. I'm from Austin, Texas which is super relevant today because we're recording this podcast in a week that Texas was battered by a terrible winter storm. I had a lot of issues recovering. and my thoughts are with folks there. 

I did consulting out of college. I did actually a lot of energy consulting, which is relevant to what's going on in the world. I then did a startup that was developing big solar power plants in India and Africa, which was a wild ride. I came back to the states and met David in California. I did an MBA in environmental sciences degree out here and then transitioned to venture. My first gig was at Kleiner Perkins in their green growth fund, and I joined Emergence about seven years ago. I've been here ever since.

David: Gosh, we’re getting old, seven years since we graduated.

Jake: We’re getting old.

Ben: Jake, what are some of the companies that Emergence has been involved with and then you personally?

Jake: Sure. I guess super, super high level, quick thing on Emergence. The most important thing to know about our firm is that we're a very focused firm. We’re focused both in terms of what we invest in and also in terms of how we invest. On the what side of things, all we do is B2B. It’s all we've ever done, it’s all we ever will do. The very first thesis that the firm ever had when the firm was started was that software would move from on-premise to the cloud. That thesis has obviously played out nicely. The very first bet the firm made in 2003 was in Salesforce.

Ben: Huge if true.

Jake: Huge if true. The true part has been great, and we've been incredible beneficiaries of it. I will actually talk about our most recent thesis and how there have been some negative implications I think of the rise of these applications and we’re now trying to address them. A little teaser for what’s to come. We started with horizontal SaaS investing. 

The second big thesis was this whole concept of building software for a specific end-user and a specific industry is going to be a big deal. People call it vertical SaaS, we call it industry cloud, and we back Veeva systems back in the mid to late 2000s doing that.

David: You guys were the only investor pre IPO, just a series A straight IPO. Times were different.

Jake: We were. Times were different. They raised $6 million from us and they spent about $3 million of it. It's been an amazing journey ever since. I was actually looking back, and this is relevant to what's changed even from the time that we've had this conversation a year and a half ago to now. They went public at about I think it was a $3 billion valuation roughly around there in 2013. When we were talking in 2019, I think they were at about a $17 billion valuation. They're now a $48 billion valuation. I will share my thoughts on what that means for the broader market in a bit.

Ben: Catch us up on other more recent Emergence investment, Zoom. I hear that’s done well.

Jake: Yes. Zoom is a video conferencing platform that has become an important part of how the way the world works. We were the first institutional investors in Zoom. We invested in 2014 and have been incredibly lucky to be on this journey with Eric and his team. Frankly, incredibly humbled by what he's built and by him. I mean, the man is just an unbelievably humble and kind 

Ben: Just to connect an interesting dot, you just mentioned that Veeva only spent $3 million of the $6 million that they raised. Isn’t there a similar story with Zoom?

Jake: There is, yeah. We invested $20 million in Zoom. It was the largest check we've ever written and they never spent it. When we invested, they were profitable, and they stayed profitable. They did raise one more round in capital before they went public. But they didn’t spend that either. They’ve been profitable almost since their founding.

David: You’ve led some great investments for the last couple of years at Emergence. Give us a quick rundown of the Saper portfolio currently.

Jake: The Saper portfolio, sure. I am lucky to work with a bunch of great founders. A few of them include a guy named Rick Nucci who is the CEO of Guru. Guru is a knowledge management platform. There's also a company that we just invested in that we haven't yet formally announced but may be announced by the time we launch this podcast called Maze, which I'm excited to talk to you guys about.

David: You wrote about it in your deep collaboration thesis.

Jake: I did.

David: Were you working on the investment while you were writing the memo, or did it come out of writing the post?

Jake: Honestly, it was an iterative process. In talking to the CEO, he helped inform the development of this thesis. The reality is that's the way we develop a thesis in Emergence, which is we try to think about where the world is headed, but a lot of it comes down to spending a tremendous amount of time with our founders and understanding from them and from much more ground-level perspective—what is going on in this business? What are some phenomena that are applicable not just to this business but to other businesses more broadly?

I mentioned there are two ways we're focused as a firm. The first is in terms of what we invest and the second is in terms of how we invest. On the how side of things, we make very, very few investments. We’re very, very focused. That allows us to spend a ton of time with our founders, which is really, really important to us.

David: Do you guys do like six, seven a year as a firm?

Jake: Six, seven a year, and there are six partners a year. Each of us on average makes about one investment per year, which means that we have the bandwidth to go deep and try to really help our portfolio companies. It's very much a go-big-or-go-home type strategy and allows you to really understand the businesses that you're involved with. 

And also, frankly, take out some of these insights to say, hey, back to a thesis I talked about in the last podcast around this concept of coaching networks, we understood that in Textio—which is focused on augmented writing initially the HR space—there are some analogies that are applicable to places like Guru which is knowledge management. Trying to understand the ways in which those things you may be able to tie the dots together has been an important part of our thesis throughout the work.

Ben: What does Maze do?

Jake: What Maze does is democratize the product research process. What I mean by that is think about what Figma did for design. Before Figma, there was Adobe focused on designers, building software for designers, and there are obviously others as well but just use Adobe as the giant gorilla. Figma’s insights or unlock was to say let's not focus on designers. Let's focus on design and build a product that allows lots of people—everyone who is involved in the design process—to work on and collaborate on a design in one place.

That core unlock brought lots more people into the design process. It helps iterate much more quickly. Arguably, the products that are being produced are better. Maze is trying to do the same thing in product research. It used to be that product research was either done by user researchers that in some cases, would actually get people to come in behind a two-way mirror and watch them understand what they're doing, try to record et cetera.

Ben: I attended these sessions at Microsoft. I was in the booth watching people trying to hunt, pack, and find the icon on Office for iPad. You get like six data points. It takes a lot of time. It's expensive, and you're like, of the six people, how many liked your product?

Jake: It's not a scalable process. You can imagine it's even less scalable in a world of distributed work. What Maze is trying to do is to make that entirely scalable and also open to not just user researchers but to PMs, the product marketers, and to anyone else that touches the product research process. Basically what they have is a product that plugs into all of the prototyping tools, the Figmas, the Adobes, and everyone else, and the world and allows you to turn those into what are called Mazes.

You enable a user to go through a prototype and understand quantitatively what's going on. You also have survey-like functionality similar type form where you can also ask questions and gather data that way. It all comes out in this beautifully quantitative report that is very specifically structured to allow for collaboration. This is where the deep collaboration concept comes in.

Ben: Listeners, you should know the reason why we're getting Jake to tell us all this so early isn't just like, hey, Jake. Come promote your portfolio companies. This all strings together in a pretty interesting thesis that deep collaboration that we're diving into today.

Jake: Exactly. Happy to dive deeper on that now.

David: Yeah, let's just do it. Let's go.

Jake: Let me set the context for it. We went really deep on Maze, but let me pull out and explain where I think this fits in and the history of enterprise software. We'll go super far back out and then we can dive back in.

David: It’s like an Acquired episode.

