What I look for in an early stage SaaS startup

What VCs are looking for

A question I often get asked in conversations with early stage entrepreneurs is: What do VCs look for when evaluating Series A stage SaaS startups — metrics or otherwise?

It’s an important question for entrepreneurs, and I can see why it can also be a frustrating one. There’s no science to what gets a VC excited about one startup vs. another. Some startups are able to raise a big round early on, while others have to slog it out even when the metrics look great. Why is this not more predictable?

One of the primary reasons fundraising is not predictable at the Series A stage is because the early stage investment decision is contingent more on the thesis and qualitative factors around the company/market than the metrics. Metrics can certainly make the investment case stronger, but at the earliest stages, they’re not the deciding factor. It is the investment thesis, and how a startup maps to that, around which the decision revolves.

With that in mind, below I outline the qualitative factors I look for in a Series A stage SaaS startup, beyond that first step of feeling excited about backing the founders. Hopefully, these will serve as food for thought for founders looking to raise a Series A:

#1: Why now? To me, this is the most important question to answer in any investment thesis. Market timing is everything. Why should this idea succeed in a big way now? What macro trends are coming together to make it happen right now? For example:

  • We’re fortunate to be involved with a SaaS startup called Gainsight that offers a comprehensive solution for customer success management. Prior to the advent of SaaS and the X-as-a-Service model, there was no need for a customer success solution. The market opportunity for Gainsight came to be because X-as-a-Service has become the preferred business model across the tech sector.

#2: Product category. Similar sized companies with similar margins can get a widely different valuation multiple. Often, the reason for the difference lies in the product category they play in. Some product categories offer more opportunity to build a stronger, faster growing and more valuable business over time. I think about the following questions here:

  • Is the product you’re building mission critical to your users’ ability to meet their goals?
  • Over time, will there be an opportunity to evolve the product into a platform connecting all other apps that are relevant to its users?

#3: Market size. Obviously, market size is important and a lot of people have blogged about it so I won’t repeat what’s already been said on this. I personally have a strong preference for a bottoms-up market sizing exercise. It doesn’t have to be super complex. But I would much rather hear the following: “we are targeting companies with 500–2000 employees; there are X such companies in the US and based on a price point of Y, we expect our addressable revenue opportunity to be X x Y” vs. “Gartner estimates that US companies spend $7.8b on [our product category] annually”.

#4: Distribution. Ultimately, startups are valued for growth. Accordingly, it really matters if you have an efficient go-to-market strategy. I think about the following questions here:

  • Is the economic buyer already in the market looking for a solution like yours, or do you have to first convince them that they have a problem to begin with?
  • Does the customer have a large enough budget for your solution, to justify the sales and marketing investment?
  • Is there a way to establish a viral/word-of-mouth distribution strategy?

#5: Long term moat. Initial revenue traction is great, but investors are looking for companies that can build a sustainable advantage over their competitors over time. Companies that collect proprietary data on their platforms can build a data based moat over time. Enterprise marketplaces and vertical market communities/networks can build a network based moat. There are other ways to do this too. Salesforce’ AppExchange platform put it at the center of all cloud based enterprise software and built a network based moat around it. The network in this case was not a network of users; instead, it was a network of SaaS apps that can be deployed at a company with Salesforce being at the center of it. The key question I ask here is:

  • Is there a winner-take-all dynamic that you can impose on the market once you have taken an early leadership position?

Those are the questions and considerations that go through my mind when evaluating a Series A stage investment opportunity. I don’t try to arrive at a perfect answer for each of these questions. There are obviously a lot of unknowns at this stage of a company’s life cycle, and it’s okay to not have all the answers. The framework above often ends up being a useful thought exercise for founders too in my discussions with them, and hopefully will be useful to the founders who come across this post.

If you’re building a SaaS startup and are thinking about some of the topics above, I’d love to hear from you. You can reach me at nakul@lsvp.com.

‘Software, At Your Service’ CEO Interview Series: Should I Hire A Chief Of Staff?

President Obama with his first Chief Of Staff, Rahm Emanuel

In recent years, the number of chief of staff hires at early stage tech startups has gone up noticeably. While it may still not be a common hire, most CEOs I know who’ve worked with a chief of staff are big fans of having that role, and believe it can be transformational for the company. However, I haven’t come across many nuanced discussions around when is the right time for an early stage tech CEO to hire a Chief of Staff? Or, how to think about the role? I reached out to Nick Mehta, CEO of our portfolio company, Gainsight, about his thoughts on the role. Nick has a one-year rotational chief of staff position at Gainsight, with the idea that the chief of staff will get absorbed in a functional role at the end of the stint. It’s an interesting way to look at the role, and has worked great for Gainsight over the last 3 years. Here are his thoughts on the position:

Nakul: In recent years, we’ve seen a few tech CEOs hire a Chief of Staff for themselves. When did you first start thinking about it, and what was the motivation to hire one?

Nick: I kind of “fell into” having a Chief of Staff. A few years ago, I hired a very talented ex-BCG and Bain Capital professional (Allison Pickens) in a general “operations” role working for me. Allison contributed so much (in sales development, new markets and finance) that we quickly promoted her to VP Customer Success. I didn’t realize it at the time, but when I promoted Allison, I also lost my “chief of staff” in the process. While she didn’t have the formal title, Allison showed me the value of an “all-purpose athlete” working for the CEO.

