Investors often give wise counsel: “slow down to speed up.” But what the heck does that mean? Growth is how you’re valued—it’s how you get to scale, and that scale is how you become a profitable viable company. Obstacles? Power through, because aren’t entrepreneurs built to run through roadblocks? Slow down to speed up… come again? Slowing down is anathema to most growth-stage founders. However, sometimes you do need to slow down, and even cut back, to create time not only to survive but also to find a new, and often better, path. I had a great talk with Nick Mehta—long-time friend, Tidemark Fellow, and CEO of category-leading company Gainsight—about his experience with having to slow down to reaccelerate.
I love Nick because he is so open and honest; this conversation is classic Nick. We talk about:
As an entrepreneur, you hit roadblocks, and one of your superpowers is finding crafty ways around and/or brute-force ways through. But sometimes that is not the right approach. After running into a roadblock many times, it might be time to pause, cut back, and get your economics in order to create time to build a strong fundamental business, and then reaccelerate growth.
I hope you enjoy this conversation with Nick Mehta about “slowing down to speed up” to create a strong fundamental business.
About Tidemark
Tidemark is a venture capital firm, foundation, and community built to serve category-leading technology companies as they scale. Tidemark was founded in 2021 by David Yuan, who has been investing, advising, and building technology companies for over 20 years. Learn more at www.tidemarkcap.com.
Dave: Today, I am super stoked to host Nick Mehta, long-time friend from college and CEO of Gainsight. I’ve watched him rise through the ranks to become the CEO of one company, and then start Gainsight and become a category leader. It’s been awesome to see his trajectory, and I think he has both the biggest brain and the biggest heart in the Valley. It’s really great to be talking to him today.
Nick: That’s a lot of compliments you have to give to a Steelers fan! It’s probably tough to say all that [laughs]. If people can’t see it, I have a big Steelers painting in the background. I enjoy a Patriots fan having to go give that many compliments to a Steelers fan. So thank you.
Dave: It’s all good. Roethlisberger’s done, Tom Brady’s playing in another city. Whatever.
Nick: We’ll put the past behind us. Let’s hug it out.
Dave: Yeah! Super fun to connect here. I was going through LinkedIn the other day, and saw the article we published in 2016, “Is Private Equity Eating the (SaaS) World?”
Nick: It’s crazy, huh? That was so long ago, and a lot has happened since then.
Dave: A lot has happened. Maybe give an update on Gainsight, because that’s one of the big stories since then.
Nick: We’re a part of that story, yeah. We launched Gainsight in 2013, and, as you said, we had to help create not just this new category of software for customer success, but actually the concept of customer success. Most folks that are listening to or reading this know that now, customer success has become a core part of every technology company’s business model because it’s not just about getting new customers; you’ve got to keep growing existing customers. Net retention rate has become a top-level company metric. But that all happened over, like, 10 years. When we got started, nobody knew any of that! We put a lot of work into getting the message out there: we’ve written three books, we run a big conference. All this stuff that’s all about evangelizing a new category.
Early on with the company, we were venture backed and had some awesome investors—really, really great. We went through an early hypergrowth phase, which you see a lot in the Valley, and then went through a slow-down phase. Nothing too dramatic, but we got ahead of the market and there just weren’t enough companies to sell to.
We put ourselves on a path to profitability, just out of necessity. Frankly, it was hard to raise any more money, and we’d gotten to a certain size where we just stopped hiring people—which is very relevant if folks think about the recession now. And the company actually ended up doubling revenue, not hiring anyone, and got to cash-flow positive.
Dave: You uttered a phrase which I think scares a lot of folks: “We stopped hiring.” I’d love to talk through that before we get into the private equity leadership, because that preceded it.
I think most companies aspire to running sustainable businesses. The thought process is something like, we’re going to grow really fast and gain market share, but at some point we’re going to slow down and then all this cash is going to gush out and we’re going to be profitable. But I think everybody is scared to actually slow down.
Tell me a little bit about the period before you ended up pulling the trigger. You probably didn’t fully stop hiring, but got to a much lower hiring level, right? What was the learning process through that? How do you integrate that experience?
Nick: Yeah. I think, by the way, it’s very situational, so I’ll describe our situation. I don’t think this applies to everyone, but in the next couple years it’ll probably apply to more than a few companies, given the recession folks are headed into. Our situation was that we were basically assigned to this new market of customer success teams and software companies. There were a finite number of these, and Gainsight actually very quickly got a lot of them—a huge percentage of companies were using us already.