Jake: It's like an Acquired episode. This is the research section. There are two things that I think are driving this concept, I will define it in just a second. Otherwise, I haven’t properly defined it yet. The first thing that’s happened is that there's been a massive proliferation of both productivity applications and collaboration applications. We are in part to blame for that. We funded a lot of these companies and a lot of our competitors have as well.

There's now it's just a tremendous amount of places that you go to get work done and a tremendous amount of places you go to talk about the work that you're doing. That has created a lot of information fragmentation.

David: You’re talking about the difference between PowerPoint or Excel and Slack.

Jake: Yeah, that is an example.

David: You do the work in one thing then you talk about it somewhere else.

Jake: That's a great example, or Salesforce and Slack before the acquisition, or wherever the places that you do the work. You're in Workday, you're working on some comp thing, and then you go to Zoom to have a conversation with someone else about it. Or you call them on the phone, WhatsApp, you text, you Slack, you Line, or you whatever.

Ben: Right. Productivity and communication have become bifurcated.

Jake: They’ve become bifurcated and increasing the odds of one another. The implication to that is that it's really hard to be in flow. This concept, I'm a musician and I get in my flow state when I'm generally in the music world. You can also be in the flow state while you're working. If you're constantly being interrupted and having to go back and forth. You did this thing here, you got to tell somebody about it here, you forgot exactly which channel you used to tell this person about, you want to go see what this other person said, but that was over a phone call. It's really hard to be in flow and actually get work done.

Not only has there been a proliferation, but the second thing that’s happened obviously is that we've had this very sudden and abrupt shift to remote work. Before, collaboration software really existed to help transmit information. There was always more communication. It was like task updates. It was much lighter weight because you did the deeper harder collaboration in person. 

You’d use your collaboration tools to exchange information, but when you're actually going to try to build something together, whatever that thing is, you would default to doing that harder build in person. The tooling didn't actually need to be as robust as I think it now needs to be as a result of that change.

Ben: Not to mention, the expectations have just changed. As soon as Google introduced live co-authoring in Google Docs, there was this notion of—I remember being at Microsoft, working on Word at this point and being like, wait, so is that everyone's expectation now? That we're not treating versions back and forth, but people need to be able to do work and collaborate at the same time? Obviously, this is over a decade ago, so this is just like a hint of what's to come. 

Even aside from remote work, it did feel like as the tech stacks got more and more sophisticated and we were able to do things like live co-authoring, you opened the door for, is everyone expecting to be able to collaborate or communicate in the medium where they're doing their work everywhere now? How fast will that world arrive?

Jake: Then there's a big question around when you have a platform like Google Docs or even O365 where you are trying to pair together collaboration and productivity in one place, you still don't necessarily know where to go to collaborate and work on a specific task because those are generic platforms by definition. Those are platforms that exist to do everything, not to do a specific job.

That actually leads me to the definition of deep collaboration. Here's how we're defining deep collaboration, which is that deep collaboration refers to software, which combines productivity and collaboration in one place to get a specific job done. The combination, the embedding of collaboration within productivity is a critical part of it, and the job-to-be-done concept is a critical part of it.

Ben: But Jake, vertical markets are smaller than horizontal markets, what do you mean? Come on, these are smaller opportunities for people chasing if it's not a big, broad, horizontal platform.

Jake: Yes, that's right. As you probably recall, the initial market size of Veeva was $500 million. The good news is great entrepreneurs find ways to make markets bigger, which is probably what you're alluding to.

Ben: Yup.

Jake: We have a preference to back-focused founders—starting in a narrower spot and then expanding from there. But I think this concept of switching from persona-based software to job-to-be-done-based software is a really important one that is only just now getting its due. Obviously, the job-to-be-done framework has been around for a while. Clay Christensen has very famously talked about it a bunch. But in terms of people building software, I think we still think about building software for the buyer and the user being the same group, if that makes sense.

It's like I’m building software for FP&A. I'm going to build software for the FP&A user, FP&A is going to buy it and that's going to be great. I'm going to build software for lawyers, for the GC. GC will be the people using it and that's just what's going to happen. The great challenge with that, obviously, is that the best work gets done cross-functionally. If you're an FP&A person, you have to talk to sales ops and you have to talk to a bunch of different other places to get information and share information to get to a great plan that everyone's on board with.

If you're a GC, a general counsel, you have to collaborate with all the other functions that are doing contracts or anything else in the organization to actually get to a great outcome. The idea that we build software with just the lens of the functional persona in mind really limits the ability to collaborate, and that's why this concept of jobs-to-be-done is a core part of the deep collaboration concept if you will.

David: To me, as a relative outsider to this space, it feels like Figma really was the first company that—knowingly or not—proved this thesis. Adobe software was for designers, Figma is design. Everybody in an organization uses Figma. Not everybody in an organization uses Photoshop.

Jake: I think you're right, David. My own view is that Figma is the first breakout company to demonstrate the possibility of this. What we've been describing internally is we call this dropping the ER. What that means is basically going from focusing on the designer to focusing on design. Going from focus on user researchers to research. Whatever the thing that you were doing, dropping the persona mentality and thinking about the job-to-be-done. It really requires building the software with a new lens.

First of all, you have to make it much easier to use because you want lots of different functions to be able to use it. You, by definition, need collaboration built-in. It wouldn't work if collaboration was scattered a bunch because you're already trying to be cross-functional within the productivity application. There's a bunch of business model applications to this that we're just now starting to think through. Things like pricing. You want to price software differently.

Ben: If you were pitching this to me as a venture capitalist, not this thesis but an idea predicated on this thesis, one piece of push back I might have is, this go-to-market strategy is going to be a nightmare. Who's your buyer? Do you have to get approval from three different people to buy? Is this a complicated sale? In the worst cases, yes, but I imagine in the best cases that you actually use all that internal enterprise momentum to get a deal done with a company. 

How do you think about optimal ways to do a go-to-market strategy wherein deep collaboration and working cross-functionally that's actually an asset for the company making the software in their go-to-market rather than a hindrance?

Jake: Ben, you're getting to the really good level 2 or level 3 questions here. You're clearly a talented venture capitalist. It sounds like I'm being sarcastic, but you're getting to really good questions. 

Candidly, we're still trying to figure it out. We're still pretty early in this deep collaboration thing. Figma, I think as we said, is the best example. There was a major acquisition that took place or is taking place that we can talk about, I think, is an example of this as well. There's a bunch of startups, but it's still early days to be clear.

My hypothesis—and we've invested in a few of these companies so I can tell you just from having to learn from their go-to-market models—is that the buyer will be the person who feels the most pain from this task not being done well. That being said, it's almost like there is this account-based marketing approach of figuring out who all the various people that care about this. 

I'll give you an example of another company that we haven't yet talked about called Ironclad. Ironclad is in the legal contracting space. I think it's another great example of a deep collaboration company. They basically provide software that allows companies to draft and collaborate on contracts internally and soon externally with counterparties as well and collaborate with counterparties externally. 

