Article by Phil Levinson for Business Insider, February 2, 2016
What is the best-performing venture capital fund in the world? If you judge by the amount of media attention and name recognition a firm receives, thenSapphire Ventures would never appear on your list.
Try doing a Financial Timesonline search of top VC firms Accel Partners, Sequoia Capital or Andreessen Horowitz, and you’ll find an average of 300+ article mentions apiece. If you do the same search for Sapphire Ventures and its previous incarnation, SAP Ventures, the total number of online article mentions across both searches is…25.
Yet, a quick look at CB Insights’ list of the top VC funds with the most exits in the last three years will show Sapphire Ventures right near the very top, tied for fourth with Kleiner Perkins, just behind NEA, Sequoia and Accel — and ahead of every other VC firm.
In other words, the fourth-ranked VC firm arguably receives less than 10% of the publicity of any of the other top 5 firms. How is that possible?
“Building a massive marketing machine just isn’t in our DNA or aligned with the type of firm we’re seeking to build,” says Nino Marakovic, Sapphire’s CEO and Managing Director. “We are intensely focused on our investments and driving results.”
7 IPOs for Sapphire in 2014-2015
Despite avoiding the limelight, Sapphire has leveraged its SAP roots to become a juggernaut in the enterprise technology sector. Coming off a down year for tech IPOs in 2015, the firm still emerged with seven recent portfolio IPOs including Box (2015), Apigee (2015), Five9 (2014), OnDeck Capital (2014) and Imprivata (2014), among others.
In the early 2013-mid-2015 period, of the top 100 venture capital exits, Sapphire invested in 10 of them. For mid-stage VC fund (B-round investments or later) that’s considerably smaller than its top-ranked counterparts (with less than $1.5 billion under management), this performance is eyebrow-raising. Their approach, however, is not.
“Nino and Sapphire are super-astute, no-nonsense, no-BS investors who don’t get caught up on matters of ideology or conventional wisdom,” says Tom Chavez, CEO of portfolio company, Krux. “They help me and my management group in much more substantive ways — for example, recruiting key people and connecting us at the executive level with new customers.”
A no-nonsense, enterprise-focused approach seems to have paid off for Marakovic and Sapphire, even though they are far less known than their Sand Hill Road counterparts. The firm was founded in 1996 as SAP Ventures—the corporate venture arm of the German-based enterprise software and database technology giant.
The firm became independent of SAP in 2011 – even while SAP remains its only limited partner – and rebranded as Sapphire Ventures in 2014. Despite having invested in roughly 130 companies resulting in over $30 billion in exits, this evolution and name-change has left the firm very much under-the-radar compared to more prominent Sand Hill Road venture capital firms.
SAP as a Key Differentiator
Perhaps this will change a bit – at least in the enterprise technology sector. Sapphire Managing Director Jai Das explains: “SAP helps us differentiate in a major way and win deals from our competitors.” He adds, “Potential CEOs all understand the leverage that the global ecosystem of the world’s largest application software company provides to them as they scale and expand.”
Mike Burkland, the CEO of portfolio company Five9, which went public in 2014, reiterates enterprise software expertise as a key differentiator. “Jai and the Sapphire team consistently leverage his own and his firm’s vast network of contacts within the enterprise software industry for our benefit,” Burkland says. “The team has made numerous introductions to important potential partners.”
Even while the firm is now 100% independent, the benefits that Sapphire reap from its SAP ties are compelling. Today, SAP services 296,000 customers in 190 countries. In fact, 98 of the 100 most valued companies in the Forbes Global 2000 list are SAP customers and 74% of the world’s transaction revenue touches an SAP system. The Sapphire investment team is not afraid to leverage this connection.
Managing Director Dave Hartwig offers an illustration: “IEX is an example of where we backed a company that likely didn’t get through many of our peers’ screens,” he says, referring to the noted alternative stock and trading exchange profiled in Michael Lewis’s 2015 book Flash Boys. “But our Market Development group, plus our spot in the SAP ecosystem, make it almost automatic that we will be able to add value in a different way from most other investors.”
Clear Focus on the Enterprise
Beyond its ties to SAP, Managing Director Steve Abbott explains that it is part of the firm’s larger focus on enterprise and B2B that is the key differentiator. “The connection to SAP is important,” Abbott says. “What’s even more important is the true enterprise technology expertise that the firm has built up, and SAP is one part of that.”
Indeed, Sapphire maintains a pretty rigid focus on the enterprise sector, with over 85% of its investment allocations falling squarely in the enterprise space. Specifically, the firm specializes in five sectors: (1) Enterprise & Infrastructure Software, (2) Vertically-focused IT & Software (e.g., healthcare, education,
finance, government), (3) Business & Enterprise IT & Hardware, (4) Consumer Software & Electronics and (5) Security.
Even for the 15% of their portfolio companies that do not qualify as classic enterprise investments, such as 2015 IPO companies FitBit and Square or the market-leading LinkedIn, there is typically a data and analytics aspect of the opportunity that Sapphire specializes in, which will also have meaningful enterprise value.
HBS Professor and VC expert Paul Gompers has written extensively about the benefits ofspecialization in venture capital, stating, “Increasing firm specialization enhances firm performance.” Gompers explains one reason for this is related to the firm’s ability to better exploit the timing of intra-sector shifts and market segment changes.
This point is quite relevant to Sapphire’s success. While VC specialization is not unique to Sapphire, the firm has excelled in its ability to recognize and capitalize on key enterprise dynamics. Marakovic points to three enterprise market developments it has focused on as examples, including: Consumerization of IT (e.g., LinkedIn, Square, Localytics), Horizontal/Vertical SaaS (e.g., Docusign, ExactTarget, Five9, Socrata, IEX) and Business Intelligence/Analytics (e.g., Looker, Alteryx, Jaspersoft).
With another of its portfolio companies, Nutanix, recently filing to go public, Sapphire’s approach and focus may help it continue as one of the top-performing venture funds. But don’t expect to read a lot of articles about them along the way.