We had this awkward and kind of scary situation where we were getting ahead of our TAM (total addressable market). We saw it in the way the amount of new logo ECV per year was starting to flatten out. One of the biggest learnings I had was that when you’re running SaaS, obviously your revenue and your ARR are growing, but the real leading indicator is your new logo lands. If that starts flattening out, you can do one of three things. You can figure out a way to reaccelerate the new logo lands—go after new markets. You could find a way to grow your spend per customer—sell them more stuff. Or you could just get ready for a slowing business, and get more efficient.
Now, we made a mistake. I wrote a whole blog post about this. I let it go probably two years too long, just kind of hoping that it was sales execution, marketing execution, or hiring a new sales leader. And that new logo volume just stayed constant. The business started slowing down.
We had raised, at that point, about five rounds of capital—about 150 million. By the way, back then that was a lot of money. Now it’s, like, a Series A or something, but it was a lot of money at the time. We had raised this money, and we went out to the market to raise another round. We had a strategy for what we were going to do to try to reaccelerate the business. By the way, just to give you some numbers, the ARR growth had slowed from hundreds of percentages a year to 100, to 75, and at the low point, probably 20% a year or something like that, at a $60-$70 million ARR. It was fine, but unless you’re very profitable, not a super interesting story.
We were trying to reaccelerate. We had bought a company in a complementary space, product analytics software, which was a very natural extension for us. I’d argue we probably did it too late. One of the learnings is, if you want to have that second growth engine, you can't do it too late because that second growth engine takes cash. If you slow down, you don’t have any cash to invest, right? I remember being very vulnerable and open, and going to the market in 2017 or something with a pitch that basically said, “Don’t worry. Our business slowed down to 20% growth, but it’s going to reaccelerate to 50% growth in the future. And, by the way, we’re burning $40 million of capital. But don’t worry, that’s going to drive reacceleration.”
After having raised five rounds of capital, I knew most of the investors out there. I remember going out this time and having every single person saying no. Everyone. One hundred percent. And as I tell entrepreneurs, it’s not like people were saying no because I was an unknown entrepreneur or an unknown company. They were saying no because they knew who we were, and knowing that, they thought this was not investible.
What ended up happening was that we raised debt: long-term debt that didn’t have any amortization for a while, with a great partner called Sixth Street Partners. That eventually worked out great, because we had no dilution when we later did the deal with Vista. But having the debt forced us to realize, we’re not going to raise any more equity capital. We’ve got to get this company to break even.
The brilliance of the SaaS model is, if you have good retention and you’re growing, you can just stop hiring and you eventually make money. It’s actually really, really simple. I’ll describe a little bit more about how we did that brake-style pause, but that was the genesis of why we decided to slow down. Purely, we got ahead of the market. We didn’t really have capital alternatives. We didn’t launch that second growth engine soon enough, and we got stuck. That’s how we got there.
Dave: The thing about you, Nick, is you cover things so quickly, and it seems so easy. But let’s pull apart some of the things that you said that are probably on the minds of a lot of CEOs that are maybe in your situation minus two or three years.
The first is TAM versus execution. Every company is going to go through this. Irrespective of the analytics around the TAM, irrespective of the metrics, they’re always going to think they can do better for some period of time. Ultimately, what got you comfortable? What in your gut made you know that you were starting to run into headrooms on TAM?
Nick: Great question. I think there were three things that told me it was TAM, not execution. Number one was, there weren’t any competitors that were growing. Gainsight is so much bigger. Today, we’re probably 10 times bigger than the number two. Obviously, if somebody else is thriving, you’re more likely to think it’s execution, but nobody else was thriving.
Number two was, when you looked at our metrics on, let’s say, close rates or sales cycle, they were all fine. It was just that the number of companies we were going after was small relative to other peers I was talking to.
Number three, which is very funny but simple, was that I would drive up and down the 101 in the Bay Area—and obviously you have all these tech companies on the road—and for every single one, I would either already have them as a customer or have met them and know exactly where they were in their cycle. It’s funny, fast forward to now, that there’s so many companies out there. TAM has exploded so much, and the vast majority of companies I’ve never heard of before. But then, it was a little bit more of an intuitive difference in the signal there.