Obviously, the general counsel is a really important persona here because they are the keeper of the contracts. But if you're a salesperson and you're trying to contract done quickly and in the pre-Ironclad world you did a lot of Slacking, emailing, texting, or bugging your lawyer to get back to you and say please approve this. I want to get this deal done before the quarter closes, et cetera. Now, you have this software that actually passes down the authority to allow you to do the contract within certain parameters yourself. 

The salespeople are going to love this. In fact, when I was doing diligence on Ironclad, I talked to one of their big customers and one of my favorite quotes was actually from a sales-enablement person who said, "Ironclad is the most effective piece of sales enablement software we bought the past three years." This wasn't the buyer ultimately. The person who is paying for it was the GC. But because it was speeding up sales deals because of this cross-functional collaboration.

David: That's such a salient example. People on sales—their comp depends on this. If they can do collaboration through this software, they're probably willing to do whatever to get the money. There was no way to do that before.

Jake: They're highly incentivized to use the hell out of this and they do. In terms of usage metrics, which is another way to think about how to track the growth and success of these deep collaboration companies, within Ironclad, we have an order of magnitude more usage outside of the general counsel function than we do inside it. 

Part of that is because there are just a lot more people outside of the general counsel organization. But what it tells you is that this thing has really become a cross-functional collaboration tool around a specific job-to-be-done. That’s the vision that we’re trying to think through with—

David: Yeah. Pre-Ironclad, nobody outside of legal was banging on contracts.

Jake: That's right. Extending this metaphor back to the company Maze that we mentioned before in the product research space, pre-Maze—and Maze is still relatively early in its journey—user research was either done again by user researchers. Sometimes the PM would do it, but in most cases, it actually just didn't get done. Basically, the PM would come up with the idea and say I think this is great and maybe they call some friends and be like, what do you think? I think this is cool.

Then they would get some engineers to start building prototypes. Engineers would build and then you get it to an MVP. Then you get something you’ve actually built out into the world, and then you have to wait until that moment to actually get feedback. But think about the countless engineering hours being wasted doing that because you're not enabling lots of people to test really easily and collaborate on the results.

Ben: Right, or the big company example of this—again, going back to my Microsoft days—is like I was never setting up the user research studies. Number one, I'm not a practitioner so I don't know the right way to do it. Number two, my job function at Microsoft as a PM wasn't one that gave me access to our pool of people who would come in to test stuff. If I wanted to test something, I would have to go to the researchers and say hey, can you do bandwidth to spend a couple of weeks and do a study on this thing?

I could of course participate, but they had to own the process. I don't know that much about the company, but I have to imagine what they're enabling people to sort of directly do user research themselves. Obviously, not like putting the user-researcher out of work. I think there's a negative connotation there, but more like enabling them to increase their bandwidth by letting other people commission the stuff and get it done faster and more directly.

Jake: Ironclad doesn’t put a GC out of work. It just makes the GC way more effective at their job and spreads their own expertise throughout the organization. The same concept of the user researcher around Maze. In talking with a bunch of user researchers, one of the key frustrations they have is they do all this work in a black box, they put it all together in a PowerPoint, and they try to get people to read it. But people don’t necessarily adjust it, they're frustrated because they’ve done all this work, and the PM goes and does whatever they want to do anyway.

People, when they take ownership over something when they actually touch it themselves and create, that's when they get deeply integrated into the process. If you actually give the PM the ability to go out and actually design a survey and prototypes or what have you, actually send those out to users to get feedback back, and then allow the user-researcher to comment and ask questions and perhaps amend the next version of Maze you do. The product marketer comes in and says, how should we think about pricing this? Maybe for the next version, let's add a pricing page, get feedback there. Then you're actually able to iterate on this cohesive product-building process versus doing it in silos.

Ben: One place that my mind goes is if you have to build all these additional views to the same source of truth data and the software for the non-designer, for the non-general counsel, and there's not one more, there's five more for all the different people with job functions—I'm thinking about a company I'm involved with, Iteratively. Of course, they have the Iteratively software that comes down through your IDE and the engineer it interacts with. There's the dashboard that the PM uses to define the tracking events. Then there's the analyst's view where they actually can see the output and the real-time data that's coming through.

Does this just raise the bar? Is this software harder to build if it has deep collaboration because it requires more code, requires more views, requires more designer time to understand all the different views into the software?

Jake: It’s such a good question, Ben. I'm serious when I say that you're asking such good questions. I think there are three different ways you can build this type of software. Two of them leverage core infrastructure from other places, and the third approach is what we're calling Full Stack native. I'll start with Full Stack native because it is easier to understand. 

Figma, I would argue, is a Full Stack native. Now, they did leverage WebGL as a really important technology enabler to build what they needed to build, but Figma created the productivity software themselves, meaning they built from scratch a design tool and all of the collaboration functionality they built themselves as well.

They didn't take Adobe XD, Photoshop, or anything else as the core productivity tool and then add collaboration around it. They said we're going to do the whole thing ourselves, so kind of Full Stack native. That term, I realize, is overly broad because I'm sure that they've used other people's code and other things and open source to do this, but ultimately, the two core elements of productivity and collaboration, they built themselves. 

Naturally, the other two ways to think about this, as you can imagine, are companies that leverage existing communication infrastructure and then build job-specific productivity around it, and then companies that leverage existing productivity infrastructure and then add collaboration functionality around it.

Ironclad, we did an example of the latter. Ironclad is built around Microsoft Word. Ironclad came to the belief that lawyers love Microsoft Word, it’s pushing a rock up a hill to try to get them into some—

David: You pry it from their cold dead fingers.

Jake: Yeah, exactly. Trying to get them to use this new whiz-bang word processor that they've built is a step too far. Even trying to get them to use Google Docs, that’s just a step too far because this is just how lawyers work, at least for the foreseeable future. The CEO, Jason, was a lawyer himself, so he had that empathy as he was building this. They built it around Microsoft Word, and they did two really important things. 

The first thing they did was they added job-to-be-done specific productivity functionality around the word wrapper. Word is obviously not built for contracting in particular, so they built a bunch of stuff around it, and then they added a bunch of collaboration stuff around it.

They added the ability to push down on certain approvals and permissions to certain types of people, a lot of people to @mention, and really deep commenting. Now, they're moving into—and this is where the business I think gets massive if they can succeed in doing it—external collaboration where you actually can collaborate with your counterparty in the same document. You can see all the history so you don't have to go back to the random phone call, the text message, the email, and the whatever.

Ben: These red lines are dipped off of two turns of the docs ago, not one turn of the docs ago. I don't understand what changed.

Jake: Imagine if you had a job-to-be-done built software that had all the productivity and all history of collaboration in one place, what a better experience it would be to do contracts. That's the vision for that. That is a good example of this type of software I'm trying here that's leveraging existing productivity infrastructure to build deep collab. 

The last category is companies that leverage existing communication infrastructure and build job-to-be-done specific productivity around it. There is a company we recently invested in that is kind of an example of that category called ClassEDU. What Class is is a virtual classroom built around Zoom’s collaboration functionality.

Ben: Is it one of the early Zaps like with their new app platform?

Jake: Yes and they've rebranded it to Zoom Apps. It turns out Zaps was less popular.

Ben: Not to mention taken.

