Is Your Market Growing Fast Enough?
A conversation with Nick Mehta at Gainsight
This conversation was a real treat for me. Nick Mehta, CEO of Gainsight, and I worked together for 6 years, building the company from $1M to $85M in ARR while I was there. One repeat topic in our exec team and board meetings was, “How large is our market, and how fast is it growing?” These were critical questions for us then, because if we wanted to be a hyper-growth company for many years to come, our market needed to support that. These are also critical questions for many companies right now, since the macro-environment is affecting the growth rates of their software categories.
While it’s standard to have back-of-the-envelope math on your market size in your Seed and Series A pitch deck, the reality is that market sizing is much more complex than that when you’re actually scaling your business. In this conversation, Nick and I dove into the nuances:
How can you track whether customers are truly ready to buy — i.e. are “in market” — so that you’re not wasting your time?
What do you do if your market isn’t growing fast enough right now?
How do you adapt your messaging to the current macro climate?
You can listen to the podcast or else read the lightly edited transcript of the conversation below. Let's dive in!
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Allison: Nick, I'm so excited to have you on the podcast today to talk about growth endurance, which is a topic on every founder's mind right now. Thank you so much for joining.
Nick: I don't think I've been more excited for a podcast in forever, so I'm so honored to be here, Allison. Thank you.
A: For some context, Nick and I worked together for six years growing Gainsight. I was super excited to have an excuse to bring him back into a recorded conversation, which we did many of while we were working together. So this is going to be a lot of fun for me, too.
N: Allison is super humble. She's one of the most important people in the history of Gainsight, so I am so grateful to continue having a relationship with you. Thank you.
A: Thank you so much. As further context for this and for the audience's sake as well, there are not that many SaaS companies that have reached $100 million in ARR. When you chat with founders, there are many of them that have raised money at sky high valuations. There are many more unicorns than there used to be, but you'll also know that many of them have only small amounts of revenue.
I was talking to a founder in Boston the other day who reached $30 million in ARR. He said he didn't know a single CEO who ran a company that was larger than his. There are other companies that are in those middle stages, who have raised money at high valuations. They presume that they're going to continue to grow at sky-high rates and rocket past $100 million in ARR.
I think this is a big problem and opportunity for a lot of startups. And Gainsight is one of those companies that has surpassed $100 million ARR and continues to grow well.
N: I don't know if you saw that they call them “centaurs.” Did you hear that new term? I don't know who made that up.
A: Yes. And actually Mary D'Onofrio from Bessemer Venture Partners was a guest as part of this series, and she coined the term “growth endurance.” We talked all about the differences between centaurs and unicorns. A unicorn has reached the $1 billion valuation mark, a centaur has reached the $100 million ARR mark. It’s very interesting how there are a lot of unicorns out there but not many centaurs.
Why do you think there aren't that many companies that have reached $100 million in ARR?
N: There are probably two different elements to that. One is probably time. Of course SaaS is not that old and it takes a while. Some companies get to $100 million very quickly. But for most of them, it takes a while, including Gainsight. And some of it is the cornucopia of SaaS companies largely were launched probably in the last five, seven years. Many of them will get there over time, and probably some of you listening will get there.
The other thing I'd add in, which is probably related, is this growth endurance problem. Let’s say you’ve gone from $1 million to $3 million of ARR in a year. That's amazing. Will you triple again next year? Will you triple again the year after? I hope you do. But the statistics say that’s not always the case.
Then the growth endurance problem ties to something that's even more fundamental. Given the amount of funding that happened in the last five years, markets got carved up into smaller pieces. Somebody's going after some super-horizontal, very specific niche thing, which could be a great business, but you may be a little more TAM limited. What do you do about that?
A: As you said, market size is really important. The rate of growth of your market is important. How do you know if your market is large and growing? We've all done the back of the envelope analysis. But how do you really know?
N: As you know, we went through this so much at Gainsight. I've thought a lot about this topic and there are two different things—large and growing. I’ll break them two separate because they're different. Gainsight's market was not large, but luckily it's been growing. So we had one, but not the other.