Dave: Yeah. Just to play it back, it’s competition—who else is growing faster at scale. It’s your bottom-of-the-funnel metrics, you’re following top-of-the-funnel metrics [Crosstalk 14:35]. What about extending the TAM? You’re heavy in tech. And we’ve talked about this, about getting into non-tech. How about the temptation to get outside?
Nick: Oh, it’s a great question. Yeah, there’s a question of whether there is execution around how you extend the TAM. I think that’s one where you could forever replay that movie and wonder, what if you did something different? We definitely tried a lot of things around how Gainsight applies to other industries—and over time, we did accumulate customers in other industries.
The challenge that we ran into was that, in other industries, there wasn’t as much of a forcing function. There’s a very clear forcing function in software as it goes to SaaS and cloud, and that’s why everyone does customer success. One of the things I feel can be a mistake for entrepreneurs is they assume that their success in one industry will translate to other ones. But if there’s no forcing function in those other industries, there’s no efficient go-to-market, right? The reason we have an efficient go-to-market is the tech companies' go-to subscription model. They figure out they need customer success; they buy Gainsight. We didn’t have that formula in other industries. We put effort into trying, but it didn’t look like it would bear fruit the times we tried it.
Dave: You’re looking for a product-market strategy, and there’s only a certain duration in which you can test that.
Nick: That’s right. That’s a really good point. You can’t test that forever.
Dave: And then, in terms of building an S-curve of growth, whether it’s general, whether it’s segment, or product—when is the right time to start leaning in, to start investing on your next growth engine? I have some views on this as well.
Nick: Yeah, and I’d love to hear your perspective. From my point of view, I think you have to sort of see when that first one’s flattening out. You want to get an indicator as early as possible. To me, at a minimum, if you’re in your second year of flat new bookings and your total area is going very flat on bookings, it’s a sign you’ve got to do it. Ideally, you know even a little bit earlier than that. Maybe your pipeline is flattening out—top of funnel, things like that. Whenever you start seeing the early indicators flattening out, right away, you’ve got to get that second thing going.
By the way, here’s another interesting point: opportunities are out there, and they’re going to happen with or without you. In our case, the opportunity was product analytics, helping SaaS companies drive better adoption of their products, measure it, and so on. There were some companies in our space that actually were partners of ours, and kind of started in our backyard. Not only did we probably do it a little too late (now we’ve caught up, which is great, but we still should have done it earlier), but we also created the opportunity for other companies. If you missed that second S-curve, you’re not only missing the opportunity for yourself, but you’re actually giving it to somebody else.
Dave: Yeah, I think that’s right. I think this is a really interesting and tough question. It’s the first real question, right? Because you have to reach a certain level of scale.
Nick: That’s right. One hundred percent.
Dave: This is kind of your classic growth-in-relation-to-age question. One of the factors, I think, was the financing, which had profitability and burn and all sorts of mechanical stuff like that, and there are spreadsheets that will give you answers. Part of it’s also the strategic lens, which is within your customer. There are usually one or two control points; there are usually strategic applications that give you an unfair right to cross-sell downstream applications. You’ve got to take that into account. If you’re not a control point, or you have a control point that’s certainly your control point, you ought to go earlier.
A SaaS model is actually great for actually investing early because, in many ways, you have to expect you’re going to get it wrong the first couple times before you find the S-curve. It’s a new product, and you’re selling to maybe a new customer, new GEO, whatever it is. This is where I think an intersection of investing in operating and being really tight on TAM—actual functional TAM as it relates to sales territories and capacity—helps tremendously. Once you start reaching a point where you worry about putting that next sales rep (or cohort of sales reps) in to grow your S-curve of sales capacity, you’ve really got to start looking at that new growth curve. You’re going to get it wrong for the first couple years—you just need to turn this thing on by the time your core business is slowing.
The other piece of the question is both the financing market and your board. From a financing standpoint, you need to be able to raise money to finance this thing, and you’ve got to raise it off the back of your prior business. Very few people are going to be super forward-looking and bid on the future business. Investors are too conservative, right?
Nick: Those two points I would double-click on, because they’re so wise. You asked when to invest in the next S-curve, and I said, maybe when sales are slowing down, maybe top-of-funnel. But you said the best thing, which is when you see your TAM getting to the end of the road—or at least to the efficient frontier.