As Allison was moving into the new role, she had hired an ex-Morgan Stanley investment banking analyst (Tyler Elkington) as our financial analyst and given her new role, she had Tyler report to me. I realized Tyler could do so much more than finance so I decided to take the plunge and make him my official “Chief of Staff.”

We are now on our third (fourth if you include Allison!)

Nakul: What does a Chief of Staff exactly do?

Nick: I look at the Chief of Staff role as being all about helping the CEO execute strategically. At any given point, a CEO has a few strategic priorities on her or his plate. The challenge is making progress on these amidst the inevitable flurry of emails and meetings. A Chief of Staff is a force multiplier for the CEO’s strategic value. At any given point, my Chief of Staff could be working on:

  • Driving the company’s strategic planning and budgeting process.
  • Coordinating a key exec meeting or offsite.
  • Prepping me for critical client or prospect meetings.
  • Project managing a strategic cross-functional initiative.

Nakul: Now that you’ve had a Chief of Staff for three years, what has been the biggest benefit you’ve derived from having that position filled?

Nick: I’m a believer now, having done it four times. In fact, I had a gap between my current Chief of Staff (Tim Hoag) and my previous (Nathan St. Martin) and felt the pain of not having one! At the most fundamental level, I can drive more parallel strategic initiatives with a Chief of Staff than without.

Nakul: At what stage of the company, should a SaaS CEO think about hiring a Chief of Staff?

Nick: It probably varies from company to company, and CEO to CEO. But in hindsight, here are some signs a CEO needs a Chief of Staff:

  • Your schedule is jam packed every week.
  • You have a growing list of strategic initiatives without an owner.
  • You are in a state where strategic initiatives tend to be cross-functional (hence not every one neatly falls under one exec).
  • You’re in a market that’s strategically growing and changing rapidly.

I also asked Nick’s current and last two chiefs of staff (Tim, Nathan and Tyler) as to how they thought about the role and where it fits in to their career aspirations, and here are their thoughts:

Nakul: What was the motivation to be a CEO’s Chief of Staff?

Tim: I wanted to be the Gainsight Chief of Staff specifically for two reasons — (1) the opportunity to lead/participate in cross-functional strategic initiatives and (2) to work directly for Nick.

As Chief of Staff, I’m able to work on (and many times lead) cross-organizational projects. So far, this includes the budget, employee success, growth/margin analysis, alignment with our partners, expense initiatives, TAM, product meetings and planning our annual “Pulse” conference.

More importantly, I talked with many of Nick and my mutual connections. The feedback on him was similar across the board — super sharp, hard worker, handles himself well around investors, empowering, motivating, full grasp on everything going on in his organization, etc. So far he has been great to work for, a fantastic role model and always has a great perspective.

Tyler: When the opportunity for the role came by my desk, I thought it was a unique opportunity to learn from a well-regarded CEO of a fast growing SaaS company. It would also allow me to quickly diversify the Finance-heavy skill set that I developed from doing Investment Banking, and start developing some operational experience.

Nakul: Where do you think you provided the maximum leverage to Nick on his time?

Tim: The initiatives I mentioned above are all things Nick would have to do otherwise. Nick still wants to know everything that is going on, so I will usually email him outlines, clarifications, etc. so I don’t spin my wheels. But he usually lets me run with executing the analysis (90% of the project time).

In addition, I perform various “program management” tasks, including prepping Nick for client meetings, coordinate certain executive/product meetings, and one-off items Nick wants accomplished.

Nathan: The major project I did as Chief of Staff was working on our Series D financing. During this time, I was able to manage the aspects of the fundraising process that were not critical for Nick to be involved in. Since the diligence for later-stage rounds involves more quantitative analysis and metrics, I was able to handle these requests while Nick focused on telling the Gainsight story and meeting with investors. I was able to work with junior members of the investment teams that were looking into Gainsight in addition to managing the data room. All of this freed Nick up to meet with multiple investors and still work with the sales team and customers to exceed our targets for the quarter.

In addition to the fundraise, I was able to positively impact such things as weekly GM meetings and Nick’s trips outside of the Bay Area. For the weekly GM meetings and quarterly offsites, I worked on the agenda was able to build presentations and reports that helped Nick make decisions without having to search for the data. When Nick had trips scheduled, I worked with the AEs and CSMs that had customers/prospects in the area, so that Nick was able to meet with as many companies as possible and have the biggest impact with his time. The first project I ever did with Nick, I was able to set 20 meetings up with other executives at a conference; many of the companies were not opportunities at the time but since then, a number have become customers.

Nakul: In what areas has the position helped you grow professionally?

Nathan: The position allowed me to see every aspect of the business and howa CEO runs his company. Not many people get to experience the full fundraising experience like I did so early in their careers. The position also allowed me to gain confidence in what I have to say and made it so that I now will share my opinion with anyone and even challenge more senior people on their ideas. Being Chief of Staff allowed me to see so much more of Gainsight than just Finance or Strategy; I have now worked closely with every team and spent multiple months with Sales, Customer Success, and Marketing. Following my term as Nick’s Chief of Staff, I helped Nick find my replacement and moved into a Marketing role where I report directly to our amazing VP of Marketing.

In general though, building a good relationship with your CEO is great, so being able to spend 6 months with him and work with him on a daily basis was enough of a benefit for me to say it was worth it. Just seeing Nick work helped me learn so many things about being a good leader.

