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:
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.