I think a big learning there for me is really investing in great data about your TAM. And I’m not talking about the fake TAM that you use in your investor slides. We all have the fake TAM that’s $20 billion. I’m talking about the actual serviceable TAM where you can go sell right now. That’s one thing I wish we had done early. Don’t just buy the ZoomInfo data and just say, “That’s my TAM,” (although ZoomInfo is great). Figure out exactly who you’re going to sell to, even if you have to buy third-party research or whatever. The ROI on that TAM data is so high. I’m sure you do it when you diligence investments, right, Dave? You guys are building your own data…
Dave: One hundred percent. We’re buying industry lists, and over time I want to bring in an account-based marketer. What you do is take the ZoomInfo and create a bunch of attributes that map the segment and propensity to buy. That really tells you how many accounts a sales rep needs in order to make their quota, and therefore how many you can put in a given territory. That’s functional TAM, right?
Nick: I totally agree.
The other learning, based on your second point, is that you’ve got to get that S-curve going in the second product before you can go raise capital. What I learned is that in the early growth stage, companies always have little venture capital bets embedded in them. But an investor on the outside wants to invest in either a growth-stage company or a venture company. They don’t want to invest in a growth-stage company that also has a venture bet. That’s a really tough thing to go do. You’ve got to get those venture bets going while you have time on your own.
Dave: Yeah. I have a couple of points to share. I do think credibility with your board is a huge part of the story—credibility in the sense that you have to be very open about what’s growing in your core business and how you’re allocating capital in the new business. There’s no free lunch here. You’re going to have to start showing operating leverage in your core business in order to divert resources into the new business. I think you just have to be really open with the data, super transparent.
Also, the board trusting you is huge. Invariably, that new thing is going to look really expensive once you start it. There are always going to be some questions about how the payback doesn’t look as good as your core business. And you’re like, of course it doesn’t, because it’s a new business! So you really need that level of trust. I really value the teams where I’m able to get to that level of trust, because those are the big bets. That’s how these companies really separate.
Nick: One thing on that, Dave—from an operative perspective, that’s where, even for the CEO, getting that level of understanding about your business as you get bigger is important, so you can know the real investment level that’s needed in the core business. Most of the time the core business is actually a little bit fat. It’s not for any bad reason; it’s usually because you’ve tried too many things because you’re trying to grow faster, so you have a whole bunch of different overlay teams or whatever. You have to ask, “What is minimum necessary to grow at the market rate in the core business? Do all those extra dollars really make sense in the core? Or do they make more sense in the new thing?”
Dave: It’s so funny, Nick. There’s nothing nefarious going on, but you’re being valued on growth. So of course you’re not thinking about how to manage investment in your core business, because that’s the growth engine and your valuations are just going up and up and up. Fast forward to 2022, and maybe you’re public. But you know in your heart that, to make this a 10X business, you have to invest in a handful of S-curves, right?
Nick: Totally.
Dave: The second piece that I see a lot is companies that reach scale think about these new S-curves, these new product initiatives, and tend to think about bunts and moonshots. Bunts being optimizations where you tweak this thing and a bunch of revenue comes out, and that feels good. And moonshots, where you’ve got, like, 10 of these things that have these massive outcomes if they’re successful, but there isn’t a lot of hardened logic as to what the real opportunity is, what the right to win is, or what the investment level is—the justification being that, well, we’re not actually putting that much money into this, so don’t worry about it.
You have to sequence this in the growth of your P&L and your valuation and all that fun stuff. But at a certain point in time, you have to have a product portfolio where you’re starting to manage some operating leverage against your core business. You have this one- to three-year time horizon. This is your big bet. This is your next S-curve. And of course you have a portfolio of moonshots that you don’t staff up that high, but you almost become an internal incubator.
Nick: Totally. I don’t know if you’ve read it, but Geoffrey Moore has a good book on this called Zone to Win. It’s all about running your company essentially for buckets. What’s called the performance zone, which is about your core business hitting the results; your productivity zone, which is all about the G&A and other things that support it; incubation zone, which are the new ideas; and then something called transformation zone, which is taking those new ideas and making them a company-level bet. It’s actually very helpful, if folks are listening, in terms of a framework to think about this.
Dave: That’s interesting. One of the many books I should read.
