June 28, 2004 Working On The Inside Insider tip gives VC firm foothold in Salesforce.com's lucrative IPO Josh Friedlander While Salesforce.com Inc. watched in joy as its initial public offering rose 56% on its first day of trading last week, so did Emergence Capital Partners LP, a small venture capital firm that had managed, in a rare transaction, to purchase a small but lucrative lot of Salesforce.com's shares prior to the IPO. While venture capital deals tend towards complexity, in this instance it was simply a personal connection with a former insider that enabled Emergence, a recently formed VC based in Burlingame, Calif., to grab a small piece-nearly 1%-of the firm's privately held shares. Salesforce.com issued 10 million shares of common, or 10% of the company, at $11 per share last Wednesday. The shares shot up soon afterward, reaching a high of $17.30 in intraday trading. At the stock's peak last week, with all of Salesforce.com valued at $1.73 billion, a 1% stake in the firm would have been worth $17.3 million. Emergence, soon after its founding in the first quarter of 2003, purchased secondary shares in Salesforce.com from an employee of the company who is no longer with the firm, said Jason Green, one of the firm's three founding partners. "We were creative and found a way to get involved," said Green, noting that his firm bought its small stake for "about a million dollars." He and the firm's two other partners declined to specify their exact cost or stake in Salesforce.com. The shareholder who parted with his shares sold them for liquidity reasons and still retains a significant stake in Salesforce.com, said Green, who declined to name the former insider. Emergence found out about the buying opportunity via partner Gordon Ritter, who discovered that the shares were for sale via his relationship with Salesforce.com and its chairman and CEO, Marc Benioff. Ritter and Benioff had co-founded Software As Service in 2000 a Web services company that is now a division within Salesforce.com. Emergence's partners thought the investment an ideal match with their strategy of purchasing stakes in technology-oriented service companies, and they formed a small fund specifically to house the shares. "A big reason we did the investment is that the Salesforce business model is a very important part of our strategy as a fund," Ritter said. Brian Jacobs, the third of the firm's partners, noted exuberantly that, "measured on its own, it's a fabulous fund." If Salesforce.com's shares remain at or above their opening price of $15 per share, Emergence stands to make a profit north of $10 million, Green said, or more than a 1,000% return on investment. Like other insiders at Salesforce.com, Emergence will have to wait six months for its shares to vest before any profit can be realized, Ritter said. "We're subject to the lock-up along with everyone else," he said. While they wait, Ritter and his colleagues will be busy figuring out what to do with a $100 million fund-targeted at technology-oriented service firms-which they have nearly closed. That fund is composed entirely of early-stage private investments, has a 10-year life span and expects investments to take four to seven years to reach fruition, said Ritter.