Lessons on Product-Market Fit from Ajay Agarwal of Bain Capital

Does your niche market feel too small? Don’t worry. You could be just the founder VCs are looking for. 

Ask any venture capitalist what they look for in a startup and their answer is almost guaranteed to include the words “product-market fit”. VCs, after all, want to make sure that their startups are building solutions to problems that people actually have. Proving that there’s a product-market fit is the best way to show them that they’re likely to receive a return on their investment.

But what happens when your target market is too small? How do you pitch to a venture capitalist when the product you’re selling is a solution for a very niche market?

In a recent discussion at one of Salescollider’s MeetUps, Ajay Agarwal spoke on this very topic. As the Managing Director for Bain Capital Ventures, Ajay spends a lot of time contemplating the potential value of products and their place in the market. Currently acting as a Board Member for a dozen companies (and formerly for a dozen more), he’s an expert in the world of B2B startup funding. 

His insight into the subject of product-market fit was valuable for all of our founders, particularly those who are struggling to sell into verticals with very few customers. 

Small Fish in a Small Pond

Prior to his life as a VC, Ajay worked as the Senior VP of Sales & Marketing for Trilogy Software, a company started by his college buddy Joe Liemandt. 

In the mid-90’s when Ajay flew to Austin to check out the company and discuss his potential role there, Trilogy was still an early-stage company. The 18-person team had been hard at work selling a product called “The Configurator”. As Ajay explains, The Configurator was built to give salespeople at companies with very complex products—AT&T mainframes or Boeing airplanes, for example—a way to sell customized orders that were feasible from a technical standpoint. 

As you might imagine, the market for The Configurator was quite small. “It was a great product,” he says, “The problem was that there were only twenty companies in the world that needed it.”

When Ajay was brought onto the team, his first tasks was to lead the company’s expansion into a broader market. Liemandt had realized that The Configurator’s customization features could be useful for companies with simpler, consumer-friendly products. “Every company has a configuration problem on some level,” he explains, “Nowadays when you go to an automotive company’s website, you have the option to click that you want power windows and it grays out a bunch of options you can’t have. You can’t have the base package if you want power windows. That’s effectively a configuration problem.”

By expanding into the automotive, electronics, and insurance industries, providing these companies with a platform that facilitated personalized orders, Trilogy was able to start growing at an exponential rate. During Ajay’s tenure alone, from 1995 to 2002, the company increased revenue from less than $1M to more than $300M. 

Building for the Future

Ajay’s experience with Trilogy serves as a foundation for evaluating startups based on their product-market fit. Specifically, it informs the way that he thinks about companies selling into a niche market. When his former employer began selling to the automotive industry, after all, the market for their product hadn’t yet been defined.

“At some level, all of the best companies are the ones that start in a space that everyone perceives as too small,” he states, “If everyone perceives the space as too small, you typically have open-field running because nobody else is going after it.”

Although he calls the niche-market problem a “conundrum for both startups and VCs”, he makes it clear that investors like him are always looking to work where there’s potential for growth. “Part of the entrepreneur’s job is to convince the venture capitalist that, even though the space seems small, it has potential to be big,” he says.

He illustrates this idea using Gainsight, a Customer Success software company he invests in, as an example. The type of software that Gainsight sells has only become a necessity in the rise of SaaS platforms. “Even the old-school technologies are trying to transform into SaaS companies or subscription companies,” he explains, explaining the growing need for Customer Success efforts. “Everyone wants to have a recurring relationship with their customer.”

It is the growing market that makes an investment like Gainsight appealing to VCs like Ajay, particularly if the company is able to find their footing before larger companies catch wind of the opportunity. “[Customer Success] might have been a small market at one point but has grown and grown over time into a big market,” he explains, “That’s good news because it means a company like Salesforce is going to ignore that market until it’s too late.”

Filling a Void

In the end, this is one of Ajay’s goals as a VC—to find startups that build products for the markets of the future, especially ones that are being ignored. It’s an outlook that was, in part, shaped by his tenure at Trilogy and his interactions with Liemandt. 

He shares another story from his first trip to Austin during the company’s earliest days: While discussing Liemandt’s plans for Trilogy over lunch, the CEO grabbed a napkin and jotted down the average income statement of a typical Fortune 500 company—30% on manufacturing R&D, 10% on G&A (finance, HR, legal), 10% profit and 50% on sales and marketing. 

On another napkin, Liemandy listed all of the biggest software companies in the world. “The biggest one was SAP who focuses on marketing. The next was PeopleSoft, they focus on HR. The next was Oracle, they focus on finance,” Ajay recounts, explaining that the CEO had found an opening waiting to be filled. “He said, ‘Sales and marketing…there’s no company that’s big. That’s the opportunity.”