All right. The other piece that you talked about is pressing pause and then reaccelerating. As I think about the CEO mindset and pressing the pause button, there are two concerns. One is, can I really be profitable? And if so, what is the level of profitability? I’m valued on growth. It feels like a really long road to, I don’t know, 20% margin, 30%, whatever the target margin is. The second concern is—and I think this is 100% valid, actually—once I press pause, it’s so hard to reaccelerate. Am I giving up option value by pressing pause?
How did you think about it? When you were named the CEO, were those two of your worries? How did you think about those two objections to putting the pause button?
Nick: Totally. I’ll address the second one first, because I think that’s probably on a lot of people’s minds, and then I’ll talk about the first one. On the fear of pressing pause, I think part of it is just the dynamics of your market. If you have a super competitive market, and everyone else is going fast but you press pause, there is a danger. Sometimes that’s still the right strategy, because they might be getting customers that are actually fundamentally unprofitable and you’re getting the profitable customers. But it’s easier when you’re the dominant player and nobody else is doing anything, and you know the market is just not here yet. That’s pretty straightforward.
I think that nowadays SaaS has actually allowed people to create new markets like never before. You’ve probably seen this, Dave, right? I think there are a lot of entrepreneurs that end up in this situation where they have something really good, but it’s a little early, and pressing pause is the right answer because they’ve got to wait for the market to come to them. That’s paid out really, really well for Gainsight. I think you need to look at how competitive your market is. What’s everyone else doing? How valuable are those extra customers? What’s the network effect? How sticky are they? For us, it was a pretty simple answer.
On how you get profitable… This is one I’d love to pick your brain on too. You’re the finance guy, so you know this stuff much better than I do. But I’ll tell you what I think, because I want to build, with Gainsight, a super durable business that’s going to be here long-term, and I think the best businesses are ones that grow with profitability. So we want to do that ourselves, right?
I think the one core variable that everyone’s got to think about is gross margin. It’s so fundamental, and often misunderstood, because software companies naturally have high gross margins. But in SaaS, there’s a little bit of a range. Obviously, inside gross margin, the biggest variable if you’re a SaaS company is going to be some kind of hosting infrastructure cost. Some of that is dependent on your industry—how compute and storage intensive your stuff is. That’s, to me, one big rock. Even within your industry, there are optimizations you can make in your platform and how you use Amazon and Google or Microsoft or whatever. There’s a lot to be done there, and 5-10 points of gross margin are worth a ton of money.
Some people kind of knock gross margin. I think once you start wanting to make money, it’s pretty darn important. Let me pause there. Is gross margin important from your perspective too?
Dave: One hundred percent. Not in growth mode, but certainly as you’re starting to—
Nick: As you’re trying to get more. It’s also a lens. Some companies are 50% gross margin, and the fear is they can never get to like 60 or 70%. At Gainsight, we’ve been lucky, in that our overall business is almost 80% gross margin, and our subscription without service is close to 80%. That part’s good; that’s straightforward.
Most people look at G&A, sales and marketing, R&D. I kind of look at G&A and R&D as naturally getting scale. There’s a little bit you can do—certainly your labor strategy, location-wise, has an effect. The more you have a global company, the more you’ll get some benefit there. But G&A settles into some range, and you don’t want R&D to be the source of leverage, in my opinion, because then you’re not really building a long-term company.
To me, once you get past gross margin, the things that matter the most are the two underlying economic variables inside the sales and marketing line—basically your customer acquisition cost, payback period, however you want to measure it. How efficient is your sales marketing to get new customers? And what’s your net retention rate? Those are the two variables that seem to drive sales and marketing efficiency, and that’s where I spend time. I’d love to get your thoughts.
Dave: I’d one hundred percent agree with that. I would say that the G&A is similar to your point around best margin. Everybody sort of glosses over it, but I’ve seen G&A’s as high as 30%-40% of net worth.
Nick: Holy cow!
Dave: I know. I know.
Nick: I hope they have a private jet or something. Are they doing something fun with the money? They’d better. [Laughter]
Dave: I don’t want to talk about it, Nick. [Laughter]
Your point is spot on around gross margin. It doesn’t get you fired up, talking about going from 70 to 80, but it’s a massive amount of money. Similar with G&A, getting from 20 to 12.
Nick: That’s right. If you have that high of a G&A to start, that is probably…yeah.
Dave: But then, it’s all in sales and marketing. Our gang fully agrees. Even with, like, a billion-dollar P&L, if you have a long-term orientation and it feeds into NRR, which is the biggest driver, you should be managing generally the same percentage of revenue around R&D. Maybe some leverage over time, but very modest, right?