On the large side, there's this classic assumption in business planning that is not right most of the time: namely, that when you build a spreadsheet, you put this many reps in, this much ramp time, this much quota, and that gets you the bookings.
So, if we did $3 million a day new bookings this year, we're going to do $6 million next year by doubling the sales team. And so you double the marketing spend. But actually, what often ends up happening is you hire all those reps and they're not that productive.
What's happening under the covers? In an existing market, one of the challenges is, for example, let's say there are 1000 companies in your TAM. Not all 1,000 of those are actually in market at any given point. And for those that are in market, you’re not going to win all of those. What ends up happening is there's a certain number of new logos you can do in a market in a given year.
What I find fascinating is that in some markets, all of a sudden, everyone needs the new thing. Data warehousing might be a good example of that with Snowflake. In most markets though, it's more like a steady march. Every year, there are only a few more people that need customer success software or whatever else is out there.
Jeff Lieberman from Insight was one of our early investors. He said that with most of the companies they invest in, the new logos per year flatten out for any given product. Maybe you can get around that with higher prices or selling bigger customers, but eventually that flattens out as well.
Basically, the number of buyers that are ready to buy in a given year in a market, in a fixed market, it flattens out. There are some markets where all of a sudden everyone's buying. But I don't think most of them are like that.
You and I had that experience where you find those customers that tell you they are just not ready. You can do everything you want, you can fly to see them, you can send them a bottle of wine, you can build a new ROI model. But sometimes they're just not ready.
I don't know if you felt the same way, but I felt like sometimes those customers that you somehow convince to buy when they’re not ready—they’re just terrible from a customer success perspective.
A: That's such a great point. When people think about their market, they shouldn't just think about the accounts that they’re going to include in their list totals. You need to get into the qualification stage to understand what size your market actually has. How do you size your market based on SQLs or some real signal of readiness?
N: We ended up sort of accidentally having all the companies that could ever buy Gainsight. You can make that number look as big as you want to for an investor pitch. I'm sure you've seen some crazy ones in the slides of companies. You can make your TAM look like $1 billion or $10 billion or whatever you want.
But, if you think about a funnel for those potential customers, what percentage have ever even interacted with Gainsight? What percentage have ever been to our website? What percentage have ever had an SQL? These signals help you triangulate to in-market buyers.
After having talked to a lot of CEOs, I’ve learned that in the very early days of a new business, you have some awareness that your number of logos will grow. So let's say the first year you do 100 logos and then the second year you do 200 logos. That's awesome. The third year you do 300 or 400, then at some point it's going to start flattening out. That's a big thing is when that starts flattening out. The natural instinct is to think you’re just not executing well in sales. Or maybe you need a new sales leader or a new marketing leader.
Sometimes that's true. But often what's happening is you have hit the efficient frontier of new logo acquisition per year for that subset of the market. Then you have to either get more TAM, go enterprise, or get a new product. This natural flattening of logos is the early indicator that you've hit the efficient frontier of your first bowling pin.
A: I'll give a couple examples of companies I've spoken with recently that were keenly aware of the fact that this readiness element factors into their market sizes.
One was a company I just spoke with maybe an hour or two ago. In their case, they're looking for companies that are about to launch a product into a new industry vertical where there is significant regulation. They can help you test out that product and launch it without having to get HIPAA compliance or some other regulatory approval. That’s huge if you're trying to innovate in a new area without a super-high upfront cost. They're trying to figure out who those companies are that are launching products into these new markets. That's their readiness factor.
Then there are other companies for whom it’s required that their customers have bought another software product, have implemented it fully and are using it before they are considered ready to buy this particular “successor” product.
What are some other types of readiness factors?
N: There are many. In making this actionable, a natural question is to ask yourself what do you wish you'd have done sooner?
One of the things that ties to this readiness is building a super-custom TAM database. It needs to be something more than a list that you pulled in from ZoomInfo or LinkedIn. These are both great data sources. But when you build a list of all these companies, you need to look for readiness attributes.
