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Q&A: Role of Customer Success According to Three Leading Investors
As ChurnZero recently secured a Series B investment bringing our total funding that has been raised to date to $35 million, we thought we’d take a look back and see the role that Customer Success plays at each respective stage of funding for SaaS companies.
And we thought, who better to ask than those that chose to invest in us along the way. In this article we will share some enlightening Q&A with our lead investors from our seed, Series A, and Series B funding rounds.
Let’s hear what they each had to say.
Early-Stage Funding & Customer Success
ChurnZero raised a $2.5 million round of financing led by Grotech Ventures in 2017. Grotech Ventures is a team committed to helping creative and driven entrepreneurs build technology companies that last. Their strategy is simple. They seek out opportunities to be early investors in high-potential technology companies.
We asked board member at ChurnZero and General Partner at Grotech Ventures, Steve Fredrick, about their experiences with Customer Success at early-stage SaaS companies. Here’s what he had to say.
Q: As an early-stage investor in technologies companies what signals do you look for in terms of customers to show high-growth potential?
A: Grotech is an early-stage investor so many of our companies have only modest revenue at the time we invest, and they are typically still working to tease apart their go-to-market motion. We certainly look at retention and net retention, though many of our companies have very few renewal cycles to evaluate at the time we invest. Account expansion is often a more telling metric at this stage as those companies with high-growth potential will often see off-cycle expansion just a quarter or two into a new customer subscription – the proverbial land and expand.
Other signs of explosive growth potential at this early stage are a highly efficient sales motion, though this is most often still a work in progress at this stage. Companies that grow rapidly often have shorter sales cycles, can leverage a high velocity inside sales model that does not require travel, expensive meals, and golf to close a sale. Meaningful inbound leads, even at this early stage, are often a sign that the market is hungry for the product offering. Interest from channel partners and sales via channel partners can be another meaningful indicator.
All the typical SaaS metrics can be indicative of potential … though some less so at this stage. An attractive Customer Acquisition Cost (CAC) is hugely positive; Lifetime Value (LTV) is largely assumptions-based at this stage and there are often few cohorts to analyze; low churn is important (though, again, there may be few renewal cycles to evaluate); a strong Net Promoter Score® (NPS) is always good.
Perhaps most important are compelling funnel metrics with strong conversion ratios between the stages of the sales cycle. Lastly, compelling customer references heavily influence our thinking as investors at this early stage where analyzing a company’s potential is more subjective than qualitative … but that is what we love about early-stage investing. Our job is to peer around corners and make bold bets. Once it becomes self-evident that a company is going to the moon, we have likely missed our entry point as an investor.
Q: If a new portfolio company does not already have a Customer Success team in place, in your opinion where does that fall in terms of priority of the business’ development?
A: Very few of our early-stage investments have a Customer Success team at the time we invest. ChurnZero was an exception to that as you might expect given the focus of the business and team’s deep appreciation for the importance of customer retention.
In the frenzy that comes with finding early-stage product-market fit, the pattern I often see (unfortunately) is that companies speed along, drinking from a firehose and closing new accounts. They are often understaffed, working long hours, and are largely focused on closing new logos. At some point, they unexpectedly experience meaningful churn which serves as a wake-up call. They in hindsight realize they’ve been entirely focused on optimizing the go-to-market motion and refining the sales strategy that they have completely ignored the “Customer Success” function. I’ve seen this so many times that is has become predictable.
The most forward-thinking companies get out ahead of this, many times with the prodding of their first institutional investors. The good news is that this “surprise” churn very often does catalyze a company into action; they recruit a leader to build a CS function; they staff it appropriately in proportion to their evolving customer count … but they (again unfortunately) often resist deploying a Customer Success platform from the outset. They either work to manage things via spreadsheets, attempt to build their own, or try using a product management platform for this despite the poor fit. I’ve yet to see any of this work.
If the company has found product-market fit, then they invariably conclude (as the customer count rises) that they need a Customer Success platform. The time wasted in this journey from 1st surprise churn to deploying a CS platform is undeniably decreasing, and I think much of that has to do with the increased awareness of platforms like ChurnZero and the growing volume of CS professionals. As these folks move to new opportunities, they are taking their learnings and experience with them which greatly shortens the ramp time for younger companies and avoids some of the most painful scar tissue. We coach our companies to staff for Customer Success from day one. For good or bad, we have plenty of portfolio CEOs who will happily share their scar tissue and likewise encourage others to staff CS early.
Series A Funding & Customer Success
ChurnZero secured $7 million in a Series A funding round in 2019 led by Baird Capital and supported by returning investors like Grotech Ventures. Baird Capital makes venture capital, growth equity, and private equity investments in strategically targeted sectors around the world. They are value creators who identify exceptional opportunities and partner with senior industry executives to build world-class companies.
We asked board member at ChurnZero and Partner at Baird Capital, Joanna Arras, to share her experiences with Customer Success at their respective stage of investment portfolio companies.
Q: If a company is looking to get Series A funding what criteria or metrics do you look for in regards to Customer Success?
A: Regardless of the stage of a company, we look at churn (gross and net, both logo and dollar) and its implications on a customer’s lifetime value. Around the Series A stage, a company’s churn usually indicates if they’ve found an initial product-market fit or if they have a repeatable go-to-market and distribution strategy. There are no concrete rules, but if you sell a product with continuous and recurring value, in line with the SaaS model, you cannot afford to turn over your customer base annually. Your customer base, and therefore revenue need to be recurring as well.