Nick: And in R&D, what you want to do is get good value out of it. New products and stuff to sell, all that.
Dave: Yeah. You look at maintenance versus new win, and try to measure it in all sorts of ways. But most of the shooting match is in sales and marketing. To me, the core of the business is NRR. Not to get into too much of a sales pitch for Gainsight, but that’s the biggest lever to growth and profitability. Of course, you need to support that with great product, but that’s where your leverage comes from.
Then, in some ways, your sales and marketing are functions of your growth and payback targets. You have a lot of people trying to figure out how to get more efficient and how to do that faster, but you’re almost like a price taker with great execution in some ways. That’s the buyout mentality.
Nick: That’s what you want, totally. It’s interesting though, because I do think that you have to do a lot of math on everything we just talked about, once you really slow down. Even in growth mode, if you’re thinking about eventually how you’re going to make money, you can make some good bets and decisions that will land the plane at the right level—as we’ll talk more about when we talk about private equity.
I think one of the challenges is that a lot of companies historically go from growth to massive deceleration to buyout, and then a massive slashing of head count with private equity. That’s this herky-jerky way of running companies. Whereas we want to land the plane, improve leverage every year, and maintain growth as much as we can. That’s the best way to run a company.
Dave: I think that’s the tip of the pyramid. Those are the best companies. And they may do this as a private company, or as a private equity-owned business, or as a public company. It’s hardest in a public company lens, because they get so many shareholders that weigh in every day. But you are trying to manage this transition—maintaining that R&D spend to create those S-curves, right? R&D might be go-to-market, actually, in different geos, but I’m referring to R&D generally.
You made this all sound so clinical. The reacceleration that you had no worries at all about—once you stop hiring, two years from now you get everything in order, and you want to accelerate again. No big deal. It’s easy. There’s no doubt.
Nick: Yeah, I don’t know. It was probably a little bit more like survival. It wasn’t clinical. I think some companies are on this path now, right? When you’re looking at cash flow, and you’re not going to be able to raise more money, you’re like, hey, the world is actually pretty simple. You’ve got to make sure the company survives. Everything else is bonus points after that.
I think one of the fallacies in software is the assumption that incremental sales and marketing dollars drive incremental bookings. We all know that markets have a dynamic that is outside of a software company’s control. There are a number of buyers that come into a new market every year, if you think about even an existing TAM. One interesting analysis is how quickly that TAM gets penetrated. Say you have a thousand potential companies. Not all thousand buy into your one. For a really hot thing, it could take over five years. For more of an accounting-type thing, it could be over 10 years.
There’s some element where you actually waste money in sales and marketing, because you’re spending ahead of the curve. I kind of had that feeling where I’d been putting my foot on the accelerator, and the car wasn’t going faster for several years. I was not worried about taking my foot off the gas.
Dave: Yeah, that makes sense. Just to underscore that, we think about at-bats analysis, both in due diligence and in post-investment. Particularly in an immature market, there are a certain number of customers per segment. They turn over, or their churn rate is X—so a certain number of at-bats happen every year, and you’ve got to get your fair share. That’s the point you’re pushing toward.
So, Vista calls you. You had done your research on private equity, and you guys figured out a deal, which I’m sure is its own story. Now that you’ve been working with them for two, three years now, what has been like what you expected? What has been different? Characterize your experience a little bit.
Nick: It’s been 18 months so far, so still early in the cycle, but it’s definitely enough to know. A few things that I think have worked out really well for us: one, I think that when you get a company to a certain point, if you’re long-term oriented and you have a pretty good vision of what you’re trying to do, there’s some element of board simplification that helps a lot.
One of my biggest value props is that I had some awesome investors in Gainsight who are still very close friends. Having lots of different investors sometimes makes things more complicated when trying to make decisions, but having an investor that’s pretty deep in our business that we can really partner with has actually been great. It’s like going deep with Tidemark, going deep with anyone—that that person gets you. I think in the bubble years—though this wasn’t true with Gainsight—there were a lot of companies that had a ton of investors, but nobody really knew the company that well. So it’s actually quite challenging to go have conversations because you have to bring everyone up to speed. That’s one thing that’s been amazing.