Jake: Yeah. Not to go too deep into the Zoom stuff, although I'm happy to if you guys want. There are two ways you can build around Zoom. You can build a Zoom app, which is something that sits inside of Zoom, or you can build on Zoom's SDK which is pulling Zoom’s infrastructure into your own application. There are actually great examples of both within the deep collab space. 

On the SDK side of things, CLassEDU is taking the Zoom SDK, so you click into the Class application, not to the Zoom application. It's built around the Zoom, so you get a lot of the benefits of that natively, and you have your account and everything else. It's a virtual classroom environment. It has all the jobs-to-be-done specific functionality you need there around attendance, quizzes, and all the things that are relevant to teachers that they're bootlegging today. 

Today, my understanding is that a lot of teachers are using Google Classroom for the productivity side of things to keep track of assignments and all the rest of it. Then they're using Zoom to the collaboration side of it.

David: Mmhmm is a similar story, right?

Jake: It is, but the reason why Mmhmm doesn't fit in this category is it's not job-to-be-done specific. That's more of a horizontal play. Another example of this would be a company from High Alpha, our friends out there. There is a company called Luma, which is building a Zoom application on top of Zoom. The job-to-be-done they're trying to do is to help people interview more effectively, and also to help people collaborate cross-functionally in the interview process more effectively

The idea being that you interview today, I talk to you, I talk to David, David interviews me, and then I go to be the same thing to Ben, the same thing to Tiffany, and the same thing to all the people I’m meeting through the process. It’s a bad experience for the candidate, a bad experience for the company.

Ben: I think the way we do this at Pioneer Square Labs is we're going to interview over Zoom because we're all remote right now, and then we're all going to go into Greenhouse to enter our feedback. The place where the interview is happening—the productivity—is completely disconnected from the place where the collaboration is happening.

Jake: You can imagine the feedback you're putting to Greenhouse may not be the world's best and most comprehensive feedback because it's not capturing the granular sensor data that it would if it were in Zoom. Imagine if you could actually flag the 30 seconds of the interview you thought were most relevant. You want to make sure David listens to before he interviews me. Imagine if there was a list of questions that David was supposed to cover, David only covered four of them, and there’s this big outstanding fifth question that he was supposed to but didn't cover. Software realizes that that wasn't talked about because he has an LP built-in. It tells Ben, this is the first thing you have to ask for. 

It allows you guys to collaborate more effectively and ultimately, hopefully, reduces the bias of hiring because you actually have the snippets from the conversation. You can go back and David says, Jake seems a little shifty, and then Ben is like, I don't know. I like him. I don't know what you're talking about, and then you could go back in both look at it and hopefully reduce a bit of bias in the hiring process.

Ben: That happens all the time, first of all. This brings up a similar thing to what you talked about last time you were on the show, which is machine learning enables network effects for the first time in the enterprise. In a way, that network effects were only sort of available to the Facebooks and Twitters of the world before. 

What I'm sort of thinking of here is we've all come to realize by now the scarce resource in machine learning is not the algorithms but the data. If you only have the set of data of productivity or you only have that set of data of collaboration, machine learning can only be so useful. If I'm going to try and run ML on my feedback in Greenhouse on the interview, it just doesn't have the data of what questions didn't get asked. Now that you have a more comprehensive data set, it can be a more useful application. 

Jake: Absolutely. To extend that trend of thinking to one next level, machine learning is only as good as the relevance of the data that you have entered in your data set. The challenge with generic tools—be it productivity or collaboration—is that there's a lot of irrelevant data within. But if you are bound to a specific job-to-be-done, you need a smaller data set to get quality insights from the machine. 

Think about the Chorus’ and Gong’s of the world that are doing this in the sales domain, because they've chosen to focus on the sales conversation, they’re gathering tremendous insight on the way those conversations take place. Tying it back to the system of record and understanding to the deal close or not the ability, for example, of Chorus to do these coaching interventions is really amazing. 

But if you think about something like Luma which has a similar infrastructure that they built around Zoom, listen to the conversation, but it's a very different job-to-be-done. The types of insights the machine will be able to draw are going to be much more relevant and much better than if it was just generic, we listen to all conversations in Zoom and give insight-type things. 

Ben: I like it. 

Jake: It's another reason why we have a bias towards being focused. The more focused you are the more effective the ML can be. There is a really important overarching question to this job-to-be-done framework, and frankly, the Deep Collaboration framework that is still an open one that we're trying to get sharp around, which is where does the job start and where does the job stop? 

Let's take Ironclad, for example. We're doing legal contracting, but there are all sorts of stuff in and around legal contracting. There's actually like the doc signature part of the legal contracting, which is kind of the very end process. There's the procurement part, which is kind of around that general space. Where does the process start and stop? I think that's kind of a moving target, and for each company, our biases start narrowly. Define the job really narrowly and then the expansion that you earn the right to do over time is into each adjacency, which is like eating more, and more of this job. 

Eventually, they'll be a logical place you stop because you become too generic, and you have the downsides of what we were talking about with being too generic. There's a very logical expansion path for a deep collaboration company in terms of expanding that job-to-be-done, as well as obviously expanding across the personas in the organization.

Ben: Anything you want to touch on in deep collaboration right now before getting into a little bit more of a broad discussion of the state of SaaS startups? I'm sure we'll circle back here. 

Jake: It's still early days in this deep collab stuff. We're still figuring it out. I think lots of people are still figuring it out. Maybe the last thing that we haven't talked about that's probably worth mentioning here is that I believe that the Salesforce acquisition of Slack is in many ways the kind of consummation of this idea. 

Whether or not they're able to pull it off, is going to be a really important question. But if you think about that it's the brain together of a core productivity set of tools and a core collaboration platform. I think part of the reason why the decision was made to make the acquisition was that Salesforce realized an increasing amount of the job-to-be-done of the sounding product was not taking place in Salesforce. All of our portfolio companies have a channel set up for each deal that they’re prosecuting. 

Ben: It's getting relegated to just be a dumber and dumber database and all the rich applications sit on top of it. 

Jake: And it's a bad experience. Setting aside if you're being a strategist for Salesforce, Slack, or anyone else, it's a bad experience for the user. If you're a sales rep and you've got to go into Salesforce to update your record, [...] track progress the deal. But then you’re actually talking about it in a completely different platform with your team, and then you may be using Slack Connect to talk to a customer directly within Slack. But all that's not being properly captured within Salesforce. There are tools that are kind of connective tissue there. But the reality is like that should all be one thing. 

Again, who knows if the integrations can actually work out the way this is envisioned. But if integration actually works out well, I think this is a brilliant move because it becomes a deep collaboration. Perhaps the largest deep collaboration platform in the world. 

David: You have several theses at Emergence that you're prosecuting at any one given time. It's not like you were only looking at deep collaboration. 

Jake: Just to repeat it. We have three priority themes at a given time, and when we want to add another one, we have to kill another one. We're trying to stay focused on having three. To be clear, deep collaboration is not yet a priority theme. We're still kind of building the conviction internally to be able to elevate to say, yeah, we think this has a lot of steam, and here's the one that we're not going to focus on as much. You're kind of getting how the sausage is being made right now. We're still figuring this stuff out. But I have a lot of excitement around it and think there's potential 

David: I love it. What are the current three priority themes?

