SAP Doubles Down, Commits Another $1B to Sapphire Ventures

Silicon Valley venture capital firm Sapphire Ventures, whose ancestry traces back to the former corporate venture investing arm of German software giant SAP, said today it has secured $1 billion in capital from SAP.

That adds up to $2.4 billion in assets under management for Palo Alto, CA-based Sapphire—-all pledged by SAP SE (NYSE: SAP), its only investor (limited partner) so far.

“I’m not sure how many other institutions have committed so much to a single fund,” says Sapphire CEO and managing director Nino Marakovic. “Maybe Google (to Google Ventures.)”

In 2010 and 2011, Marakovic shepherded the spinoff of SAP’s former in-house venture arm, SAP Ventures, into the new independent venture capital firm later renamed as Sapphire Ventures. The firm has grown from 7 or eight staffers to its current 27, of whom about half are investment professionals, he says. Taken together, the two venture outfits invested in more than 135 companies. Sapphire alone has backed about 45.

Business writers have remarked on how little press coverage Sapphire has drummed up compared to other VC firms making similar investments. But on the occasion of this large fundraising round, the firm took a little license to reach out to reporters and crow a bit.

“This is the seventh largest fundraise this year,” Marakovic says. The big haul puts Sapphire in the same company with Andreessen Horowitz, Kleiner Perkins Caufield & Byers, Norwest Venture Partners, and other heavy hitters.

Four of Sapphire’s portfolio companies went public in 2015—Apigee, Box, Fitbit and Square. They followed three in 2014—-Five9, Imprivata, and OnDeck. Citing an article by PitchBook, Sapphire says it placed among the top venture firm investors that had backed U.S. tech companies that managed to pull off an IPO since 2011. Sapphire was behind Sequoia Capital, IVP, Accel Partners, and New Enterprise Associates. It tied with DAG Ventures for fifth place.

Sapphire doesn’t comment on its financial performance.

Marakovic says Sapphire’s close affiliation with SAP brings benefits to the venture firm’s portfolio companies as well as to the big enterprise software company. Sapphire taps the SAP networks to introduce young companies to customers and showcase them at events. The venture firm, in turn, is a conduit of global information about early innovation trends in tech sectors for the big German company, he says.

“They see us as a sensor network,” Marakovic says.

Sapphire invests directly in growth-stage technology startups, but it also invests as a limited partner in the funds of other VCs, who support early stage companies. Sapphire helps and monitors the progress of those very young startups, making it well-positioned to lead or participate in follow-on financing rounds for promising ones, Marakovic says.

Sapphire is free to seek investments from limited partners other than SAP, “but SAP is a great partner for us,” Marakovic says. At least at this point, “we saw no reason to rock the boat,” he says.

Sapphire has raised money in stages, beginning with an initial $353 million for its first direct investment fund, and $150 million for investments in other venture capital firms. SAP later pitched in another $651 million for direct investing in startups, and $250 million more to support other venture funds.

From the bulk of its new $1 billion, Sapphire is now creating its third direct investment fund with an amount exceeding $651 million, Marakovic says. It will use the remainder to form its second fund to support outside venture firms. The plan is to provide longer-term backing for these venture funds in the United States, Europe, and Israel.

Although SAP may derive some strategic benefits as well as investment returns from its relationship with Sapphire, Marakovic says the venture capital firm sets its sights on financial gains alone. It makes 90 percent of its investments in products and services aimed at businesses rather than at consumers, he says. While wildly successful consumer startups such as Facebook arise “once in a blue moon,” enterprise startups more consistently hit “second and third base rather than huge home runs,” he says.

But some of the most interesting startups are hybrid companies that involve both consumers and businesses, Marakovic says. Facebook qualifies as one of these hybrids, he says. Facebook’s masses of users don’t yield revenues, but they generate data that’s useful to its enterprise customers. The same can be said of two companies Sapphire has backed: LinkedIn, which sells information from users’ professional profiles to recruiters, and the user-focused compensation database PayScale. Seattle-based PayScale allows job hunters to enter their educational backgrounds, work experience, and current positions. It then finds comparable workers and their pay rates, which may help users negotiate for better compensation. Using that aggregate data, PayScale can sell reports on current market conditions to employers.

Marakovic sees certain frontier technologies on the horizon that could generate another wave of disruption in both consumer and business uses—-virtual reality, machine learning, and the pairing of voice recognition and artificial intelligence.

“Business processes will be transformed and automated,” Marakovic says—-and he’s not just talking about customer service phone bots. “Even knowledge work will be more automated.”

Bernadette Tansey is Xconomy's San Francisco Editor. You can reach her at btansey@xconomy.com. Follow @Tansey_Xconomy

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