Customer Success: Investment Thesis

Product-led growth is one of the trends we’re most excited about at WaterBridge Ventures and many of the fastest-growing and visionary companies today are product-led because it’s such an efficient distribution channel that aligns incentives between a company and its customers. To become a successful product-led organisation, companies need best-in-class go-to-market tools.

One of the key GTM developments we’ve been tracking is the shift in where revenue and value is generated in the customer lifecycle. In a traditional top-down sales motion, salespeople aim to capture the highest dollar value and secure large contracts from the start. In product-led growth however, the dollar value of initial “sale” is often far less than the overall long-term opportunity, and given the prevalence of freemium and free trials, often negligible. With many companies now self-serving using a freemium, trial, or a low-cost version of the product, most top-line growth is driven through expansion revenue — either as product usage grows with the customer or as it expands to more parts of an organisation.

And this isn’t just important for product-led growth companies, but all SaaS and subscription revenue businesses. Net retention and net expansion are key and often critical drivers of company growth.

Customer success (CS) teams own the retention and expansion numbers, and with the massive rise of SaaS as a software delivery model it should be no surprise that #customersuccess is currently the 6th fastest growing job as a result.

Customer success Tools make your CS Managers smart and up to date on the account health. Customer Success Management is a proactive approach followed by B2B SaaS company to reduce Customer Churn and Upsell. Objective of Customer success teams/software is to focus on Customer Health Score, Reduce Churn, Retain Customers, Increase Upsell, Cross sell & Renewals and Handhold in Onboarding.

A customer success manager without a CS software does notes taking on Google doc or Apple notes, Sifts through 10 different windows to find relevant data, for product usage reports relies on engineers which is coupled with lag and requests marketing team to send one off emails to customers on updates.

CSM Software helps in

• Tracking Product usage & Adoption Rate
• Create Customer health score, a single metric to measure account health, using Product usage data, Support tickets, Survey Results, Invoice history, email/slack communication and marketing engagement
• Helps in creating a bird eye view of customer lifecycle
• Helps CS Manager in deciding either to Fight Churn & Upsell
• Workflow Automation & Timely Alerts.

Need of Customer Success has grown in lockstep with Tailwind in SaaS

1. Shift from Ownership to Subscription based economy, easier to cancel software anytime
2. Big Ticket Customers; LTV/CAC: 5:1
3. Increased access to Customer Data and Product Usage
4. Go to Market strategy of startups ‘Land & Expand’ and ‘Product led growth’
5. Number of accounts a CSM Handles has increased. For example IBM has 1K CS Managers
6. CAC is 5–25 times more expensive than retaining new customers
7. Probability of selling to an existing customer is 14x higher than to a new customer.

Total Addressable Market

Rapid growth witness in SaaS

Source: Statista; Marketing Intelligence

Rapid growth of CS Industry

Source: Statista; Marketing Intelligence

Target Market for CS Softwares/Tools

CSM teams of Large Enterprise & Mid Enterprise B2B SaaS companies with atleast 1 year of mature data having CSM teams of 10+ members.

The budget of CS Teams in large enterprise is less than 10% of Annual recurring revenue (ARR). While for the medium enterprises the budget for CS teams is 10–20% of ARR.

Small & Medium business market is yet not ready for a CS Tool as

1. They have less accounts to manage.
2. More over a tech stack of Slack+Zendesk+Google works well for SMB players.
3. Lack of Sophisticated data to churn for CS Tool

CS Tech Stack & Market Map

Source: WaterBridge Ventures

Large Enterprise continue to tilt towards Building CS Tool vs Buying it

Current CS Tech stack for large enterprise either use Gainsight or Totango tools dedicated to the needs of large enterprise or Custom Build your CS Tech stack or use CRM (Salesforce + HubSpot)+ (Tableau/Looker/Mixplanel). Companies like Tableau, Amplitude, Whatfix, AWS use Custom Build or Salesforce++.

1.0 Wave of CS Software

Founded in 2009, Gainsight is the pioneer of the customer success category. Under the highly regarded CEO Nick Mehta, the company scaled to over ~$100m in ARR in 2020, and was acquired by Vista Equity Partners in Nov-2020 for $1.1B. Gainsight’s core product is geared towards large enterprises and the architecture is built on top of Salesforce.

Founded in 2010, Totango has raised $48m so far with the last round being a $24m Series C. The company does have strong logos — Google and Zoom. Totango has evolved itself as a new age CS software.

First-generation players educated the market on the importance of customer success and how to build a community of customer success managers. However, these products are built for the top-down sales motion, have an older interface, and often require a heavy services lift to deploy.

2.0 Wave of CS Tech Software

Founded in 2015, ChurnZero is a US based company that has quickly scaled up to be #3 in the category. Company has raised $35m, with the last round being a $25m Series B at a $114m post led by JMI and Baird. The company made a few specific design choices in competing with the likes of Gainsight: Focused on mid-market and Instead of integrating with every single product, they built integrations with the few such as Salesforce, Zendesk, Mixpanel and Chargebee. By focusing integrations on a few standard products, onboarding time came down from months to weeks.

Founded in 2017, Catalyst Software is the hot new startup on the block. Founded by a brother duo that ran customer success at DigitalOcean, the company raised a large Series A of $20m from Accel in Jul-2019, only to have a quick double down from Spark and Accel for a $25m Series B at $125m post less than 9 months later. Catalyst builds on ChurnZero’s design choices with a few additions such as custom build dashboards and improved UX.

Integration time has been reduced to 1–2 weeks.

3.0 Wave of CS Tech Software

As Customer Success 3.0 wave continues to evolve, here are few emerging themes where new age start-ups are focusing upon.

Theme 1: Business Outcomes: Show ROI to customer by quantifying the value product delivers. KPI to properly measure customer outcomes. Startups such as ZapScale, ScaleVal & @Telescope are focusing on same.

Theme 2: Machine learning: Using Machine learning to identify unique business signals that predict churn risk and expansion signals. ML is the most funded upcoming theme. Startups such as ZapScale and Tingono are focusing on same.

Theme 3: AI: Uses AI and Machine learning to scale product adoption and growth by automating post-sales work. Startups such as CustomerSuccessBox and Magnify are focusing in this space.

Theme 4: Emotional Intelligence: Sentiment analysis from customer interactions and creating actionable insights. Startups such as Staircase AI and Complete CSM are focusing in this space.

Theme 5: Virtual Customer success manager: Outsourcing of CS as a function. Company such as ESG is focusing in this space.

Do write reach out to me on Linkedin, or Twitter if you are building in the space or would like to brainstorm!