Jake: The first one is still industry cloud, this vertical SaaS concept that continues to really dominate. The second is the deskless workforce, and the fact that 80% of the world doesn't do their work at a desk. But 95% of the software that's been built for workers is built for desk-bound workers. It’s a crazy mismatch. And the last is this coaching networks concept that we talked about last time around using machine learning to help coach workers in how to do their jobs better in real-time. With Textio, Guru, Chorus, and others being examples of that.

David: Ben touched on this a few minutes ago, vertical versus horizontal. How do you guys think about the future of breakout companies in enterprise software broadly defined when you've got something like a Figma? With an evaluation [...] environment, who knows. But people certainly believe that that can be a very, very, very large business, and it’s just focused on design. Versus a horizontal thing like a Salesforce or Zoom that have been your enormous, enormous winners at Emergence. You could think of plenty of other examples for other firms over time. 

When you're thinking about prosecuting an investment, how are you thinking about this? Are you thinking that verticals are always going to be better and so we should mostly invest in verticals, they can be bigger than you ever think? Are you thinking that there may still be use cases where a broad horizontal piece of software like a Zoom will still be an opportunity in the future? 

Jake: Yeah. The reality is that both are true. If you look at our track record, Veeva was obviously the narrow bet. Zoom was a super counterintuitive bet. At the time, I was lucky to be on the diligence team then. There were lots of platforms that existed that did video conferencing. Ultimately the connection we came to was that (a) it was actually a technology bet in the sense that the codec that Zoom had built was sufficiently better than the other codecs. It was really hard to improve codecs once you’ve started to roll, and (b) that Eric and his team were the world's best people to build it. We made this risky horizontal bet that has this potential upside.

David: Right, because you could have rewound back to 2014 and said, I think the future video is actually going to be vertical. The technology out there is good enough. If you really want to improve, you’re going to do video collaboration for specific use cases.

Jake: Yeah.

David: That turned out not to be true. 

Jake: That's a really interesting point, David. The history of our firm has been—and this is not planned because you look back and kind of rewrite—you tell the story one you look at what's happened. The first bet was Salesforce. 

Salesforce became this phenomenal horizontal platform upon which lots of vertical-specific applications, including Veeva, were built. The hope actually is that Zoom is the next Salesforce in the sense that Zoom can become a horizontal platform upon which lots of other vertical-specific applications are built. The great hope here is that Zoom becomes Salesforce in the sense that it becomes the next major horizontal platform, upon which these jobs to be done specific applications can be built. 

That's the vision with this ClassEDU company, that’s the vision with this Luma company, it’s the vision with lots and lots of companies. The whole Zoom apps ecosystem is intended to try to create those jobs-to-be-done specific applications that can leverage the horizontal infrastructure that Zoom has built. 

David: Why would you go build your own video codecs these days?

Ben: It's funny, David. Where I thought you were going with that question is sort of the Ben Thompson assertion from a couple of years ago—the end of everything. That, hey look, big techs settled. Apple’s won their corner, Google's won their corner, Facebook's won their corner. Those are going to be the big companies, those are going to be the big platforms. From here on out, we’re going to be chasing big opportunities, but not as big as those. There's not going to be another rising $2 trillion tech company that enters the arena here. Jake, what do you think about that? 

Jake: I think like it's more up in the air than it ever has been. Part of that is because of bipartisan nervousness around that status quo in Washington. We'll see how that goes. This is not a fully big thought but perhaps you'll let me talk me through it. 

If you believe it to be true that those companies will be more nervous about making acquisitions—particularly acquisitions into new markets—because of fear of backlash on the hill, then what that means is that the acquisition landscape for the second tier of companies may become actually more interesting. 

The Shopify's, Twilio's, and others in the world may actually have more ability to make interesting adjacent acquisitions because the ones that would typically go to the really big folks who are willing to pay whatever price or able to pay whatever price aren't able to because of regulatory concerns. You actually may see that second layer start to become more interesting and threatened. I'm kind of thinking out loud with that. But that could actually be an interesting dynamic. 

David: When I think back to many years ago when I was an institutional VC, that kind of Ben Thompson thinking of big tech is settled, had settled in. You were playing for, yeah, you could get IPOs occasionally if you're really, really lucky. But the reality is most of your companies weren’t going to get bought. You're playing for one of the big players to buy them for a lot of money. 

But I feel like what's happened in the last few years is so many more companies can go public, can get liquidity, can be viable standalone businesses than anybody ever imagined before. So you don't have to be betting as an investment thesis, especially on the enterprise side of like, yeah, I think this is going to be strategic and going to get bought. What do you guys think about that? 

Jake: This actually underpins this full question around the SaaS market is really hot right now. Is it sustainable? Is it a bubble? My take on that—and this I think relates to your point—is that the TAMs are just much bigger than everyone thought. If you believed the TAMs were constrained and big tech had all the big TAMs that existed, then yeah, that logic made sense. 

But if instead you believe that you can build a $50 billion company selling pharmaceuticals software because the pharma companies are now buying much more software than you ever imagined they would because they need software to do their jobs better, then the calculation becomes really different. Because it's very unlikely that Google, Facebook, or Amazon are going to capture that market.

David: It doesn't matter if Salesforce wants to buy Veeva or not. Great. If they want to buy it for $100 billion, sure. If they don't, it’ll be a $50 billion public company. You're still happy.

Jake: Exactly, and back to the earlier point, I think that for the top tier of big tech they may not be able to buy just a matter of price. They may just be blocked off doing it, at least under this administration. 

Back to the state of SaaS for a second, if you could [...] on that. Things are frothier than they’ve ever been, and certainly, you can see the public market multiples. I can speak to it in the private markets as well.

Ben: Define frothy for us. How do you numerically box that?

Jake: I mean numerically, you just look at the revenue multiple. The multiple of what the company is worth to its revenue. Again, in classic private equity, you do it on an EBITDA basis. But for most software companies, you value it on revenue, even ARR, or even next year’s ARR, which is like the way to be even less conservative.

Ben: Of course, that's because many of these companies don't have EBITDA.

Jake: Correct. Most of them don’t. To be clear, one thing that’s different about this in pets.com—just to make super clear, this is not pets.com—is that, while these businesses are not profitable, almost all of them could be profitable at a moment's notice if they chose to stop growing as quickly because their gross margins are high. 

Ben: Right, they’re unit profitable.

Jake: Yeah, they're super profitable. They’re 70% plus profitable. They're just pouring a ton into R&D and sales marketing. 

Ben: The R&D thing is the scary thing. I fear for many of them. There's some class where the total absolute margin dollars that they're creating from selling their product are not actually outrunning the R&D alone. If they chose tomorrow to stop sales and marketing, they still have a big fixed cost org sitting there that they need to support, even if they weren't actively spending on growth. That would be sort of the middle ground counterargument there. 