A second thing—and this is more on the personal side—is that we’d been working on the company for about eight years when we did the deal. It was nice to be able to give all the employees a win and say, “Hey, you did a great job, here are a lot of great financial outcomes for people’s lives. Now let’s double down and go big.” I think there was some element of having a win, which helps people. You’ve helped companies through that in the past yourself.
A third thing that’s been great is, we think there’s an inorganic opportunity around Gainsight in acquiring adjacencies. We did our first deal post-Vista, and a lot of these firms, like yourself, have a lot of experience with that. It’s really, really simple in terms of just getting things done, and how you go build an add-on and sell it in your base. There’s a lot of experience there.
And then fourth thing is, a lot of these companies—and this is what Tidemark is building too—have a great network. The network, in this case the Vista CEOs, have been phenomenal. There are, like, a hundred companies in the portfolio and the collective CEOs have a lot of good answers.
Those are four things I was hoping for that I ended up getting. Then I have a couple other unexpected things I’ll tell you about in a second.
Dave: Yeah. Other than the single owner, that sounds a lot like a typical experience with a venture firm. But my sense is your experience has been a little different. You’ve worked with some great venture investors. How is it different than your typical venture investor?
Nick: That’s a really good point. What’s actually different is that I think it’s going deeper. One thing about a lot of these firms is they have a lot of people. In the Gainsight relationship, there’s a senior managing director, there’s a senior vice president or the vice president, and there are three or four analysts. They’re actually really deep—they meet with my team every couple weeks, they understand what’s happening in the business, and they understand our market. When I have a conversation with them, they’re up to speed. That’s one difference.
A second is that they only do companies of this size and scale. I think one thing that happened for some of the earlier-stage venture folks is that they just don’t have as many companies, and it’s smaller. A lot of those companies actually end up exiting in some way. They don’t have as much depth in that zone, because that zone either is a public company or a strategic exit. They don’t have that many companies like that, so they’re just not as experienced in that area. That’s probably the second thing that’s different.
And then the only other things are unexpected, since you asked about that too. One thing that’s been great is, we have extremely strong values and culture at Gainsight. It’s a big part of who we are and what we do. That’s obviously the paranoia of any CEO when you have any investment, let alone private equity, right? I think these firms have changed a lot—at least, I can speak for Vista. They very much understand that to be growth, they’ve got to align with the culture of the company. The objective evidence is that our Glassdoor score is the highest it’s ever been. We’re almost 4.7 right now. It’s not because of Vista, but they definitely didn’t mess it up. There’s nothing that happened that was a negative there. I think that’s very important for a lot of people when they’re thinking about private equity: how do you preserve your culture through this process?
Dave: One of the common concerns—and maybe this is a false concern, I don’t know—is that private equity firms are much more comfortable in terms of profitability versus various ways to make money (the growth versus profitability scale). What we described early on was really a fluid assessment of what’s optimal, whereas a lot of private equity firms historically have thought, “We’re a hammer, everything else is a nail.” You’ve talked about reaccelerating under Vista. In terms of cash flow and raised debt, how have you experienced that?
Nick: I should have mentioned that one, because that was a surprise to us, right after the deal. We knew they were growth-oriented, but I think they looked at us and saw that what had happened was net not hiring anyone for a couple years, and our revenue more than doubled, so maybe it was starting to reaccelerate a little bit. I think they looked at it and were like, okay, this is the time to go invest again.
Gainsight hadn’t invested for a while, so when we did the deal, we were about 650 people in the company. We’re more than 1400 people now. In 18 months, we more than doubled the size of the company, at a significant scale. They were big time on investing.
My sense—and you know these guys, so you probably have thoughts too—is that what they wanted to do was use the first couple years of investment to test. Put the foot on the accelerator and see what happens. Our business reaccelerated massively. A lot of it’s just timing, where the market is coming to us now, but I think they figured out that this thing is actually a reasonably good growth business. I think they actually wanted to put that money in early on, but I get the sense, and you probably have the same experience, that if the investments aren’t working, then eventually you’re going to want to put in a path to more of an EBITDA-type transaction at some point. Fortunately for us, the growth stuff has worked really well.
Dave: Yeah, I think that’s right. I think a lot of companies have an experience where it’s not as cut and dry. A lot of these businesses are still evolving. The initial payback may not be great, but there is an aspect of patience to it that they expect to push through. At times people are less open to that, because they just haven’t seen it. I find private investors are some of the smartest people on the planet; it tends to just be about context.