Using Gainsight as an example, there is probably a certain number of CSMs you need to have in order to be a customer. There's a certain size of your subscription business you need to have. But also, you probably need to have a certain maturity in how you're using your CRM or Salesforce. A lot of our customers use Snowflake, so maybe they have to do Snowflake first. There's also an IT prioritization, which is like that company you mentioned, where sometimes you implement one software product first, and then something second, something third.
For example, with Gainsight, very often people implement or update Salesforce and then they buy Gainsight. For many years, we tried to get customers to do Gainsight first. They would tell us no, they are not doing Gainsight first.
One of the things I wish we'd done earlier was a very custom TAM where you start with all the companies and you build all these attributes. How many CSMs do they have? Is the CSM team growing?
There's nothing more valuable than knowing every single potential buyer in your market and where they are in the maturity process. Even if you have to survey them and ask them if they are in the market for software. That is gold.
A: That also points to the idea that you're never really done sizing your market. Actually, it should be a continuous exercise. The whole point of readiness is that it happens in a moment in time and you want to be right there. Ideally, maybe be there a month before it happens, so that you're first in the game.
There's another company that I work with called Swantide. They come in really handy when you're migrating your CRM from HubSpot to Salesforce. Usually that comes after you hire a VP of Sales. So really you need to be tracking the new VPs of Sales that are showing up at smaller companies on LinkedIn.
N: A huge thing for Gainsight is new heads of CS. So we have this very elaborate process — we're maniacal about it — in which we track all the new heads of CS, and then there's a welcome basket we send them. The new executives for many software products are a trigger for change. One thing to think about is that companies don't want to change. So, if they want to buy your product it's because they have to change. Why do they have to change? Well, maybe they have a new executive. Maybe they just bought a company. Maybe they took private equity funding. Those triggers are a big way to think about who's in the market for your product.
A: While we're on the subject of market size, we are also going to talk about market growth. Markets might have growth rates that are indicated in market research reports. And it might just seem like there's this annual cadence. But we all know that markets don't behave linearly or even have a fixed rate of growth that causes them to grow on an exponential curve. It's bumpy.
There might be some years where the market expands dramatically, other years when the market is flat, other years when it contracts. We saw this for a number of markets during the pandemic. How do you think about continuing to grow your company at a predictable rate when your market may not be growing that way?
N: There are two parts to that. One is understanding how the market's growing. You have to know what's happening in your market. And then, what do you do when it has slowed down? We totally have lived that. I feel like this whole conversation is therapy, by the way. Oh my God, I have written about it many times.
Gainsight was really fascinating in the early days when it was a small market. It's easy to grow on small numbers. Later on, we slowed down a lot because we just had saturated the market. There weren't enough companies.
And then, the last three or four years really we accelerated, which has been really great. But what happened? One of the things we've looked at is, what are those leading indicators of the market growth?
In our world it's pretty simple. CSM hiring is a pretty good leading indicator. We look at how many customer success managers are out there in the world and how that's growing year over year. Also, new SaaS company formation, which has been certainly a boom the last few years, is another leading indicator.
One of the things that we've been able to do (which is not as real time as I want) is see where things were really picking up a few years ago. Then we were able to start ramping up again in sales and marketing and so on. That's part A of how you know when it's slowing down or speeding up. Part B is then, if it's slowing down, what do you do about it? There are two things you can do.
One is very practical right now. You have a value proposition for your product: it does x, y, and z. That value proposition can be tweaked. So, I would encourage 100% of companies to look at their value proposition. Look at what companies value right now and make sure what your value proposition is what people value.
Again, to use Gainsight as an example—in boom times, what does Gainsight do? Well, we're going to help you scale faster, expand your customers more, and grow faster — all these very aspirational things.
But today, you've probably frozen your budgets, but you're growing and you can't throw people at it anymore. So, we're going to help you automate more in customer success—digital customer success. We're going to help you find more risk. We’re going to help you be more predictable and plan better. That’s not necessarily as aspirational.
