This piece originally appeared in VentureBeat.

Consumer-to-consumer (“C2C”) marketplace startups are enjoying a Renaissance, as exemplified by Airbnb and others. Sites like these that facilitate transactions between people have disrupted older offline business-to-business marketplaces by taking advantage of ubiquitous mobile access, and delivering a better experience.

Larger market size and revenue predictability

In the late 1990s, Zoho Corp. emerged as an online marketplace for hotel supplies that raised $63 million. Targeting the massive hotel industry ($120 billion in revenue in 2012 according to IBIS), Zoho operated on a transaction model whereby the company received a small percentage of each transaction. This transaction model severely limited revenue potential and made commissions unpredictable.

Zoho ultimately shut down when key buyers, including investors such as Harrah’, purchased only a small fraction of products from the heavily commoditized hotel supply chain. As a result, Zoho earned small commissions on low margin business with little predictability.

Today, business marketplaces can use SaaS platforms to increase market size and improve revenue predictability by selling subscriptions to access and manage the marketplace. For example, LiquidSpace enables individuals to reserve meeting rooms, conference or office space at commercial venues such as hotels. As a transaction marketplace alone, the market size is similar to Zoho’s which aimed to apply a small commission to a large target market and win by capturing volume. However, in addition to monetizing transactions, LiquidSpace also sells their platform directly to hotels (50,000+ potential), universities (100,000+ potential) and enterprises (potentially in the millions) as a service to manage their own meeting spaces internally.

These internal networks greatly increase the market size opportunity as well as revenue predictability with a monthly subscription service instead of a transactional model. Further, adding subscription customers with internal networks of captive guests, students, and employees greatly increases the number of individuals with access to the public marketplace since it is all one platform.

Better Unit Economics

Looking back at 2012, one thing is abundantly clear: all things SaaS were firing on all cylinders last year.  Based upon what we saw in 2012 – and what we’re seeing already in 2013 – the momentum around SaaS company creation shows no sign of slowing.

From seasoned enterprise executives, to entrepreneurs with consumer backgrounds, everyone seems to be thinking about SaaS these days.  The reasons for this increase in activity are numerous, but in part come down to market fundamentals, including:

• Public SaaS companies are killing it.  The performance of publicly-traded SaaS companies far exceeded that of the NASDAQ and S&P 500 indices in 2012, proving just how important the SaaS industry is in the technology sector today. In fact, according to William Blair, the performance of public SaaS stocks through Q3 of 2012 was nearly double the performance of the NASDAQ and bested the performance of the S&P by nearly 3x.
• SaaS exits are on the rise in a big way.  Over $1.3 billion was raised in SaaS IPOs in 2012 per a William Blair analysis.  SaaS M&A activity has also risen to sky-high levels, led by deals such as Oracle’s acquisition of Taleo for $1.9 billion, IBM’s acquisition of Kenexa for $1.4 billion, and Microsoft’s acquisition of Yammer for $1.2 billion. For SaaS businesses, the exit landscape has never been better.
• The venture pendulum is swinging back to the enterprise.  Because of the robust exit environment and the fact that VC interest in consumer technology has waned a bit, William Blair found that there is intensive interest in SaaS businesses among venture investors.  Over $3 billion in venture capital was invested in SaaS companies through the first nine months of 2012 year versus $1.7 billion in the first nine months of 2011.  For the first time in many years, B2B is again top of mind for many in the venture community.

With the excitement among entrepreneurs at an all-time high when it comes to SaaS, the logical question is “What’s next?”  As we gaze into our crystal ball, it reveals a number of noteworthy trends on the horizon for 2013, including:

