So You’ve Raised a SaaS Mega Round: Now What? (Nick Mehta)

Gainsight CEO Nick Mehta on what happens after a company raises at a sky-high SaaS valuation.

Why it was kept

The passages Kyle kept, tagged Software TAM: hypergrowth can continue for a long time but not all growth is persistent; markets have a relatively fixed number of buyers; valuation becomes excess weight to carry; the most dangerous thing is to deploy all of the capital at once; no investor wants to follow a late-stage round priced for perfection; and companies with good growth and some profitability do fine.

As Kyle captured it

• So You’ve Raised a SaaS Mega Round: Now What? by Nick Mehta at Gainsight Software TAM
  • Your hypergrowth can continue for a long time. It worked for Shopify and Twilio – why can’t it work for you?
  • I hope you buck the odds – that you are right! But for now, I’m going to explore all of the potential futures, so you can prepare. As they say, “plan for the worst and hope for the best.” Right?
  • Remember that not all growth is persistent. Growth rates often slow down.
  • This happens because all markets have a relatively fixed number of buyers that are “in-market” during any given year.
  • If you can’t find those new growth engines and your new logos stall, prepare for a long climb over the wall.
  • We started maxing out in terms of market growth. And we were 70%-ish of the total market for what we do, so we couldn’t grow any faster by taking market share.
  • Your valuation becomes excess weight to carry, as you know you have a long way to go to live up to it, especially with slower growth than you planned.
  • Potential outcomes that might be attractive in a vacuum are prohibitive due to preferences and the last round’s valuation.
  • If you don’t raise money at these incredible valuations, you might pass up a chance to take your company to the next level. If you do raise money but end up hitting a growth wall, you could end up stuck.
  • Your company is now priced and poised for perfect execution.
  • Finally, remember that the only way to destroy a SaaS company (besides running out of money) is to mess up on retention/churn.
  • The most dangerous thing you can do is to deploy all of your hard-won capital too quickly and not get the growth to show for it.
  • The truth is that no investor will want to follow a late-stage hedge fund who invested in your company at a sky-high valuation if your company isn’t crushing it.
  • Companies with good growth (e.g., 20%+) and some profitability can still trade at very high multiples of revenue. For example, as of this publication, publicly-traded cloud contact center company Five9, with a rule of 40 score of 41 and 33% growth in the last 12 months, is currently trading at 23.1 times forward revenue.
  • Sometimes, Twitter can make us feel like everyone else is racing past us. There are undoubtedly near-overnight success stories in tech—Coinbase, Zoom, and the like.** But there are 100 times (or more) businesses out there who are slogging it out each day.**