Tyler: The role gave me incredible insights into the different functions — sales, marketing, customer success — of a fast-growing tech company and how they all work together. It also has grounded into me to always keep the bigger picture in mind, to always think cross-functionally … It’s easy to get too focused on only the department in which you work. I’d highly recommend the role to anyone who is looking to work for the best and learn a ton about growing a business.

We’d love to hear from other tech CEOs who’ve had chiefs of staff about their thoughts on the role, and their advice to other CEOs who may be thinking of hiring a chief of staff.

‘Software, At Your Service’ CEO Interview Series: Dan Teran, Managed By Q

Happy New Year folks! For the next edition of the ‘Software, At Your Service’ CEO interview series, I reached out to Dan Teran, one of the most interesting founders I’ve gotten to know over the last year. Dan is the founder and CEO of Managed By Q, a rapidly growing NYC startup that is bringing to bear the power of software and a marketplace approach to rethink the office management services space. Dan and his co-founder Saman are hugely ambitious, have no shortage of hustle, and have been very thoughtful about every small detail around their business. I have touched upon the thesis of on-demand services for the enterprise earlier too, and I think Q exemplifies that thesis.

I hope you enjoy the chat below as much as I have enjoyed getting to know Dan and his vision for Q:

DanTeranManaged by Q is a pretty unique business. How did you stumble upon this idea, and what about the idea compelled you enough to start this company?

We actually started working on the business looking at a similar problem for a different customer. My co-founder, Saman Rahmanian, was the person in his building responsible for choosing a maintenance company and was blown away with how bad the options were. I had recently moved into a co-op in South Williamsburg and was also having persistent issues with the building maintenance. Saman designed the original iPad concept and kicked things off by retaining a residential property manager to help us learn about the market, and we ultimately decided that condo and co-op boards were terrible customers, and turned our attention to office managers.

For me personally, I got obsessed with the idea of creating an operating system that could run physical space with the reliability of software. The more we talked about it and socialized the idea everyone agreed that this was something that had to exist. So we went to work building it. That core idea hasn’t changed.

Q is an operationally heavy service business. How do you ensure service quality remains consistent as the company grows? Are there specific strategic decisions or measures you’ve taken to ensure high customer satisfaction?

This is definitely the single greatest challenge in our business, and something that we put a lot of energy into solving.  We’ve seen numerous businesses in the consumer space really struggle with this exact thing and put a lot of thought into building our business in a way that optimizes for the best quality of service.

Probably the most obvious strategic decision we’ve made is to put a big emphasis on being the best employer to all of our employees. The first decision was to employ people properly as W-2 employees, the second was to figure out what would make this a really great job and attract great people, and the third was building shared prosperity into our business model. As a result we’ve built an amazing, diverse workforce that is all aligned behind a the single vision of making it easy for our clients to run an office, and everyone shares in the company’s success.

You’ve managed to do a great job of layering on additional revenue streams on top of your core office cleaning services business. How do you think about what products/services you can add to your existing businesses?

The core value proposition to our customers is that we make it easy to run an office, all of the opportunities adjacent to cleaning have spiraled out from there. We don’t think about how we can make more money, we think about how we can make it easier for our clients to run their offices and the money tends to follow. We’ve been able to leverage our access to the physical space and our field operators to deliver a uniquely high level of service, this is part of why it is so important that our field operators are incentivized to go above and beyond the call of duty.

A couple of weekends ago, a Q Operator was cleaning a client’s office and noticed a leak from the upstairs neighbor, we were able to get a handyman on site within hours to coordinate all of the repairs without any involvement from the office. If they hadn’t been using Q it would have been a miserable weekend for the company. The building owner is actually now recommending us to all of their tenants because we were able to save the day. This wouldn’t have been possible without the technology we’ve built, the amazing Q operators, and a robust enough service offering to solve all of the client’s problems.

Beyond saving the day in these types of situations, the fact that we’re in the space every single day puts us in the optimal position to do things like replenish and re-order supplies, which is a huge hassle for office managers.

What does Q look like at scale, 5 years from now?

This is a big question. I’ll start by trying to make it simple. If we’re successful, I think 5 years from now Q will be in every interesting office in the US.

In the past 18 months we’ve been very successful in scaling our core services, which has allowed us to aggressively expand into a lot of offices, but our ambitions are much bigger. We’ve had great success expanding our service offering beyond core services by working with Q Partners in our marketplace, and anticipate massive growth on that side of the business. We’ve had the opportunity to really get to know our customers in the past year, and are building some amazing product to support the needs of office managers – right now all of our customers use the cleaning service but that will not be the case forever, we are building products that adapt to support the unique needs of every office manager rather than prescribing a one size fits all solution tied to our services.

I think I’ve revealed too much… the best is yet to come.

In a lot of ways, you are an atypical tech entrepreneur with an atypical business. Q is very operationally heavy for a B2B business, you and your co-founder weren’t coming out of Google or Facebook or an Uber. Did that impact your fund raising strategy? Was it tough to raise capital in the beginning?

We’ve always been able to find investors that are aligned with our vision for the company. We definitely started raising capital at the height of the on-demand economy frenzy and had a lot of investors that wanted us to pursue a 1099 model, but it never made any sense for our business. The right investors got that immediately. I don’t have any data to back this up, but I’m guessing more people have lost money betting on companies that had “Uber-for-X” in the pitch than have made money (unless they are in Uber).