• This will be the year of the enterprise mobile app.  Most investors are hardly thinking about mobile apps in the enterprise.  There has been a fair amount of investment activity in the area around mobile device management, but there few mobile-focused business apps have been funded.  We see the industry perched on the cusp of a revolution in business applications that are built specifically for mobile devices and take advantage of the unique features they provide. Built-in location awareness, on-board cameras, the relatively low cost and durability of mobile devices is opening new doors for use in a wider range of industries and applications to dramatically streamline operations.  For example, Doximity pioneered the first HIPAA secure mobile-based professional networking platform for physicians that improves the speed and quality of patient care.  DoubleDutch’s mobile-first CRM app makes managing the sales process easy, effective and even fun.  Roambi lets you turn boring business data into insightful, interactive graphics on any iOS device.  The next few years promise to be the era of the business application, and we starting to see many more entrepreneurs approach us with mobile-first business app concepts.
• Verticals are hot. We’ve seen a number of SaaS up-starts find tremendous success with vertically-focused solutions, including Veeva in life sciences, Top Hat Monocle in higher-education, and Xtime for CRM in the automotive service industry.  Further, we’ve seen first hand how a vertically-focused strategy can enable a company to build a business with high market share in a very capital efficient way. While health care and education seem to get all the attention when it comes to verticals, there are plenty of other opportunity outside these hot spots.  My partner Gordon wrote a great post on this topic.  I expect we’ll see many more entrepreneurs pursue vertical strategies in 2013.
• Defensibility is more important than ever.  With all of the investment activity in SaaS these days, there are many more companies being created in each application segment.  As a result, we may begin to see more price-based competition in certain application markets.  In order to avoid becoming commoditized, the best SaaS entrepreneurs are thinking about how to build a moat around their solution.  Whether it’s finding a way to create a network effect (like LinkedIn) or using the data on customers’ usage of your product to deliver more value than the competition (like our portfolio company Lithium), the pressure will increasingly be on entrepreneurs to build a defensible advantage into their SaaS offerings .

We’re extremely excited about what 2013 holds for the SaaS industry – and are looking forward to working with our existing portfolio this year, as well as many new entrepreneurs, to help build the next generation of SaaS leaders.

Where can you find some of the hottest CEOs all in one place? Each year, Emergence Capital Partners’ CEO Forum brings together the CEOs of some of the most successful B2B companies to share their experiences and expertise, learn from one another and talk about exactly how they’ve successfully made B2B, SaaS and enterprise sexy once again.

While the Emergence CEO Forum is always a must-attend event, this year, it was truly something special. Not only did we welcome new members to the Emergence family, but we heard from some of the most innovative leaders of our time exactly how they’re revolutionizing the B2B digital services landscape.

It was a rare opportunity to get inside the minds of these visionaries and hear their perspective on the issues, strategies and opportunities they face. With blockbuster speakers like Jim Corbett, Geoffrey Moore and David Sacks, the agenda for the event read like a who’s who in the B2B enterprise technology start up space.

Even though most of the value is generated by the behind closed door conversations that take place among the CEOs, we wanted to share some of what Geoffrey Moore presented to our CEOs.

The Perfect Storm is Actually a Tornado!

We hear a lot about how market forces, business opportunities and stellar teams often converge at just the right moment to create a “perfect storm” for success. But have you ever considered that the “perfect storm” should look more like a tornado?

Geoffrey Moore has made the understanding and effective exploitation of disruptive technologies the core of his life’s work. A best-selling author, his books Crossing the Chasm, Inside the Tornado, The Gorilla Game, Living on the Fault Line and Dealing with Darwin are required reading at leading business schools.

During his talk, Geoffrey captivated the CEO Forum audience with his assertion that entrepreneurs must harness the tornado effect to reinvent enterprise IT. Sharing his thoughts on the waves of disruption and the keys to digital engagement, Geoffrey masterfully wove every-day examples into the discussion of his macro theories and trends, making it easy for the audience to relate.

According to Geoffrey, these waves of disruption are watershed eras in the evolution of the way we work today: from the 1980s revolution in Digital Office Work with personal IT to the 1990s Digital Value Chains in Enterprise IT, the age of personal Digital Consumption in the 2000s and back to the enterprise IT focus of Digital Engagement in the 2010s.

Needless to say, the audience was thrilled to hear his prediction that the pendulum is swinging back to enterprise IT and it’s once again time for us to shine.