One thing you can do is tweak your value proposition for where the market is now. That might mean product, but mostly it means messaging and customer success.
The second thing, though, is you can also use the new market to find new opportunities. In that world, for us, digital customer success is so hot because nobody wants to hire and they still have to serve their customers. So, everything we're doing is how to keep doing more in digital customer success.
We bought a community software company and are doing more with our in-product offerings. We’re looking at other acquisitions and new products, all around digital. So you're looking for what is hot right now. That big part of being a founder or CEO is having a really good sense of what is hot right now and being willing to change that, because the world changes.
A: That's a really provocative point. Particularly because so many founders, especially in the early stages when they're starting out, are so passionate about the space they're building in. They've probably experienced the pain point themselves, or they've otherwise been very close to a pain point. They really want to solve this particular thing, and then they might start to go to market and be disappointed by the reactions that they're getting.
So, do you tell that person, be opportunistic, be in the moment, market to what's hot right now? Or do you tell them keep plugging because eventually someone will discover why you're so brilliant and why your product makes sense?
N: It's short term versus long term. Long term your vision is still going to happen because the economy will come back and there'll be another cycle. There’ll be another boom, there'll be another bust. Gainsight made it because we just didn't give up and are too stubborn.
But then short term, adjust the message to the moment. So let's use a different example, HR tech, because that's very understandable. A year ago there were probably tons of HR tech companies who said they were going to help you hire more people, retain your top talent, improve your culture and more. All those things are great and really important. But they are very bad messages right now. If you get an email about accelerating your hiring process, you’d wonder if that company is paying attention.
There are other things? For example, you probably need to do a better job assessing who's really performing versus not. Or maybe you're trying to move to more lower cost hiring approaches, and so you need to do more hiring at scale, but in lower cost regions.
There's always something you could do to tweak the message. And it's just about getting really creative and really knowing what people want right now. When you're doing anything from product management to sales to customer success or marketing, a big conceptual thought process is, what's on the whiteboard of that customer right now?
When I say whiteboard, I mean whether it's a physical whiteboard or their to-do list. What do they have on their list that's independent of you? Right now, on 100% of company's lists is items like get more efficient, save money, get to roll a 40, get more scalable, reduce burn.
So how do you get relevant to something that's on people's list? They're not going to put you on their list. They’re going to want to see how you fit into something that's on their list. So figure out what's on your buyer's whiteboard right now.
A: I'd love to double down on this theme of what is in your control, since the growth curve of your market doesn't seem in your control. Your choice of market might be, but once you're in it, you’re in it.
Thinking about the best way to run your company when you're at different stages — and we've traversed many of them together — if you had one tip to give to a founder who's running a $10 million ARR company, another founder who is running a $50 million ARR company, a third founder who is running a $100 million ARR company, what would you say is a tip for each stage? What changes along the way?
N: By the way, the numbers might change for different companies. Because some companies, some businesses are unabated growth to a billion with one product in one market.
You think of the old days, something like Microsoft Office. Everyone needs it and it's gotten to huge numbers. But most companies do hit some step functions and some pain at 10, 50, 100. Use Jeffrey Moore, who wrote Crossing the Chasm, the famous business book, for people that aren't aware. At 10, you definitely crossed the early adopter to a little bit more mainstream. And customers are not just buying because they want to be part of the future. You're in those early days of gains, those early customers versus later on, when there has to be a real value proposition, and it has to fit with my priorities. It's probably less about being an innovator and more about maybe a little bit of FOMO or doing it because everyone else is doing it.
What that means practically is your sales process itself shifts from an evangelical sales process and “let me show you the product and demo” to a little bit more of a value-based sales process. That might be where you start doing ROI models of the value of buying your software. It might be more case studies of why other people are doing it. It’s more social proof, versus the early days where that customer wants to be the speaker on your podcast or the speaker at your conference.
There's this shift of the evangelical sale to the value-based sale that happens maybe around $10 million. That's something that is legitimate. Then at 30 or 50 million, there's a different thing that we went through, which is you definitely are starting to push the efficient frontier of how many new logos a year you're hitting.