With regards to our backgrounds,  I definitely think there was some hesitation around our operating chops early on, but we were able to raise a small angel round from some really incredible investors which gave us enough fuel to prove ourselves and the business case. We’ve also put a big focus on hiring into our weaknesses and hired a phenomenal VP of Ops who had been at Quidsi and Amazon very early on, and a SVP of Finance + Admin who had run finance and admin at the Huffington Post and Exhale Spa.

Talk about the difference between your experiences raising your seed round vs. Series A? Any learnings in there that you could share with other founders?

I get asked about fundraising a lot, but having only raised three rounds of financing in my life I’m far from an expert.

I think one thing that I’ve learned is that it is a totally different job at each stage of the company, so you really need to lean on people who have seen a lot (usually investors) to coach you through what that means. Very few skills transfer between stages, you need to be able to tell a good story at every stage, but the later stages require a much deeper understanding of your understanding of the business, industry, and even the US and global economy. One oversimplified way to think about it is that with each subsequent financing you are one step closer to being a public company CEO, assuming you don’t get fired, and public company CEOs need to know this stuff.

My best advice is probably to read everything, ask for help, and don’t assume you know anything.

What were some of the mistakes you made early on as a first time founder, that in retrospect you could have avoided and would advise other first time entrepreneurs on?

This is also a question I get a lot that is kind of tricky, it is very hard to separate things in the past that were stupid mistakes, and things that were lessons that I needed to learn in order to get better and smarter. Probably the biggest mistake to avoid hiring poorly. Even if you spend all your time on hiring, spend more time on hiring. The longer I’m in this business the more I see how amazing great hires are and how devastating bad hires are. Businesses are complex organisms, and the wrong people can do a disproportionate amount of damage, even if they are well intentioned.  Always, always, check references. If you think people don’t lie on their resume, it is because you are not a sociopath!

‘Software, At Your Service’ CEO Interview Series: Daniel Chait, Greenhouse.io

Daniel-ChaitFor the second part of the ‘Software, At Your Service’ CEO interview series, I reached out to Daniel Chait, the founder and CEO of Greenhouse.io. Greenhouse is leading the charge in bringing to life a modern recruiting platform that enables companies to not just source better talent, but also rethink their entire recruiting experience from a candidate point of view.

I’ve gotten to know Daniel well over the last couple of years, and have been very impressed with his vision for the recruiting market, and Greenhouse’ ability to consistently rise above the noise in a crowded space. But more than that, I’ve always enjoyed my conversations with Daniel – he’s a keen observer of product-market trends in his space, is thoughtful and articulate about his vision, and has remained unassuming despite the success Greenhouse has enjoyed over the last couple of years. Daniel’s story is also particularly interesting for other SaaS founders for a couple of reasons: (1) Daniel spent more than a decade in the professional services world (as a software consultant) prior to founding Greenhouse. There was a ton he had to learn and unlearn to adjust his mindset to run a software product business; (2) Recruiting software is a very crowded market with lots of point solutions, but he and his team have managed to carve out a leadership position for themselves. I believe they’ve been able to do that because of a very keen understanding of their customer’s pain points, and how to position Greenhouse as the central platform from where customers run all recruiting initiatives.

I hope you enjoy the chat below, as much as I’ve enjoyed my conversations with Daniel. Here goes:

Prior to founding Greenhouse, you spent a decade as a software consultant. How was the transition from building a services organization to a product organization? What did you have to learn and unlearn?

The entire business model being different required a big adjustment. I remember sitting down to do our first pro-forma P&L projections and thinking, ‘Okay, how many billable staff do we have, what’s our utilization, what’s our bill rate…. wait a second! This isn’t right at all’. Fortunately, I was able to dig up a ton of resources about the SaaS business model from blogs like those of Jason Lemkin, Tom Tunguz, David Skok and others.

My consulting business served big financial institutions, so the other big adjustment for me personally was moving from a Wall St. culture back to a tech company culture. I had to shed a lot of the armor you build up dealing with the dog-eat-dog world of big finance and reconnect with the openness and sense of purpose that comes with being more of a startup, and a people-oriented business. Luckily, that’s in my nature. So it was a pretty easy thing, once I recognized the need to do it.

Lastly, Greenhouse is just a way, way faster growth business than consulting can be. So even though I’ve participated in building a large organization before, this time feels like playing the movie in fast-forward. A lot of the lessons I learned over the years about culture, communication, recruiting, and management, I’ve had the chance to apply here at Greenhouse – just much faster!

Recruiting software is a crowded landscape with large incumbents as well many modern startups attacking the space. What gap did you see in the market that led you to found Greenhouse?

Before Greenhouse, recruiting software was largely set up to solve the “applicant tracking” problem. Legacy systems saw recruiting primarily as a paperwork and compliance problem, so the tools had the objective of making the process simple, reducing paperwork headaches, and keeping compliance. Meanwhile, the business landscape had undergone this radical transformation, where organizational success had become primarily driven by the value companies  were able to get out of their people. Furthermore, with the transparency and mobility brought about by the information revolution, talented people were no longer tethered to a single employer for their entire career. Hence, you have this new world where companies need the best people more than ever, yet those same people have tons of power, and thus, need your company *less* than ever!