When Crossing the Chasm became a best seller, it made us think about our own technologies. The challenge for us then as early innovators was to transform into industry visionaries and finally to become the pragmatists and conservatives who would build a big business. Today, crossing the chasm is not enough for this new breed of lean startups. Inside the tornado is where magic happens. But, exactly what’s happening inside that tornado? And what enables these companies to turn a mild breeze into an unstoppable tornado?

The model Geoffrey described is simple, yet insightfully brilliant and extremely applicable. In order to generate a tornado, like the one created by Yammer, 4 key drivers must be present:

• Acquisition:  This is probably the most critical area of focus. Bringing in new customers or users generates an initial critical mass that makes everything else possible.
• Engagement:  Once you have customers/users flowing into the system, you must ensure they are fully engaged and realizing value from your solution in order to build a strong, sustainable business.
• Monetization:  Once you’ve generated substantial value for your customers/users, the next step is to devise a way to extract money from those interactions. If you’re unable to monetize, your tornado might quickly run out of steam.
• Enlistment:  The final driver is enlistment or advocacy—the synergistic moment when you’ve successfully generated enough value for your customers that they become willing advocates for your brand, raving about your solution and inviting their friends and peers. The ability to monetize and enjoy the viral benefits of customer advocacy is truly golden!

To drive home his theories, Geoffrey shared four examples of companies that have had trouble aligning these drivers to generate a tornado, citing Kiva’s high cost of acquisition, LinkedIn’s engagement issues, Facebook’s clear monetization challenges and Yahoo!’s low enlistment levels.

Now that we have the formula, how should it be applied to our own startups? That’s where the “slowest gear” questions become salient:

• What is your slowest gear today?
• How do you plan to speed it up?
• If you succeed, what gear will then be slowest?
• How far away is your viral tornado?
• If you had more capital, what would you do differently?

As you can see, the model is simple, useful and extremely applicable to high velocity B2B companies. While it seems most suitable for freemium companies, the conversations following Geoffrey’s presentation proved its relevance for almost any company looking to generate its own unstoppable tornado.

So, now that you know what it takes, the question is, “What will YOU do to create a tornado?” As we approach the new year, the market remains primed for the next big thing that will continue to transform the way we do business. Will it be your next-generation concept? Or will yours get swept away by the perfect storm of another big idea? Now is the time to harness the winds of change, create your own perfect storm and chart a new course for the future of enterprise business technology.

This article first appeared in TechCrunch.

In the days before the cloud, on-premise software providers that focused on selling into a vertical market were considered second-class citizens to the “big guns” selling into the broader horizontal marketplace. The real “win”—in market share, wallet share and ultimately, profits—was the broadest approach. The notion of specializing in solutions that serve a market niche or specific industry was considered limited unless it was just the start of something more horizontal.

However, with the advent of the SaaS model, the tables have turned. Focusing on niche verticals or specific functional areas may be one of the most successful strategies of the enterprise cloud software era. While there are still a few providers for whom the “all-things-to-all-people” approach is quite successful (Microsoft, Oracle), the vast majority of successful cloud solution providers have struck gold by picking one thing and doing it extremely well. Mass customization by vertical or functional slice with a purpose-built solution that meets your customer’s unique needs is becoming the new key to success in the software industry. Why?

The Obvious Benefits

Some of the drivers are fairly obvious. Going vertical dramatically lowers customer acquisition costs (CAC). Refining your audience reduces the sheer number of potential targets, enabling you to reach customers more quickly with fewer sales people and increasing word-of-mouth recommendations, thus significantly improving sales and marketing efficiency. In most traditional models, CAC is typically equal to or twice the annual contract value. In other words, you might spend $100k to land the customer and see only half that in recurring revenue the first year. Many times it takes two years just to break even and three years to turn a profit. But, with vertical-focused companies in our portfolio, CAC can be as low as one-fourth of the annual contract value, delivering immediate ROI in the first year alone.

Going vertical also enables you to capture a larger market share more quickly. With a horizontal solution, there’s so much ground to cover, in both geography and business sizes, few can achieve more than 5 to 10 percent share. However, focusing on a specific vertical or functional area enables you to achieve much greater penetration—up to 60 percent share in some cases—and solidifies your solution as the industry standard. In a vertical, become the standard and the whole industry adopts your peer-approved and recommended solution. Capturing the lion’s share of the market enables you to gobble an even larger piece of the pie.