Q: In your experience at what stage do you recommend a SaaS company invest in Customer Success technology?
A: A SaaS company should start thinking about Customer Success as soon as they start thinking about Sales. However, it makes sense to start investing or allocating budget dollars to CS once the customer base has gone through a renewal cycle (so you have proof points that you’re able to retain customers) or once there is enough opportunity for product and feature upsell that it doesn’t make sense for the Sales team to focus on anything other than acquiring new customers. Sometimes this happens at a certain revenue threshold or a certain number of customers. It might even coincide with a funding event. I have rarely seen companies invest in Customer Success too soon.
Learn more about why Baird Capital chose to invest and their viewpoint on Customer Success in this article “Behind Our Investment: Joanna Arras Talking About ChurnZero.”
Series B Funding & Customer Success
ChurnZero raised $25 million in JMI Equity led Series B funding round in March of 2021. Returning investors in the round included Baird Capital and Grotech Ventures. JMI Equity is a growth equity firm focused on investing in leading software companies.
We asked board member at ChurnZero and General Partner at JMI Equity, Larry Contrella, to share his experiences with growth stage companies and the importance of Customer Success. Here’s the insights he shared.
Q: What is the role of Customer Success in growth stage businesses?
A: First and foremost, when we are evaluating a potential new investment, we want to ensure that customers are having success with the product and getting the most value possible out of the offering. The Customer Success function plays an integral role in that.
It starts with making sure that customers are getting up and running quickly and smoothly – the implantation process is well orchestrated and includes training for their teams. Once customers are live, we want to ensure they are getting the most value out of the solution. This includes making sure their teams are using the product correctly, regularly, and understand the full functionality and value it provides. We want our companies to solve difficult problems for their customers, and be viewed as partners and thought leaders, not vendors.
When customers are getting value out of the product, they renew at high rates, are strong references for other prospects and expand their footprint with additional seats or new products. In order to ensure customers are realizing that full value of the product, we focus on investing in high quality CS organizations. And if the company doesn’t have a CS team in place at the time of our investment, building out the CS function is typically one of the first priorities.
Q: As a growth stage investor what expectations does your team have for new portfolio companies in regards to Customer Success maturity?
A: Given the push to SaaS and subscription-based business models and the fact that it is easier to retain a customer than to acquire a new customer, Customer Success teams have become a top priority at growth stage businesses. Most “growth stage” companies that we partner with either have a Customer Success team in place or are in the process of putting a Customer Success team in place. This team grows over time as the company and customer base scales, but with the right processes and systems the CS org should be able to scale efficiently (more customers handled per Customer Success Manager).
Once a company has hired a Customer Success leader and has started to build out the team, we typically see them invest in technology (like ChurnZero) to help them scale. Many companies start by using manual processes (email, Google sheets, Microsoft Excel) but that doesn’t work at scale. It’s very similar to the Sales team need to implement a CRM, or Marketing team needing to implement marketing automation once the company reaches a certain size.
In terms of metrics, we expect that all companies will track simple customer health metrics like Customer Satisfaction Scores (CSAT), NPS, and renewal/retention rates. Overtime, as companies mature, we expect more bespoke customer health scores that include additional data like product usage, customer engagement, support requests, etc.
Q: What are the top metrics related to customers that you hold your portfolio companies accountable for?
A: We focus on customer health scores, which typically include several metrics, such as customer satisfaction, NPS, product adoption and usage, support tickets, customer engagement, relationship status, billing/payments, etc.
In order to do that well, our portfolio companies need a system of record like ChurnZero to manage Customer Success processes and workflows at scale. Part of why we were so excited about ChurnZero is because it was very clear that the product is a perfect fit for JMI portfolio companies and the broader SaaS/subscription revenue market.
We also track metrics like gross and net retention, renewal rates, time to value, customer whitespace, etc. A successful Customer Success team that ensures the customers are getting value out of the product will have a good pulse on all of these metrics and will be able to push the right direction by having the right interactions with customers at the right time.
We are all looking to help our companies grow and be successful, whether that means making good on your projections to current investors, or prepping to pitch your company to new potential investors, don’t make the mistake of neglecting your most valuable asset – your customers.
The last thing you want to happen is to have to try and explain to your board of directors why you have a churn problem, or have an investor you are hoping to partner with point out inefficiencies in your onboarding process.
Be proactive and get ahead of any retention issues before it’s too late, because as you heard from our experts above, it’s never too early to invest in Customer Success.
Check out our ROI resource hub to learn about the return on (Customer Success platform) investment we can bring you today. You can also learn more about customer success metrics to better engage investors here.
Customer Success Around the Web
- Customers Want You to Set Meeting Guidelines– Learn how to set rules for a healthy meeting culture with your customers.
- How to Let Customers Know About a Price Increase (Without Making Them Mad)– Discover ways to justify price increases and how to break it to your customers.
- Why & How Every Single One of Your Employees Should be Talking to Customers– Find out how to get all departments involved and become customer-facing in an online community.
Fighting Churn is a newsletter of inspiration, ideas and news on customer success, churn, renewal and other stuff and is curated by ChurnZero