Greenhouse was built to address this new kind of problem, where a company needs to bring its A-game to bear in recruiting. Companies need to improve how they plan, execute, and optimize their recruiting approach in order to compete and win for top talent. We at Greenhouse saw that and imagined a new kind of software tool that would address that new and critical set of problems better than anything before.

What advice would you give to first time SaaS founders about thinking through product-market fit, and how to position their product in a competitive market?

For product/market fit, the way we approach that type of thing at Greenhouse is, first of all, understand what phase you’re in and optimize for that phase. That is, before we had product/market fit, we knew that we were going for that and so didn’t worry about stuff that didn’t matter (yet) for us like revenue, CAC, etc. We just wanted to understand whether we had a product anyone wanted, then how to sell it to them, and only then we started worrying about the next set of questions like scaling the sales process, optimizing pricing, and so on. So you’re just optimizing for learning, which means almost trying not to scale – do things yourself, be very hands on, and introspect a lot on each experience. Going too fast or hiring too soon at this stage can be a barrier to the sort of learning that’s critical to getting to the next stage.

As to positioning, and my experience is limited mostly to B2B, enterprise-y sort of stuff, basically always, always go for high value. Identify the biggest problem, the most value you can deliver, and position there. If you are playing in a small pond (say, we can make your paperwork process slightly more efficient) then you’ll never be able to support a differentiated and sustainable competitive position. It’s all commodity. By contrast, Greenhouse is going after a huge pool of value (helping people build more effective companies), so we have lots of ways to differentiate and really drive lots of value for each customer.

Does fundraising become any easier once you have some traction behind you? How did the fund raising experience differ for you from when you were raising your Series A vs. Series C round?

Yes and no. It gets easier in the sense that there’s no check scarier for an investor to write than the first check in. So the further along you are (in rounds, or even within a round), the more other investors feel safe “going along with the crowd.”

On the other hand, I feel like each time I go to raise money the whole process is different than the previous round, so you do start over from square one in some sense each time. Series A investors are interested in very different questions than B, C etc. You learn really quickly that going to raise a B round with an A story just doesn’t work. They have all sorts of new questions, you need to present the data differently, and so on. For the most part, the investors themselves are also a different set. Few investors write $3M checks and also $30M checks. So the people you pitched & the relationships you built in your A round aren’t very relevant in your C round. You have to start all over again at the next tier up.

How do you think of cash burn vs. growth for an enterprise software startup in the current environment?

Great question. Investors have been in this mode of rewarding growth rate above nearly everything else, so it’s tempting to just put both feet on the gas pedal, take your hands off the steering wheel, and just try to grow as fast as you possibly can, come hell or high water. At Greenhouse, we have tried to be a bit more balanced. We’re building a long-term sustainable company which means being thoughtful in how we balance growth vs cash burn, but also the other elements of sustainable business success. For example, we’ve probably invested way more in service reliability (security, stability and performance) than others. If all we care about is this year’s ARR, there’s no reason to do that.

Any avoidable mistakes you’ve made as a first time SaaS founder and CEO over the last 3 years, that you can share?

Be more thoughtful about communication. So, it turns out that, being CEO, people will try to do what they think I want. Weird, I know! I’ve learned that if I just say every idea that I have, unfiltered, it leads people down a ton of blind alleys. I’ve gotten much more thoughtful at communications, understanding that as a leader, the things you say are listened to very carefully so you need to be just as careful in what you say, and how you say it.

I intend to continue this interview series through November and December with SaaS founders and CEOs whom I’ve gotten to know well. Would love to hear of questions that are top of mind for current and prospective SaaS founders in the comments section, and I’ll incorporate them in future interviews.

‘Software, At Your Service’ CEO Interview Series: Nick Mehta, Gainsight

Building a scalable, long lasting SaaS business is not easy. Navigating the landmine of mistakes that one can make as an early stage SaaS CEO is even harder at times. What makes SaaS particularly tricky is that while you have to deploy an enterprise sales and marketing playbook, the product-market side is more similar to the consumer world in that the product categories are often not defined clearly at the beginning. Often, the ideas that look niche-y in the early days go on to become massive categories over time. While the more well defined product-market areas don’t have the market size question hanging over them, they are over-crowded and it’s difficult to rise above the noise. Picking an area that can lead to a large market over time, while still allowing for differentiation when competitors come in is just one of the many tricky questions facing early stage SaaS founders and CEOs.

As the year draws to a close, I reached out to a few SaaS CEOs whom I know well and asked them if they’d be open to sharing their thoughts on some of these questions. So over the next several weeks, I plan to publish an interview a week with early stage SaaS CEOs playing in areas that I focus on. I wanted to kick off this series with a chat with Nick Mehta, the CEO of Gainsight. We’ve been fortunate to be part of the Gainsight story at Lightspeed. Nick and his team at Gainsight are doing an incredible job defining the new category of customer success management, and I think his thoughts here are great food for thought for any early and growth stage SaaS CEO:

Nick1You are a second time SaaS CEO. What were you looking for, in terms of space or product-market, when you were thinking of your next SaaS company to start or join before finding your way to Gainsight?

You’re right that you definitely think a bit more the second time about category, since so much of the potential of a company is set by the market in which it plays. For me, a few things jumped out:

  • A space with a big tailwind, where I could see it becoming very large over time
  • A business where the skills I think I uniquely have will be leveraged
  • A problem that I’m personally passionate about

Luck had it that Gainsight (formerly JBara) and Customer Success were just getting started and checked all 3 boxes!