Jake: I would argue that situation was bad accounting because if there are people that exist to keep the core product you've built running and delivering value to your existing customers, that should not be an R&D, that should be in COGS, cost of goods sold. R&D should only be forward-looking product building, and everything else should be in COGS. That's not the way other people do the accounting, but that's the purest way to think about it. 

Ben: Yeah, that makes sense. My view is mostly constrained to early-stage companies, but who doesn't put their engineering head count in R&D, even if they're supporting existing customers.

Jake: As you get a little more mature, often you have kind of a support Engr org. That goes into the COGS, and then you kind of have R&D, which is really thinking about next-generation stuff. But you're right, it changes as you get more mature as a company. 

Ben: You were talking about revenue multiples. Tell us where we were at some point and where we are now.

Jake: Yeah. At times in my career, we've been kind of like 5X-8X revenue.

David: Mostly, that's what? Giving you credit for the rest of this year [...] where you predict you're going to be at the end of the year?

Jake: Yeah. I mean, sometimes people use the denominator of the next 12 months' revenue. You can be a little more and then you would lower your multiple. Generally in that range. Basically, what I'm about to say is that it's an order of magnitude different now. It doesn’t actually matter if you're using this year or next year. Because ultimately, what's happened is that if you look at the most highly valued public SaaS companies, they're trading at 40X–50X. That is the highest it's ever been. 

And then when you pull that back into the private markets, the same thing is happening downstream where there are companies that are raising at really high prices, some of which don't even have revenue. It's an infinite multiple.

David: Your average investment that Emergence is making right now, and you guys almost exclusively do As and Bs, right? 

Jake: Correct.

David: Whatever framework is being used for evaluation, how often are actual revenue projections entering the picture versus just not?

Jake: At the A, you generally don't price on a revenue multiple. Its price on the market is the reality. What is the market price for this deal, or perhaps slightly below it if the founder is willing to take a discount to work with you? But you have to think about revenue growth because ultimately, your funding businesses in the future, so it's super important. You may be basing it a little bit less on exactly where the company is today. 

David: These CEOs aren’t coming to you and being like, I think I'm going to hit a $10 million revenue run rate next year. So I'm looking for $300 million, 30X. That's not in the conversation? 

Jake: No. What they're saying is my buddy raised to this, therefore this is what I think I should get. That's the reality of where things are. That brings me to the second reason why the market is so hot. The first I think is a legitimate reason that there’s a long-standing trend, which is that the TAMS are bigger than people thought. Cloud is taking over, revenue and market share that was considered real world or physical is now in the cloud. Part of what Zoom is taking revenue away from is the commercial real estate and airline revenue. That's all going into that market cap. Thinking about something like Snowflake, this concept is that data is not a tech thing. Data is an every company thing. Needing a place to store and make use of that is a much bigger thing that I think people even thought a few years ago. 

That trend is here to stay. I obviously wouldn't do this job if I didn't believe that these TAMs were big and growing. That is all goodness. As a VC, I'm excited to continue to bet on that.

The other reason why I think the markets are so frothy—and again frothy defined as just revenue multiples as an example—is because of interest rates. I mean, ultimately what's happened is that because interest rates are so low, people with money are looking for places to put it to earn money, and there are not that many places to do it. Putting it in debt doesn't pay as much anymore.

David: Pays zero. 

Jake: Yeah. It pays zero or sometimes negative in certain situations. Putting it in equities is more attractive. When you look at the public market performance, tech equities—in particular enterprise tech equities—more broadly have performed really well relative to the rest of the market. Then you continue that line of thinking and the LPs, the investors are like, well, I'll go earlier stage and do early-stage tech equity.

David: Which has performed even better.

Jake: Which is performed even better. Unsurprisingly because it's a market, capital has just flooded into early-stage technology and late-stage technology. Technology investing, the private market is technology investing. That has, in part, driven up the price of these deals. There are just so many more places that founders can raise capital from. Therefore, it has an inflationary effect on the pricing. 

Ben: Yeah. So it's more capital chasing more deals. The number of companies is going up, but the amount of capital going into the system is way outpacing the amount of new companies, so you are seeing that valuation growth. 

Jake: That's correct. Another way to think about it though is segmenting it. It's not just companies, it's great companies. Because while more companies are being built because it's easier to build a company than ever before, at [...] it’s almost free. There are still a limited number of great companies, but there's more and more capital chasing after that. 

Entrepreneurs need to make a choice in terms of what they want. There's really cheap—what we would call passive capital—that is available to great founders where, hey, take my money, no board seat. Let's check in a year, but I don't care. You don't need to report to me. That model, for the right entrepreneur, is a great model. It's all about what they actually want versus a model more like ours, which is we’re really signing up to get in the trenches with you and try to help you build out your BDR to SDR to AE ratios and figure out what your first call sales pitch deck should look like, and help you hire your first VP of sales. The nitty-gritty stuff. 

Ben: This is not my forte. Whenever someone starts talking about this stuff, I'm like, oh man. I really hope they can raise from Jake. That would be ideal.

Jake Thank you, man.

David: That's such a good point though. I was talking to a founder this morning who is the founder of a very, very high company, going to raise a great round and has lots of firms interested. It's a very esoteric thing. They are true industry experts in what they do. They came from the industry. 

He was like, honestly, I don’t want somebody to come in and be that because they’re not going to know what they’re talking about. I know what I’m talking about. I want somebody who’s going to be great, not going to cause me problems, good brand, and all that—fine. But it’s a bug, not a feature. If you think you’re going to help me because I definitely know better than you. 

Jake: Yeah. David, forgive the touchy-feely Stanford reference here. To me, this all comes down to self-awareness on both parts—on the founder’s part and on the VC’s part. It gets really important for the founder to know what she wants. What does she need? What does she want? What are her blindspots, and what is she looking for? You're thinking about hiring somebody. You’re hiring a board member who’s really hard to fire. 

What is the thing that you want and need? If you are self-aware enough to know that, then God speed. If this person really believes they know their space really well, then they shouldn’t give up a board seat. They should solve for the lowest solution possible and the lowest involvement possible. That’s the right thing for that person. 

The same thing is actually true on the VC side of things. The reality is there are lots of ways to be good at venture. There are lots of firms that have done this and lots of people have done this in lots of different ways. 

David: I can pick out somebody because I’m not a [...]. You could Tiger or you could be Lee Fixel and be like, I’m not going to do anything for you, but he’s a great investor. He’s made a lot of money. 

Jake: Yes. I assume he probably really enjoys that style of investing. It’s a very personal question, what do you enjoy doing? For me, I deeply enjoy doing the stuff that I was just talking about. I deeply enjoy getting deep and being on every recruiting call for the VP of Sales and trying to figure out who is the right fit for this particular founder and using my network to try to vet this person and can sell this person. I did two of those this morning. I get a lot of energy from it. 

I get less energy from the passive, okay, I see that the company is doing well. That’s just a personal thing. As a VC, first, you have to find a platform that’s aligned with the thing that you want to do. Then you as a platform have to ensure that you’re focusing yourselves on deals and situations where that works. And then you have to fight this concept of FOMO, which I think we may have talked to on the last podcast. 