Case in point: In just four years, Veeva Systems has eclipsed Oracle as U.S. market share leader for life sciences CRM platforms, simply by specializing in the life sciences industry.  Others have also garnered sizable share in their respective verticals: OpenTable claims 12 percent share of the North American market for seated diners and WebMD commands more than 40 percent of all web traffic in online health, according to Compete.

New Benefits Emerging

While lower cost and larger market share might be “old hat,” new benefits of going vertical are emerging that may be even more powerful. Cloud platforms enable innovative companies to replace competing technologies or entire swaths of functionality in just a few quarters with an ultra-rapid deployment model, whereas such a feat would have taken years in the old days of on-premise, installed software. This unprecedented new paradigm allows companies to capture a much larger share of wallet and leverage the inherent data gathered to deliver impressive value-added analysis.

Delivering Layers of Value

The focused approach enables you to garner a larger share of wallet by deploying software modules tuned for both the taxonomy and regulatory issues of a given vertical. As new customer needs come to light, the unique infrastructure of the cloud model makes it much quicker, easier and less expensive to develop and deploy new modules of value, offering new layers of functionality specially tuned for the given industry. Veeva (an Emergence portfolio copmany) has mastered this layer-cake approach, taking a slice of a number of horizontal solutions (i.e. CRM, content management, marketing automation), and focusing them specifically for the deep regulatory issues of the life sciences industry. In fact, in just one year, the company has twice rolled out entirely new functionality that entire companies were once built upon. Its Veeva Vault content management solution was quickly followed by its Veeva Network marketing and data platform—all built from scratch and deployed in the span of just 18 months. Another great example is RealPage (Ticker: RP), focused on property management solutions. With a market cap of $1.6B, the company has expanded into adjacent segments, including apartment complexes, student housing and senior communities among others.

Leverage Data to Become an Invaluable Advisor

One of the fundamental advantages of the cloud model is its ability to capture data at an unprecedented granular level. With an installed solution, you may know how many seats are provisioned on the system; with a SaaS solution, you know exactly how many active users there are, and more importantly exactly what they use (and don’t use) on your platform. In the cloud, you can capture, archive and analyze user data, as well as virtually every other piece of data that comes into the system. This ability to analyze and draw correlations across various layers enables you to discover insights your customers may have never known existed.

Social software provider Lithium Technologies (another Emergence company) leverages its depth of knowledge in building successful consumer communities to help its customers realize a “Community Health Index” (CHI), a detailed usage analysis that is highly predictive about whether a community will succeed or fail. Lithium has been able to streamline this process, automate the creation of CHI reports and bundle them with up-sell versions of its service to monetize this valuable data. Zillow (Ticker: Z) is another great example. While the company tracks every click to deliver a more tailored experience to its users, it also leverages the power of crowdsourcing to augment their data vault by allowing owners to add detailed information to their properties such as description, photos, etc.

Leveraging data to help your customers succeed is a powerful and effective way to elevate your company from software vendor to invaluable advisor. This feat is much easier in a vertical or specific functional area. The taxonomy and “schemas” of the data are much easier to correlate than if you are working with, say, pharma companies and retailers on the same platform.

Ultimately, this ability to extract hidden value from inputted and behavioral data is perhaps the most critical component to market success for any SaaS vendor. Serving in this C-level advisory capacity not only makes your solution more valuable to the customer but also enhances your overall position as a trusted business partner. As a result, demonstrating your value as a data analyst and advisor solidifies your role as a market expert—and the market leader.

At Emergence Capital Partners, we’ve seen this focused approach drive customer acquisition costs down as much as 75 percent. That’s a powerful incentive in a business where sales and marketing is often the largest cost of doing business.

There’s been a lot of buzz among Facebook investors after they announced lackluster results for their first quarter as a public company. Shares sank 10% in after hours trading signaling that the public is getting less patient after the social network giant posted net losses of $157 million. Zynga plunged 40% after announcing results a day earlier, and after Facebook’s quarterly results were announced, the social gaming company was hit even more.