That's where you start really looking at the marginal efficiency of sales and marketing, particularly in this new world. You start saying, okay, are we really getting more growth from the extra dollars we're putting in? We definitely stopped getting more growth from the extra dollars we put in right around that time. Maybe it's 30 or 40 or 50 million, but right around that time we were hiring more salespeople, spending more on marketing. All these new people showing up and nothing changed. The sales per quarter were the exact same.
Then you have to get a really good CFO and be really, really thoughtful about the ROI of your spending. And then, hopefully you do it early enough that you don't get stuck, is start deciding what is your second act.
I forget who came up with that term. Maybe it was BCG or McKinsey. Somebody had a paper a long time ago about software and the “second act”. That original example (I think it was actually Microsoft Office) showed that they got to a billion of revenue and they had to do their next thing.
The second act comes sooner in SaaS because there've been so many companies that actually get to 30, 40 million and realize they have to start thinking about their second product. For second act in SaaS, the good news is it's pretty straightforward. It's that you've been more SMB than market and you're finding a way to do more big enterprise deals. That’s clearly a big growth accelerator. For lot of companies, that's how they keep it going from 30, 40, 50 to 100 million. They’re not necessarily doing more logos, but they're doing bigger deals. Somehow you're convincing bigger companies to use your software.
You saw the fits and starts we had around that, where we thought we got a really big customer very, very early on. Then we just didn't get any other big customers for a long, long time. But then eventually we did. That's how some of the re-acceleration happened.
Your second act could also be a second product that you're cross-selling to the same base. Your second act could be a second product or a new business that's selling to a totally different TAM. But you have to figure out what that second act is, particularly as your ROI of incremental sales and marketing starts dropping. This all fits together. You go from evangelical to value-based selling. You push that as far as you can, you measure the ROI. At some point the ROI starts dropping in terms of marginal ROI, then you get your second act and then hopefully growth keeps going.
A: I want to double down on the first thing you said about value-based selling. I actually think for a lot of companies in this macro environment, that need is coming much sooner than at $10 million in ARR, because every other company needs to really justify spend. And procurement is getting involved in decisions that they used to not be involved in.
I support a lot of founders who are thinking through how to pitch ROI. If you had one tip to give to a founder about how to demonstrate ROI and how to pitch it, what would you say?
N: The macro tip is that most ROI models, nobody trusts them. So, don't just do a generic ROI model. In an ROI model, the number one more important factor is it has to be value levers that are relevant to the customer right now.
Number two, you want a mix of very tangible and aspirational levers that are broken out. The way to think about this is there should be some parts of the ROI model that are so obvious that nobody's going to debate it. Then there are some parts that are aspirational that are kind of the upside.
So Gainsight's going to drive massive efficiency. It's also going to reduce churn. The efficiency is you don't have to hire two more CSMs next year. You’re just going to use Gainsight instead, and that's believable.
And then it's going to reduce churn by three or four points. Well, I don't know if it will or not, but at a minimum we've paid for it with the savings of the headcount.
That's giving them something that's believable and something that's aspirational. And you should break them out. Don't just say it's $10 million and it's generic and hand waving.
Finally we have some examples and some data. This is a cool thing very recently we've been looking at, which is there's an industry association in our nerdy space called TSIA. They do a study on ratios of accounts per CSM. And then we actually looked in our data in our system, because we're big enough that we have a lot of customers, and accounts per CSM for Gainsight customers. It turns out that Gainsight customers have way more accounts per CSM than the industry average.
So now you can go to the CFO who cares about efficiency and show them the efficiency value proposition ROI with proof points in terms of other Gainsight customers.
A: Nick, that's a great note to end on. I'm sure people are taking a lot of notes as they listen to you. Thank you so much for having the conversation with me today and most of all, it's just fun to have you on. So thanks so much.
Nick: And everyone listening, you're lucky to learn from Allison, because I got to learn from Allison for six years, and you're lucky to keep listening to this podcast.
Allison: Thanks, Nick.