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.
Doubling down
“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.
Counterintuitive convictions
“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.
Goldberg said Pilot wanted to be the Zappos of fintech and go the extra mile for every customer, even with bespoke one-off requests.
“They wanted to make sure that people absolutely loved the product, which is easy to agree with in theory,” said Goldberg. “I was probably much more conservative on the extent to which we should cater to customers in those early days, trying to balance the financial impact of some of those decisions.”
McKellar said that she and her founding team believed that doing the most for customers early on, even at a high cost, would pay off.
“It’s easier to start with a higher-touch, higher-quality experience that builds a really dedicated customer base and then choose where you want to go from there,” said McKellar. “It’s harder to start from something less delightful and claw your way up to delight.”
She said that it required a leap of faith for the first three or four years of the business that the margins would eventually work out.
Both parties agree that the tension that existed on this issue was healthy and ultimately good for the business.
“These healthy tensions are super constructive for the business,” said Goldberg. “If you look at the growth we’ve seen in this business, a significant number of leads are coming through word of mouth. People have these stories of how Pilot came to their office and helped them do ‘X’ before a board meeting.”
He said that it created a relationship between Pilot and their customers that made clients feel like the startup was actually part of their companies.
“The pressure from Mark caused us to work a little harder and be a little bit more precise in our instrumentation to be able to prove to ourselves and the board that the long-term trajectory … that, in a bounded timeframe, our margin would achieve certain milestones that would work for everybody,” said McKellar.
It ultimately forced the Pilot team to be very explicit about how they talk about this and set achievable goals on how they’d drive incremental results.
They went into greater detail.
For example, it costs quite a bit to onboard a Pilot customer, integrate with all their financial systems and be on hand to help them get activated over time. But the cost of administration and customer service, and the amount of work it takes diminishes significantly over time.
One of the “instruments” that Pilot used to talk to the board about this level of customer service and attention was to split customers into cohorts. Goldberg explained that grouping customers into cohorts — joined six, 12 or 18 months ago — gave them the ability to see if Pilot was going in the right direction.
“That ultimately gave us the green light to say ‘yes’ to spending more, giving discounts and providing one-off services, because we knew that in the long term, it would make financial sense,” said Goldberg.
Part of the argument for spending more up front also came down to the long-term vision and being granular in communicating the possibilities of the technology.
McKellar described the importance of being able to speak about the automation of Pilot with clarity.
“We could say that we believe there is this much room in automating the low-level underlying activities and could describe what the gains would be,” said McKellar. “We said it would take time to build all of these things, but [we] also had an understanding of the white space in front of us and can speak to that in a way that is convincing about how much room we have to continue improving the service or automation.”
Close to the customer
You often hear founders and investors talk about being customer obsessed. But the job of a CEO or founder often expands and evolves to include much more.
While customer feedback loops can be important early on, it’s not uncommon for that to fade over time. McKellar believes customer advocacy is not only important for the health of the product and business, but to set an example for the company culture.
“Founders have a responsibility to be the beating heart of the customer being centered across the company, how the customer is thought about and treated,” said McKellar. “You have to model that and be the hardest-working customer advocate and customer success manager and lead by example on that.”
She says she spends about a quarter of her week directly engaging with customers.
“Being in the weeds helps you make sure that you’re setting an example and giving people a sense that every interaction with every customer matters,” she said.
You can see the full conversation, including a walk through Pilot’s Series C deck and the TechCrunch Live pitch-off, in the video below.
TechCrunch Live goes down every Wednesday at 3 p.m. EST/noon PST.