Consumers are fickle. Building a business based on consumer behavior is risky, the main reason consumer companies can grow quickly, but then experience unpredictable performance. We looked at b2c and b2b companies after going public, and the data supports this view (our analysis included all tech IPO since 2004 who had one year or more of aftermarket performance by 12/31/11). SaaS companies experience the highest consistency after going public, while other business models are less predictable.

The distribution of growth for each sector is shown below. Less than 10% of SaaS companies have seen declines since their IPO, while 67% of Consumer Internet companies are valued below their IPO price. 

This is the key driver for our focused strategy. Since the founding of Emergence Capital Partners, we have focused exclusively on SaaS and Technology Enabled Services businesses. With focus, we have a deeper understanding of key metrics and best practices and a unique network of executives within our sector.  We have partnered with some very strong entrepreneurs and have been rewarded by the success of some great companies such as Salesforce, Success Factors, Echosign and Yammer. Despite the capital consumer internet companies are attracting, we firmly believe we will generate more consistent returns for our investors and entrepreneurs by continuing to focus on this category.

When we founded Emergence Capital in 2003 we envisioned a new generation of technology-enabled services (“TES”) companies that would fundamentally revolutionize IT globally. Early investments in Salesforce.com and SuccessFactors that became multi-billion public companies proved we were right about this tectonic shift to cloud-based computing architectures and recurring revenue business models. We also predicted an equally powerful shift to end users away from centralized IT that would ultimately change the way software was bought and sold now referred to as the “business freemium” model. Finally, we theorized that massive changes in consumer online behaviors would also impact the workplace and identified an investment thesis around enterprise social networking as a big potential opportunity. We reached out to many companies in the space, but Yammer, we believed, had the vision and caliber of team that could take full advantage of this enormous opportunity.

We were the first new investors into Yammer after it spun out of Geni, a consumer internet company also founded by internet visionary David Sacks. We joined the board in January 2010 and began to help the company modify it’s DNA from a kick ass, product-driven, consumer internet company to an enterprise sales and marketing powerhouse. In the two and a half years since we’ve been involved, the company has grown to from 25 employees and 1 sales rep to over 350 people with a world-class, global sales and marketing organization and penetrated 85% of the Fortune 1000. Today, Yammer has over 5 million users in 200+ countries on over 250,000 corporate networks. At $1.2 billion, this transaction is the largest private company acquisition in SaaS history. Certainly we are proud of the financial return, a “homerun” by any definition in VC parlance, but we’re even more proud of what this company has accomplished and it’s impact on millions of business users and companies around the globe.

David Sacks now joins the pantheon of Emergence-backed Cloud Titans such as Marc Benioff of Salesforce.com and Lars Dalgaard of SuccessFactors (now SAP). We wish David great success in continuing to make the dream of cloud computing come alive and look forward to the impact Yammer will have on the IT landscape in the future as part of Microsoft. Congratulations to David, Adam, Mark, DavidO, Jim, DeeAnna and the entire Yammer team – we are so proud of having been associated with Yammer and your historic success.

This past week I was inducted to serve on the board of directors for the National Venture Capital Association (NVCA), the largest and most influential professional organization for the venture capital community whose membership comprises over 90% of professional VC firms in the US. It’s an honor and privilege to have been selected by my peers but also a tremendous responsibility, and one that I thought long and hard about before taking on. It’s a four-year commitment, requiring the same level of attention and caring as any private company board. I wanted to share my thinking on the decision, some initial impressions and also ask for your feedback on what you believe are the most important issues facing the entrepreneurial community that I can address during my tenure.

The NVCA operates out of the limelight, mostly behind the scenes in Washington as a sort of archangel for the venture community and the entrepreneurs  we serve. Having just attended my first board meeting, I was blown away with the level of professionalism and insight of the organization in understanding the dynamics in Washington and how to direct efforts in the service of entrepreneurial innovation and job growth—the two tenants of the NVCA and our industry. The organization has built an incredible and trusted brand in Washington by practicing a conscientious, informed and pragmatic approach over many decades, rather than just throwing money at high-paid lobbyists. As a result, the NVCA actually can make a difference.