David: What’s so beautiful about all of this is, yeah, this is how the internet works. It rewards niches. You want to be the very, very best at what you do. And if what you do is very narrow, that’s fine because there’s a lot of stuff on the internet. There are a lot of people on the internet, there are a lot of companies in the world. Being the best at a particular niche is a winning strategy. 

Jake: There is no such thing as the world’s best generalist. There’s no such thing as that person. 

David: Maybe Mario Gabriele is excluded for that. That’s his niche. 

Jake: Perhaps Mario will take the title of that. You can argue, he would be the best writer of content or community creator for this. In reality, what he’s doing is a little more narrow than that. The more narrow you make your niche, David, to your point, the higher likelihood you have to be the world’s best person at that thing. 

The trick is to figure out something that’s big enough to be interesting to you and small enough that you have a chance to be truly great at it, if that’s your desire. It’s really hard to fight that tendency though in venture. 

Ben: Yeah. When you said the fear of FOMO thing, I want to put a fine point on something you said earlier and then transition us to another little topic here. The fine point earlier is when you had the entrepreneur coming to you and say my buddy is getting this. What is really happening when prices are getting more "expensive" or when the multiple of EBITDA revenue for the next 12 months is going up, it’s just the investor saying, I’m willing to take more risk. I’m willing to basically pay the same amount of money but take more risk, or pay more money to take the same risk. 

That is how you get into that bubble of conversation where there is an economic equation that works where there’s a certain amount you should pay for risk. If you want to make this argument that valuations are going up because TAMs are going up, awesome. I fundamentally believe that. If what is actually driving them is way more money coming in and people taking more risk for the same dollars, that doesn’t end well because, at some point, people realize that and go shoot, all of our risk models are wrong. 

Jake: Yup, and I think it’s bad for the founder. 

Ben: It’s bad for everyone. 

David: Of course the VCs are going to say that. 

Jake: Exactly. David is like the independent friendly Angelican, call us out on this.

David: That’s right everybody, I am the neutral third party. 

Jake: The neutral party here. 

Ben: God, I never in my life thought—when we started Acquired—David would be the entrepreneur whisperer, non-VC.

Jake: I really do believe it’s true. When I advised mutual friends of David and mine on raising capital. I think that you should raise your A when you feel pretty confident that you have a product-market fit because that capital can be then used to help you scale you’re going to market, which can then help you raise a growth round. That makes a lot of sense. 

If you raise the A before you find product-market fit, you blow the cash in trying to find the market fit. You got this big hole in your cap table, you’re going to try to raise the next round with no product-market fit, and it’s going to be a harder thing. At some point, the music stops. 

It’s also just bad culturally. Companies perform better when they feel a little bit of cash constraint. If you got $100 million and you have no product-market fit, you can take forever to try to get to this. There’s no sense of urgency, there’s no sense of drive. It’s just the focus. Ultimately, all that starts to pass is the focus. 

David: Just yesterday we were on a twist with Jason. We did a little fund draft of our Mount Rushmore of CEOs. The number one criteria we used to judge CEOs—among several, Ben will of course shout out that I made the rules—is capital allocation. Your job as a founder is capital allocation. You may be able to raise a bunch of capital, but if you allocate that poorly, you’re doing a bad job.

Jake: Absolutely. I’m curious actually to think about the other criteria. Ben, what were the other criteria that you guys were thinking about?

Ben: The second one was would you want to work for this person?

Jake: Yeah, that’s mine.

Ben: It theoretically should show up eventually in market cap. There’s a touchy feelingness to it. But ultimately, it does feel like you could evaluate every CEO on absolute market cap dollars generated under their run because everything feeds into that. 

The third one is how good is this company for the world? I guess not the company, but this particular CEO’s impact on the world. Either with their company or then what they did with the money that they generated. Which to be fair, David, that was a ludicrous thing to throw into the criteria because it is uncorrelated from their financial returns in the way that our society functions. I do believe they should also do three, but you can’t judge the caliber of a CEO for their shareholders on criteria three. 

David: I think yes. I didn’t get to articulate this on the episode, but what I was thinking was, you could say the tobacco CEOs were great CEOs. I would definitely not want to put them on Mount Rushmore no matter how good capital allocators or leaders they were.

Ben: I see what you’re saying. You’re not getting jewel as one of your…

David: Yeah, totally. 

Jake: I do think of this concept—back to the touchy-feely concept of self-awareness—you have to figure out what motivates you as a leader, bet that as a VC or as CEO. Are you motivated to create those products? Are you motivated to do something else in the world? 

I genuinely believe that part of what drives Eric at Zoom is seeing life happen on that platform. I tell you, for me and for my partners, we have the great benefit of being able to choose our investors. We made a choice a little while ago to focus almost exclusively on nonprofits. Almost all of the money that we invest on behalf of is on causes that we are all motivated by—be it social justice, or climate change, or that kind of thing. It really matters. It changes how I think about waking in up and doing this. 

If I’m feeling tired, I’m feeling down, and I really don’t have the energy to do it, but I had a call the day before with a foundation and talked about the impact that some of our distributions have done, it really does change my behavior. A lot of this is just about figuring out what is the things or set of things that will drive you when things aren’t as good, and setting yourself up in a situation where that’s institutionalized. 

David: Can you just tell us a little bit about the impact that Zoom had on your firm, at Emergence? Because it’s pretty enormous. Most firms never experience something like this and, of course, it’s wonderful. But I got to imagine, there are just a whole bunch of consequences of I’ll brag for you guys. The Zoom investment alone generated $10 billion dollars plus of returns for you guys. 

Jake: We still carry a lot of it. We sold a lot of our shares, so who knows what it’ll ultimately be, but it’s been tremendous. I want to talk about my partner, Santi, who led that investment, who serves on the board today, and who is himself an insanely humble human. 

I am so, so grateful for the way he’s responded to this. This type of success matches career-defining. He will be one of the greatest VCs in the world based upon this return alone. He is as humble and collaborative now as he was when I met him nine years ago, and as focused now on ensuring that we act with a we-all mentality, and not in [...] as he ever has been. I’m so, so grateful for that. I don’t take it for granted. I have friends in other places where that’s not the case.

David: Yeah. Firms in history that something like this has happened to and it’s completely ripped the firm apart. 

Jake: I think part of it is the founders of the firm. and Santi wasn’t a founder. He was groomed through the firm the same way I was. All of our partners have been picked up mid-career and taught how to do the job. But the founders of the firm had some early success with things like Salesforce and Veeva, and themselves behaved the same way that Santi’s behaving now. There’s a precedent that gets set. 

The same thing happens as people think about retiring. There are lots of firms where when senior people retire, they hold on to the carried interest for long periods of time, which has a demotivating effect on the rest of the firm. I am deeply grateful for the way that the founders have thought about transitioning in such a graceful way. 

The firm, there’s so much selflessness and collaboration built into the way we treat each other, that it is the only place that I want to do this, and it is (God willing) the place that I will do this until I retire. I feel emotional talking about it. But I’m really proud of these people because they have not let this money and the success change their behaviors at all. If anything, the reaction within the firm has been, how do we go get more foundations and more endowments to invest in us so that we can share this wealth?