Gainsight has created a new enterprise SaaS category that’s pretty horizontal in nature. That doesn’t happen often in B2B software. As you look back over the last two years, what were the key strategic moves you guys made that helped customer success management become a standalone category?

I think about this question a lot. Every day, as a CEO, you make dozens of decisions. In the moment, they all feel similar. But in hindsight (post-facto), a few stand out:

  • Our big bet on evangelizing the category and job function of customer success, led by Dan Steinman and Lincoln Murphy, on our side
  • Our early decision to run a conference not about Gainsight but instead about the category (Pulse); Pulse had > 2,000 attendees last year in our third year of the event
  • Our focus on mid to large-sized companies, which forced our product to become enterprise grade in a hurry – and made us invest a huge percentage of the company’s team (> 50% of headcount) in R&D
  • Our relentless use of cheesy pop culture references at every turn
  • On a serious note, our willingness to be ourselves in terms of our values (Child-like Joy, Success for All and Treat people the way you want to be treated) and our brand

Anything you would do differently in the early years at Gainsight if you could do it all over again?

I don’t really believe in that line of thinking, since so much of what got us here is the sum of everything good and bad that happened. But we introduced a proactive customer onboarding process called Gainsight Express about a year ago which radically streamlined customer time-to-value – I wish we had come up with that sooner.

Can you talk a bit about the culture you’ve tried to imbibe at Gainsight? Hiring and retaining talent in silicon valley can be tough, and it seems there’s not enough discussion on how company culture can be the critical difference in eventual success or failure…

I almost hate the word culture now because it’s been so tortured.  In my opinion, culture is not a recruiting or retention “tool.”  Culture is existential.  Culture has to be there because that’s the kind of company as the CEO that you want to work at – not because it’s a way to recruit others.  That’s why culture has to be very personal to the CEO.  You can’t outsource it.  You can’t delegate it.  You can’t read a blog and copy it.

Also I think the culture should sound bizarre to people who don’t like it.  It shouldn’t be for everyone.  At the same time, it shouldn’t become monochromatic so you exclude diversity, so it should only be very tangible issues that really matter to you and your company.

For me, our culture is built around the weird, quirky, cheesy, bleeding heart, sappy person that I am and my iterations over the years in thinking about what I care about.  So our values are centered around:

  • Golden Rule: Treat people the way you’d want to be treated – not because it will come back to you and help you but just because it makes YOU feel good to do it
  • Success for All: Build a company where everyone wins – customers, teammates, families, partners and investors
  • Child-like Joy: Bring the same free spirit you had on the playground to work every day – take your work seriously, but not yourself

There’s a lot of talk these days about high burn rates, and that the current mindset of growth at all costs can be dangerous. How do you think about the question of growth vs. profitability for a B2B startup in today’s environment?

You have to keep your ear close to the ground in terms of the funding market. Anyone that tells you that funding doesn’t matter is lying to you or being naive. Your cost of capital is very important. When it’s lower (in good times), you can take more risks. When it’s higher, you take less. No good CEO intentionally tries to waste money but every good CEO is paid to take appropriate risk.

Risk is reflected in one way in the choice of how much capital you “invest” in losses or less profitability. The less risk appetite in the market, the more quickly you need to be able to converge.

In a market where there is less appetite for risk, you need to stock up on capital and be ready for a world where you can’t raise again for a while, if ever.

You are also an advisor and angel investor in a number of startups. What are some of the common mistakes you see first time founders making?

I see three types of mistakes happen most often… there are many more that all of us are always making and learning from but if I have to summarize, these would be the three:

Mistake #1: High friction, low value. I think the most telling question to ask for a B2B SaaS business is “what’s your Average Selling Price?” Some companies do great with a high ASP (e.g., $100,000) and a complex sales model. Others do great with a $100/mo service sold online. I worry about businesses that have complex sales for $10,000 per year products. I think ASP is a big indicator of client value.

Mistake #2: Starving R&D. I see too many companies that use an MVP approach to start (which is great) but then believe keeping product lean is always the right answer. In some categories (e.g., consumer), it makes sense since a small number of engineers can scale to a huge number of users. But in enterprise, with the varying needs of companies, I’ve found that long-term shareholder value is often correlated with R&D investment. I worry about companies with 3 engineers and 30 sales people.

Mistake #3: Assuming there is a bright line of ARR for funding. I often get the question from first-time entrepreneurs – “what’s the ARR level I need for a Series A?” The harsh reality is that this isn’t platform 9 3/4 from Harry Potter – there is no magic mark you walk over to get to a Series A. Investors are much more interested in the quality of the customers and the differentiation in the product. Case in point, some companies with 3 customers paying $200,000 per year may be great Series A candidates while others with 1000 customers paying $1000 per year may not be.

Where do you think are the greenfield opportunities in SaaS today? It seems most of the obvious horizontal opportunities are taken or over-crowded with competitors…

It’s not novel anymore but the number of vertical SaaS opportunities really blows me away. The reality is that SaaS allows technology to take over more of the value chain than traditional software. In the software world, you’d sell software alongside hardware, professional services, third-party networks, etc. Now a vertical SaaS company can integrate the entire stack, expanding the Total Addressable Market dramatically for traditionally “niche” categories. Related to that, the merger of SaaS and marketplaces (which has been well-documented), further expands the category.