I liken our entrepreneurial ecosystem to a fragile, diverse and beautiful coral reef. The NVCA acts to protect the reef and its inhabitants from the inevitable unintended consequences of broader legislation and over-regulation. As a small industry, we are rarely given center stage, but we certainly feel the effects of collateral damage. For example, legislation such as Sarbanes-Oxley has had devastating impacts on the ability of young companies to go public over the last decade. An overburdened FDA has drastically reduced the rate of innovation in our health care system. Immigration restrictions have sapped our access to talented human capital required to scale our companies. Together, these and many other issues can create significant deleterious impacts on our entrepreneurial ecosystem and thus stifle the rate of innovation and job growth in our economy. The NVCA tackles these challenges, among many others, and has made significant progress on a number of fronts.

Recently, the organization played center stage in legislation to reduce the negative impact of Sarbanes-Oxley on young, growing companies with the successful passage of the JOBS Act of 2012. This effort was spearheaded by NVCA Board members (notably Kate Mitchell from Scale) and the amazing staff of the NVCA (notably Jennifer Dowling), and it will save young growing companies from spending hundreds of millions of dollars in resources to comply with overly burdensome accounting and regulatory compliance measures designed for much larger companies. I must admit that I was pretty skeptical of getting anything done in Washington, but the passage of this bill gave me great hope. I’m now very optimistic that, with guidance from the staff at NVCA and a determined effort, we really can make a difference.

As an investment firm, making great investments is, of course, paramount to our success. However, supporting a healthy ecosystem that protects and supports entrepreneurship is the most critical component in the longer term. I am excited to have an opportunity to make a difference for the broader entrepreneurial ecosystem and to reduce the friction for great entrepreneurs blazing the trail of innovation. I would love your feedback and thoughts on how to maximize the impact during my tenure.

Early-stage CEOs need to be good at lots of things.   In our view, the most important is setting a vision for the company –- and then translating that vision into tangible objectives for the rest of the team.

For this to be done well, a CEO must be able to simplify all of this in a way that everyone in the company can understand and act on.  This is hard work.  As DaVinci said, “Simplicity is the ultimate sophistication.”

One tool that we’ve seen CEOs use to make it easier to communicate vision and objectives is Mark Benioff’s V2MOM.  In his book Behind the Cloud, Mark tells the story of how he’s used V2MOM since Salesforce.com’s inception to focus the company on what matters.  V2MOM requires a company to outline five things (and refresh them periodically as the business evolves):

• Vision – What you want to accomplish
• Values – What’s important about your vision
• Methods – What you need to do to deliver on the vision
• Obstacles – What might stand in the way
• Measurement – How you will know you’ve met your goals

Seems simple enough, right?  Well, it’s not always easy to get each of these things boiled down in a way that everyone can agree upon and process.  This is where the CEO’s talents come into play.

We’ve seen the V2MOM process work exceptionally well in several of our portfolio companies (both early and growth stage).  If you’d like to do a better job of getting your team aligned around your vision –- and equipping them to deliver on it — it’s definitely worth integrating V2MOM into your company.

Should a small team of developers serve businesses around the world?  Business Freemium companies are often global from inception.  This is an important part of the story for how the Business Freemium Model is disrupting SaaS and Enterprise Software.   We have been studying Global Business Freemium for a couple of years.  We would like to share some of what we have learned to help entrepreneurs and executives to create a Going Global Strategy.

Emergence Capital is pleased to be investors in Business Freemium leaders that include Yammer, Box, YouSendIt, and echosign (Adobe).  We’ve been actively framing and executing on Emergence Capital’s Business Freemium strategy since 2009.  See this presentation for an overview of how the model is disrupting SaaS and Enterprise Software: http://www.youtube.com/watch?v=9MfhXq_KCGg.