We’ve spent so much time over the past three months trying to figure out what are the causes we each deeply care about and we think are underrepresented in the world that we wanted to have the access to this asset class that’s so hot? It’s hard to put in words how beautiful that is to witness as someone who is adjacent to that success, but it has not had that success yet. 

David: Thank you for talking about it and sharing. It’s one such testament to your partner Santi. Thanks to you, we had him on for the Zoom episode. His story as an immigrant, being frankly discriminated against by venture firms trying to break into the industry. How many times did he have to try to get his green card?

Jake: He tried a ton, but he didn’t try as many times as Eric, who I think tried 10 times. They have a lot to bond on that front. 

David: Totally. The most critical thing is don’t let this incredible success blow things up. Stay humble, stay focused, stay hungry. How are you thinking about the Zoom happening in terms of a playing offense coming out of it? How can you leverage it and make yourselves even better?

Jake: For sure. That’s a really good question. The first thing, just tactically, is we really want to support the Zoom ecosystem. We want to support companies built on top of Zoom the same way we did the Salesforce investment and then supported companies like Veeva, ServiceMax, and Steelbrick, and a bunch of others built on top of that ecosystem. It’s goodness for the core original investment, and obviously, it’s goodness for new investments. We believe that if you are building something in and around the Zoom ecosystem, we are pretty well suited to help you navigate that ecosystem. 

We think we have a competitive edge to offer founders, and we think it’s also really good for Zoom because Zoom wants to become a platform rendition of the core product it provides today. That’s the first most tactical answer, which is we really want to be the main player in the ecosystem that’s enabling this next generation of companies to be built. That’s part of it. There’s also just some foundational org stuff we’re thinking about. How do we provide more value to our companies?

We have the great benefit of being focused. When we think about our platform team, we don't have to hire people who have consumer expertise, who have marketplace expertise, and who have this and that. We can just say, who are the world’s best people who know how to build and scale enterprise offer companies? We can get them and we can afford to have them part of our family. 

Our second core value is we strive to be the most important partner to our founders. What we’re trying to do is funnel some of this success we’ve had to try to double down on that and make sure that’s the case with our next founders, our next founders, our next founders. It’s the R&D thing, actually back to the earlier point. We’re trying to reinvest this back into the engine so that it benefits the new founders that we’re backing. 

The last thing I’d say, and actually I realized that this is even more touchy-feely. This episode is going in an interesting direction, but I’m happy to share it. 

David: In full disclosure to all LPs, Jake and I were in—what was it called? That part, that touchy-feely?

Jake: [...] Labs.

David: [...] Labs together. 

Jake: And a billion-dollar company came out of our six-person group. 

David: That’s right, Branch Metrics.

Jake: Branch Metrics. Shout out to our friends at Branch. To answer both of your questions David in terms of what has the impact been and also how are we trying to strengthen the core of going forward? We have invested a lot in strengthening our interpersonal relationships. We’ve actually hired a facilitator. We meet with her monthly, and we talk about anything that is on top of mind, but particularly things that are vulnerabilities for us. 

It’s about sharing what’s going on in our lives. We know what’s going on in each other’s lives so we can support each other with what’s happening with the others’ families, and that kind of thing. As well as sharing what we call pinches or interpersonal issues where it’s like, hey, Santi, when you said this way in this pitch, it made me feel hurt, made me feel frustrated, or what have you. Being able to voice that to him, not bottling it up, and just pretending it didn’t happen allows for a much deeper level of connection. 

We also ask for things like expectation setting. We had a really good conversation a couple of weeks ago where we laid out what are our expectations for each other in coming funds? What do we really want, and be really, really detailed and explicit about it so that if any of us are not living up to those expectations, we can go back and say, we all agreed to this. Something’s changed, let’s figure out what’s going on. We have this wonderful facilitator who’s able to help us have those conversations and facilitate us through the hardness to the goodness. 

David: Maybe Acquired LPs too, but the institutional LPs will tell you that partnership dynamics are everything in a venture firm. There’s no amount of money that is too much money to invest in it. 

Jake: It’s money and it’s time. We’re spending a lot of our time on this. I will tell you, I feel so connected to these people as people beyond the main job. I know what’s happening, I feel in my gut when things go well for them. When things go badly for them, I really care deeply, deeply. It also means when we’re talking about work stuff, we’re just playing it at a much deeper level. 

It’s a different thing. It’s not transactional. It’s like we’re all here trying to do this thing together, and we’ve recommitted to the underdog mentality collectively and said, what got us here won’t get us there. We need to think really sharply about how we adjust our strategy and our dynamics to make sure we’re able to replicate the success. 

It’s the commitment to vulnerability. It’s something I hadn’t spent a lot of time on prior to our experience, David, in grad school, and it’s something now that I so deeply believe that vulnerability brings strength. I just can’t shout that from the rooftops loudly enough. 

Ben: I love that. Man, I can’t think of any better way to wrap this episode. 

Jake: One plea I’d make actually to founders that are listening, find a peer group. Find a peer group of other founders that you can be vulnerable with. You spend so much of your time wearing an armor fighting everything, particularly if you’re a solo founder. But even if you’re not, you’re just constantly in battle mode. 

You need to find an outlet for people who are experiencing the same thing that you can be vulnerable with. The good news is there are more and more of these groups popping up. You can do it informally. You can just find a group for peers you know. You should definitely set guidelines and certainly, strict confidentiality has got to be that number one. But there are other guidelines around how you can run these groups effectively. 

But there are also formally facilitated groups. If you guys want, I can share some and you can put it in the show notes of examples of this. It’s so important for founder health, mental health. Frankly, I think it’s important for company performance. I deeply believe in this concept. I’ve got a peer group of other VCs at other firms. We meet regularly, have tea groups, and share our vulnerabilities. It makes me stronger and feel more connected to this industry. 

David: Nobody should ever shed a tear for VCs. But it’s hard to perform at the highest levels anywhere. As a VC though, at a firm like an Emergence or PSL, you have a built-in partner group, you have partners. But yes, as a founder, it can be very, very lonely. Definitely underscore that. 

Jake: This was really fun guys. Thank you for creating the space for this conversation. 

Ben: Jake, thank you for joining us. There will be part three of the story at some point down the road. When you get your next idea about a new thesis, come tell us about it. 

Jake: I’m excited to come to tell you about the ones that are starting to succeed in this earlier thesis. I got to come back and actually deliver. 

Ben: You’re going to come raise fund three with us. Your episode two is really about people really liked fund one. It was qualitatively good.

Jake: Fund three I got to show markups guys. I got to come back for markups. 

Ben: It’s exactly it. 

David: All right guys, this is great. 

Jake: Thank you. 

David: LPs, we’ll see you next time. 

Ben: We’ll see you next time.

Note: Acquired hosts and guests may hold assets discussed in this episode. This podcast is not investment advice, and is intended for informational and entertainment purposes only. You should do your own research and make your own independent decisions when considering any financial transactions.

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