Where are the greenfield opportunities in SaaS?

SaaS is no longer a new business model. One look at any of the market maps for marketing tech, sales productivity apps, HR tech or other functional areas within enterprises would tell you how crowded these traditional enterprise software landscapes have become… Is there another billion dollar company to be built in some of these areas? Sure, and I’m actively looking for those. But where are the large greenfield spaces? What are the areas that haven’t seen a modern piece of software in years? I believe most of the greenfield opportunities in SaaS today are beyond the traditional horizontal/vertical enterprise software areas. As new distribution and pricing models emerge, and a younger workforce looks for modern software tools even in the most old school industries, some of the hitherto untapped areas are becoming ripe for SaaS to penetrate. Here are a few areas I am beginning to see some interesting startups emerge in:

  • Government software: I think the combination of the recent hires the Obama administration has made + the stark difference in the quality of software government officials use in their work vs. personal lives has gotten to a point where we are going to see huge SaaS opportunities open up across a spectrum of government functions – better software to manage elections, create/manage/store documents and forms, communicate with citizens, allocate city and state level resources, finance management, budgeting etc. Traditionally, selling to governments has been associated with long sales cycles and conservative buyers. But I think that’s beginning to change. Am increasingly coming across early stage startups seeing great traction selling to states and municipalities, in some cases while deploying an inside sales model, which would have been unthinkable even 3-4 years ago.
  • On-demand services for the enterprise: The on-demand economy has had a great run over the last few years. The model that Uber and Airbnb pioneered is now being deployed to all forms of consumer goods and services – food, groceries, car valet, laundry, spas etc. But surprisingly, to me, one area where on-demand startups haven’t focused enough is the enterprise segment. Workplaces have similar needs as households and individuals – food, office supplies, cleaning, maintenance/repair services, transportation, legal and accounting services etc. My view is that we will start seeing some interesting startups come up that offer similar on-demand services with an exclusive focus on enterprise needs. ManagedbyQ is a great example of a company that’s leveraging this opportunity.
  • SaaS for the hourly worker ecosystem: Historically, most of the big enterprise software companies have been built around addressing the needs of knowledge workers. Salesforce, Workday, Zendesk, ServiceNow, Veeva, Marketo, Tableau are all examples of software that address the needs of knowledge workers. This is largely driven by two factors: (1) Knowledge workers tend to spend a lot of time in front of a computer screen and the software workflows they use are mission critical to their daily output and (2) Knowledge workers tend to have more budget to spend on software. However, with everyone owning a smartphone now and freemium distribution models having proven out, almost everyone now stands to benefit from the power of software. Uber, Lyft and Instacart are the most obvious examples of startups that have leveraged the penetration of smartphones and built massive franchises with 1099 workers on one end of their marketplaces.
  • Heavy industry software: Heavy industries like construction, mining, oil and gas etc. are still primarily using legacy on-premise solutions in various aspects of their business. From project management to cost/budget management to big data applied towards machine optimization, there is a ton of greenfield opportunity in these industries. With smartphones and tablets everywhere, field workers in these industries now have the opportunity to use software to make better decisions on the go… Why wouldn’t these industries leverage modern software to drive higher efficiency gains than they’ve ever had the opportunity to?

What other areas are ripe for SaaSification, according to you?

If you have customers, you need customer success!

Once every few years, the combination of a couple of macro trends allows for a new software category to emerge. At Lightspeed, we believe such a confluence of macro factors is coming together to create the next big software category: Customer Success Management. And today, I am thrilled to announce Lightspeed’s investment in the leading startup in the customer success management space, Gainsight.

Our investment thesis for Gainsight is pretty simple: As customers increasingly interact with products / businesses online, a wealth of data on the frequency and depth of product usage, customer-vendor interaction (webinars, support tickets, NPS surveys etc.) and background of the customer engagement (size of company, contract, is the primary buyer still at the company?) can be analyzed to identify which customer engagements are going well, and which ones are not. In recurring revenue businesses, these signals manifest themselves in the form of customers that are at risk of churning out, or opportunities ripe for upsell. In other businesses, these signals manifest themselves in terms of whether the customer came back to buy more product/services or not. Additionally, at a time when even a little bit of customer dissatisfaction can travel far and wide through social media and other online forums, companies just cannot afford to drop the ball once they’ve made the initial sale to the customer. In this new world, customer success and account management has gone from being a cost center to a revenue imperative.

As these twin trends of (a) more data to analyze customer engagement and (b) increasing need to keep the customer happy throughout the engagement come together, Gainsight is firmly positioned to be the defining company in the customer success category. Gainsight not only provides its customers the ability to analyze internal/external data to measure customer happiness, it also provides the workflow and collaboration tools to the customer success, customer support and sales teams to act upon the insights being generated by their platform.