Nick: Yeah. The other thing I’d say is, by the way, there are two actors in this play, right? There’s the investor and there’s the CEO. I do think that one of the success criteria for running a business long term in general—but definitely working with private equity or any hands-on investor—is to be pretty secure in yourself, and also very transparent.
I just love Gainsight. There’s no vested interest, so they know everything about it, good and bad. We tell them! I love every idea they have, because that’s just more good ideas to consider, right? And if you have that attitude, I think working with any investor can be great. If you have a different attitude—where the investor is my adversary, I want to tell them as little as possible, I’m always worried they’re going to screw me over, and I don’t love it when they give me ideas—then you’re probably going to have a hard time, long-term, with almost anyone. You’ll definitely have a hard time in the public markets. Forget about public markets.
Dave: I think that’s right. I think, because we’ve talked about the extremes, to make this a useful discussion you have to talk about the in-between. The in-between is like, there’s a difference in view. This is where I think it’s not private equity versus non-private equity, it’s the people in a situation. I know some CEOs can feel outmatched; the PE firms brought in a group that can field a softball team. If I think it’s blue, you think it’s green—it’s not black or white, but there’s a measure to it. It can be really challenging trying to get through. That’s some private equity firms. In the ones that I’ve been fortunate to work with, that’s not the case, but it can be.
Nick: I think that’s a good point. Two things helped us there. One was, you’re talking to a lot of other CEOs to see what are they like. Not specifically just the firm, but also the people. We were fortunate to work with a lot of the folks that worked on Marketo, for example, so they had seen the growth playbook.
The second thing is, if you’re considering working with any investor, one of the things I would ask is, show me your diligence—I guess in the PE world, they use this term value creation plan—and show me what your thesis is on our company—before you close the deal. They actually showed all of that to us, and honestly, it was the same stuff we were thinking. I think getting some kind of alignment on the strategy pre-deal is a good thing.
Dave: Awesome. Well, congratulations for the run. It’s so funny that this happened reasonably quickly after we started talking through it. It shows what a fast learner you are, and it sounds like it’s been a great experience.
Nick: It’s been awesome. I’ve had a great time. Honestly, a lot of people reading or watching are probably building businesses for the long term, so it’s funny. If you run the company for long enough, you’ll eventually meet every form. Like that software company in Boston, Kronos. I don’t know if you know them. They started like 40 years ago. They originally built time clocks, and then they built time tracking software. It’s been a private company, family run, venture backed, public company, private again, multiple PE investors, regrowing, trying to go public again at some point. Eventually, if you really believe in your company, you’ll eventually be in every mode. You just have to kind of adjust and learn how to make it work.
Dave: Yeah. If you were giving advice to either the CEO or executives that are in some of these transitions between ownership and those modes—how do you get up to speed? How do you make sure you can make that transition? What you’re describing are very different types of optimizations, very different strategies. Not everybody is set up for that. Do you have any parting thoughts on that front?
Nick: Yeah. I think there are two different things: how are you set up for that now, and how do you get your company set up for that? On the company side, I think one thing that worked for us was describing the company to the employees in different phases. Think of it like chapters in a book. And we talked about chapter one of Gainsight, which was the first couple years, early-stage venture. And we called these G1, G2, G3, G4, G5. I think I stole this—I think ServiceNow might have done something similar.
Anyway, that was really helpful, because when we did the Vista deal, we could say we’re now entering G5 of Gainsight; here’s what G5 is going to be all about. We had all these slides that explained it, and people really gravitated. Some were like, oh, yeah, I’m not excited about the next phase. You can have an honest conversation, and that’s totally healthy. There’s an employee communications aspect.
Then, if you’re honest, you probably run the same assessment for yourself. Write up the job description for what the CEO of G5 of Gainsight needs to be, and ask if you are up for becoming that person. You’re most likely not that person today, unless you’ve done it many times before. You have to learn. I had to learn a lot in the last couple years, but I was excited about that. This is more fun than anything else I could imagine. You know what I mean? I think writing the job description and seeing if you’re the right person is a legit thing to consider.
Dave: You have a better growth mindset than I do. I come to the same realization, but I don’t necessarily do it as willingly or as cheerfully as you do. Any job you’re in, you constantly have to push yourself to take on a different role and flex different muscles, or develop muscles that you don’t have. And I think that’s great advice.
Thank you, this is awesome.