How Pilot convinced Index Ventures to think long-term about margins
On a recently recorded (and soon-to-be published) episode of the Found podcast, an entrepreneur told my co-host and me that he sees a broad swath of the venture capitalists out there as money managers, more focused on short-term gains and returns than long-term revolutionary technology.
Whether you agree or not, it’s hard to ignore the fact that the multipliers in Silicon Valley and the growth of software businesses have changed the way we think about a startup’s timeline.
“The pressure from [Index] caused us to work a little harder and be a little bit more precise in our instrumentation to be able to prove that the long-term trajectory would achieve certain milestones that would work for everybody.” Jessica McKellar
Pilot, a bookkeeping software service that has raised more than $160 million since inception, is not necessarily a stranger to the shorter-term desires of investors. Index Ventures partner Mark Goldberg, who led the Series A and Series B rounds for the startup, would be the first to tell you that the board and the founders had some early disagreements about how the company should operate.
Obviously, it wasn’t enough to stop him or Index from doubling down on the business.
We talked about all this and more on TechCrunch Live.
“It was pretty terrifying,” said Goldberg. “In my gut, I thought, ‘Wow, we better get this right.’”
A few things clicked into place for Goldberg to want to keep investing in Pilot. The first was that it was a real category-creation opportunity, in that bookkeeping was a $100 billion industry that was largely fragmented.
The second was the customer love for the product.
“We started to hear customers proactively calling us from within the Index portfolio saying that they hated doing bookkeeping and back office functions, and now they don’t have to think about it. They said things like ‘Whoever this Pilot team is, they’re doing some wizardry so I can just shut my brain off to the part of the business I didn’t enjoy doing.’”
The third was the conviction and dedication of the team to empathizing with and understanding their customers.
He recalled a time early on when the team was no more than 10 people, most of them engineers, when he visited the office on a weekend. They were all wearing green visors, doing bookkeeping for their customers.
“They weren’t doing it because they needed to for customer support, but because they really wanted to empathize with the customers for the product that they were building,” said Goldberg. “That’s the sort of sweat equity and market recognition that told me, if this continues to grow, there really is no ceiling on what this business could become.”
While that sort of dedication to understanding the user was attractive, it was not without its costs.
“Pilot is a technology company wrapped in this lovely human layer of high-touch support for its customers, which is a bit counter-intuitive in Silicon Valley, where most companies don’t want humans in the loop,” said Goldberg. “That’s what I know and understand, and we had a view that this sort of tech-enabled service model could be very valuable, but we wanted to make sure that they could create a financial profile that had gross margins that reflected that of a software company.”
In its simplest form, Jessica McKellar and her co-founders felt very strongly that they wanted to focus on the customer fully and deliver great customer service from the very beginning. In a business where you are onboarding customers by ingesting the entirety of their financials, that can be costly.