When most people think of customer success, or what Gainsight does specifically, they associate it with renewals management in recurring revenue businesses. While that is definitely where Gainsight started, that is only the tip of the iceberg. Gainsight’s vision of customer success is much broader than just enabling annual renewals, and we’re already beginning to see an expansion beyond SaaS/tech companies in Gainsight’s customer base. Gainsight’s vision is to place customer success at the heart of every conversation a vendor has with their customer. In my mind, this is a very important part of our investment thesis here. Every company that intends to have a repeatable engagement with its customers needs customer success. We live in a world where regardless of business model, companies can measure customer satisfaction through social media, NPS surveys, support tickets, online usage of the product, whether the customer is attending your webinars and conferences or not, etc. We also live in a world where one bad customer experience gets amplified through social media and can damage a brand at a global scale within minutes. While social media and customer support solutions provide the tools to react to such scenarios, Gainsight offers the toolkit to be proactive about customer happiness, not just when someone is complaining online or when it’s time to renew a contract. In this day and age, any company that does not have a dedicated customer success team is sending out a clear message to its customers as well as prospects that it doesn’t care about them.

I’ve had the pleasure of getting to know Nick and his team well since early 2013, and have been blown away by their expansive vision for customer success. In the last two years, Gainsight has gone from being an early stage startup that focused on account management to starting a movement around customer success. Nick has put together a great management team around him, and Gainsight is leading this movement from the front. We’re thrilled to be backing Gainsight in this journey, and are looking forward to helping them build the next big software company.

The next phase of ‘consumerization of the enterprise’

In 2009, when I moved to the Bay Area from India and started learning the ropes on enterprise software, one of the buzz phrases in the industry was ‘Consumerization of the enterprise’. At the time, the ‘consumerization’ was about bridging of the huge gap in usability of software people used at work vs. what they used as consumers. Think Oracle, SAP, even Salesforce.com and then think of Google, Facebook, Twitter. The gap in usability and design was obvious. That first phase of the consumerization is still playing out in the enterprise world. Companies such as Yammer, Box, RelateIQ, Asana, Marketo, Zendesk and several others have led the charge in terms of building software that is easy and intuitive to use for business users.

In my view, we’re now beginning to see the second phase of this ‘consumerization’. And this time, it’s more than the UI. It’s about the business model. If you think about it, most enterprise software business models come down to a very simple equation: Customer pays for the software. Pricing models can vary (freemium, free trials, paid POCs etc.) but in the end the customer pays for the use of software. On the other hand, some of the best consumer software that we use on a daily basis is free. I don’t pay to use Google, Facebook, Twitter, YouTube or even iTunes for that matter (till I actually buy something on iTunes). Consumer software monetizes mostly via advertising or commerce. I think we’re going to see an emerging genre of enterprise software that monetizes similarly. Two models that I’m beginning to see emerge are:

  • Enterprise marketplaces: Companies such as oDesk, 99Designs and a few others pioneered marketplaces in the enterprise world a few years ago, but those were still marketplaces where the primary outcome was buyer meets seller for an infrequent transaction. Next-gen marketplaces like uTest, Contently, Scripted, Upcounsel and Boost Media not only provide a network of freelancers on the seller side, but also offer deep workflows for the buyer organization to manage the work being outsourced through them. The workflows being offered here are as much a part of the value prop to the enterprise as the commerce transaction itself. Additionally, addressing mission critical functions as content marketing, usability testing, advertising etc. allows for these companies to establish almost a subscription-like engagement with their customers. Some of these startups are indeed pricing their offering as a subscription to ensure predictability, but the subscription tiers are based on the volume of transactions.
  • The iTunes model: Zenefits and Quartzy are two early stage startups that come to mind here. Both solutions represent modern UIs, are free to use for their customers, and monetize through commerce that happens over their software. Buyers only pay when they buy a service/product from another vendor via the solution. The core software workflow is completely free, and the commerce piece is optional. This is quite powerful as a business model. Business users don’t normally get to use enterprise-grade software for free!

In my mind, this shift towards consumer business models in enterprise software could be a pretty important one. It would allow for scalability, and network effects of a kind that enterprise software hasn’t seen in the past.

This is still an evolving thesis for me, and I’d love to hear about other startups that are deploying a consumer business model to the enterprise world, and the learnings from those.

Let’s do this…

Hi. My name is @nakul, and I am a venture capitalist at Lightspeed Venture Partners. I am based in San Francisco, where I live with my awesome wife @kunjan_chabra, the home decor blogger behind An Affair With Color.

I’ve been a VC pretty much throughout my career. I started my investing career in India in 2006. Five years ago, I moved to the bay area with Battery Ventures (I initially joined Battery in India) and have focused primarily on enterprise software investing since. Recently, I joined Lightspeed (www.lsvp.com) to help build out the firm’s SaaS practice.

I have wanted to start blogging for a while. I am aware that the tech world doesn’t really need another VC blog. There are already a lot of great blogs out there with a lot of great content on entrepreneurship and trends in technology. But I haven’t seen many that are dedicated to enterprise software, and that’s the gap I hope to fill. I would like for this blog to be the place where I can offer my take as an investor on macro and micro trends I see playing out in the enterprise software market, and the myriad opportunities those trends are creating. And I hope that over time, others in the SaaS ecosystem will chime in with their thoughts on these topics too.

From my side, I’ll try to keep the writing crisp, and my thoughts precise. I will also strive to provide an authentic voice to how I, as an investor, look at the SaaS world. There’s a lot of exciting stuff going on in enterprise software these days. Big data, mobility, freemium pricing models are all disruptive forces that are changing the way software is used within enterprises. I’m excited to get this blog started and have a conversation about some of these forces.

Alrighty! Let’s do this now…