One of the recurring themes from our conversations with Business Freemium entrepreneurs and executives was whether and how to service and market to the high percentage of their free users that were actively using their application outside of the United States.  These companies often reported strong absolute and relative usage in emerging countries, which traditionally have not been served by SaaS or Enterprise Software because it was not profitable to do so.   This made us think of Clayton Christensen’s The Innovator’s Dilemma.  He wrote that new leaders with new models generally start by serving markets that were hard for incumbents to service profitably.  Less than ten employee companies are hard for SaaS sales organizations to profitably sell to and Business Freemium took root in that segment.  Global is another important dimension to the disruption.

The founders and CEOs of the pioneers in the Business Freemium market made courageous decisions to accelerate the growth of their global free and paid users years ahead of when leaders in prior software models had done so and often when the companies were small in terms of revenue and or people.  SurveyMonkey’s CEO, Dave Goldberg, and VP International, Minna King, have built an exceptional global business and company in part by investing in a global strategy years ago. http://blog.surveymonkey.com/2011/02/13_languages/.   Yammer has a large percentage of their users outside of the US and translated the service into many languages starting in 2010:  http://blog.yammer.com/blog/2010/11/yammer-in-translation.html.  Last week I spoke with an entrepreneur with millions of users, the majority of which are outside the US.  He translated his application into multiple languages when the company had little revenue.  LinkedIn, one of the first public Business Freemium companies, reports that 60% of their members are outside of the US as of December 2011 and that 33% of their revenue for the quarter ended September 2011 was outside the US.  Their international revenue grew 183% year to year in that quarter, much faster than the rest of the company.

We listened to these leaders and many entrepreneurs and developed a framework for creating and executing a Global Strategy for companies with a Business Freemium Model.  We hosted a forum on Going Global for the Emergence portfolio and friends of the firm in 2011.  Dave Goldberg, CEO of SurveyMonkey, keynoted the event.   There was a lot of discourse, agreement and dissent.  The presentations and conversations made it clear that the Business Freemium Going Global Strategy and execution is different than how SaaS and Enterprise Software companies grew around the world.

Our recommendations to Business Freemium entrepreneurs are the following.  Choose to be the global leader in your market, or not.  Design global into your product from inception even if you expose the capabilities later.  Implement languages early.  Think carefully about how you will accept and manage global payments, especially in auto-convert businesses.  Identify the executive you will send to lead new global markets well before they need to go and do it.   Accelerate the auto-convert business in other geographies with an inside sales and or field sales model.    Choose venture investors with experience in Global Business Freemium who can help you craft your strategy and execution plan in more detail.

Global Business Freemium is exciting for customers, entrepreneurs, executives, employees, and investors.  Business users around the world can access exceptional products that are easy to use years before they might have otherwise.  The model opens up new markets in company size and geographies and accelerates global revenue while consuming less capital and time.  Companies and investors should consider developing global capabilities and leveraging global resources much earlier in the company lifecycle.  Let us know how we can help.

The answer: Focus.

When we founded Emergence in 2003, we realized that to do something as crazy as starting a new venture firm in Silicon Valley, we would have to do things differently than other firms.  And so, we decided to focus on an area that was completely misunderstood by the venture community: technology-enabled services.  We also made a commitment to limit the size of our portfolio so that we would have time to focus on the entrepreneurs we would back.  We even decided to locate our offices in San Mateo to be closer to the software community rather than being near most other VCs on Sand Hill Road.

We felt that a reasonable fund size would allow us to execute our focused approach best.  We think everyone should have capital constraints.  It forces us to be clear about our priorities and truly selective about the investments we make.  It also allows us to spend more time with a few entrepreneurs rather than a little time with a lot of entrepreneurs.  We’ve raised billion dollar funds prior to forming Emergence and have found that more capital doesn’t always yield better results.

Focus has paid off for us.  We’ve had the pleasure of seeing many of our portfolio companies blossom into industry leaders.  We have attracted world-class base of institutional limited partners.  We’ve developed a reputation for being the leading venture firm focused on tech-enabled services — the most-meaningful technology trend that we’ve seen in our careers.  And, along the way, we’ve built a great firm culture that’s focused on collaboration and having fun.

So when it came time to raise our third fund, there was no question that we’d limit the fund size to enable us to execute our focused, disciplined approach to venture capital investing.  We’ve never been a firm that follows the pack and we don’t see any point in changing now.