VC Fireside Chat: What You Need To Know for Early-Stage Success

Getting your first round of funding is one of the most important steps in building a successful startup, and it's also one of the hardest. Pilot Co-Founder and CEO Waseem Daher recently sat down with Mark Goldberg, Partner at Index Ventures to discuss the current VC landscape. Below you’ll find an excerpt from their discussion covering what you need to know when raising your first round: how to structure your pitch deck and what key metrics to focus on at this early stage, how to craft your narrative for that critical first meeting with investors, and much more.

The VC Landscape

Waseem Daher: So, Mark, please give us an overview of the current VC landscape. Is now the worst time to launch a startup?

Mark Goldberg: I have a lot of empathy for today's founders because this is the most challenging fundraising environment I've witnessed, and I've been doing this for a while now. That said, especially in the earlier stages, you're far enough below the turbulence of the public markets that you should be okay. While it's a hard funding environment, the people embracing things as they are and not as they want them to be are the ones who are the most successful right now.

WD: How do you see the current environment impacting early-stage (pre-seed) versus later-stage Series A and beyond?

MG: The optimism for you is the earlier you are, the less affected you are by the macro environment. If you were a business that thought you would trade at 50 times revenue 13 months ago when we were in the bull market, and now your public company is generating revenue at just five times, you know you have some work to do. But if you come to Index Ventures or any other VC funds and say,“I have this idea I'm so excited about! Let me share my passion with you," there are still many investors with a lot of money and who are enthusiastic about making deals right now, including Index. 

WD: Talk to us a little about how you personally, and Index Ventures think about what stage to invest in?

MG: Index is slightly different in how we organize versus some of our peer funds. We have one multi-stage team. So, I'll see someone leaving Dropbox to start a company, fund that individual, or we'll double down on Pilot at a multibillion-dollar valuation. It's contrary to some of the ways other funds organize, but there's a lot of value in havin g more of a spectrum.

So, much of the time, my team and I are trying to get to know people like you to say, "Hey, what are the next great generation of founders? How do we get to know them as early as possible?"

Raising Funds

‍WD: When should companies consider raising on less favorable terms? How about founders wondering if they should raise more money now on worse terms or wait to see if they can raise at terms they're happy with?

MG: The only thing you should care about when fundraising is, "Can I successfully get a fundraise done in this environment? If optimizing for terms, you may be misreading the market today. And without diving too much into tactics here, you should be trying to get someone excited about your business at this stage, and then the output of that will be the terms, which, hopefully, are favorable. 

But if you go in saying—and I see this as a mistake that people sometimes make—"Hey, I'm raising 2 million dollars at an 8 million dollar cap," then I think that's a terrible idea because you've lost all the leverage. I may be willing to do it at 30, but you just told me you would do it at 8. Or I wanted to do it for a different number, but now you've scared me off because you wanted to do it at 8.

So it's important to communicate excitement about your company. Whether it's me or somebody else, your priority is to get others excited about your idea and let the terms be the last part of the conversation. In the mainstream view of picking your investors to optimize for terms or the brand of the firm, a lot of the personal element—which is important for early-stage companies—gets lost.

Conversely, the next time Pilot raises money, it won't matter who the investor is now. Getting capital is not an issue when you are a late-stage or multibillion-dollar company getting close to an IPO. As an investor, you're getting on board, or you're not; moving the trajectory of such a business is challenging. That's not an insult to growth investors - it's just the reality of growing up as a company.

WD: To your point about the personal element, how does an early-stage company know who the right investor is?

MG: At the early stages, every day feels existential. I don't know how early you are, but if I were in your shoes, I would probably be thinking, "Are we going to make payroll in three weeks? Are we going to find product-market fit in the next six months before we run out of cash? These are the questions some founders are dealing with at this early stage. That's why having an investor who not only has your back but is someone you can use as a sounding board to problem-solve becomes more significant. The human dynamic is more important the earlier you are.

The things that we have always looked for are a deep conviction, i.e., "Do you believe in what the team is doing? Do you believe in the team? Do you believe in the opportunity?" Because fundamentally, it's easy to get on board when things are going great. The litmus test is, "What's the dynamic going to be like between you and your investors when things are not always going perfectly? And as it turns out, they never go perfectly according to plan. Will they still be excited?

You have to ask yourself, "Is this person really about us and what we're up to, or are they excited by what the Q1 numbers happen to be? Anyone who's pitched a VC will have some empathy at this point I'm about to make: when someone connects with your idea, whether it's an investor, employee, or prospective employee, you know when there's chemistry. You're looking for that same feeling in an investor, and if it's not there, you realize it quickly. Maybe you take the money because you have to, but ultimately, the dream relationship is one where you just feel it. I talk to many entrepreneurs, and when it resonates, it's electric. So that's what you're looking for.

Pitch Deck

‍WD: Zeroing in on the all-important pitch deck – what are some of the most important areas to highlight, and what should you leave out, specifically when fundraising at this time? 

MG: The best pitches are conversations, not presentations. So If you find yourself in a meeting where the person is sitting with their arms crossed going, "Tell me about your business, walk me through your pitch," you've kind of already lost. Control the narrative and build a connection with the other side. Try to gauge, "Are they excited about the idea? Are they as excited as I am about this idea?" And slides can sometimes get in the way of that.

I want to hear their response to: "Why have you chosen to do this? This is a very hard career path. You have a much harder career path than I do at this point in my life. I get a basket of Pilots, and this is the one thing you will be working on. So, again, why have you chosen to do that?” And that's what I want to hear because grit is the biggest trait I'm looking for. I'm on 15 boards right now, and not one of those companies has had a straight-line trajectory up. And to me, the founders who get back up after getting knocked down instead of throwing in the towel resonate the most.

That said, a slide that can be a helpful way of anchoring a conversation without getting in the way of building that kind of personal relationship and storytelling with the person on the other side of the table is always welcome in your pitch deck.

WD: Yes, and surely there are some essential elements you want to hear about in the story. Deck or no deck, what key points do I need to hit in drafting the narrative?

MG: First, it's important to realize a few things when you're meeting with an investor – they likely hear a lot of pitches, so you've got to do something you know stands out a little and has some energy. You have to get in the right headspace—let it be clear that you want it badly and will show up every day with enthusiasm. And if you're pitching over Zoom, energy is doubly important!

Remember that VCs may have little to no knowledge of what you're talking about, so you have to be able to dumb it down to the point where they can empathize with the problem space, and quickly too. And that's part one of the challenge: how do you tell a concise story around the problem you're trying to solve?

It sounds very simple, but it's anything but. That's one of the biggest mistakes founders make—not getting this right. Founders live and breathe the weeds of their business, but I'm going to meet 30 companies a week, and I have to figure out what you're doing. So you have to connect me pretty quickly with the problem space itself. Then you’ve got to tell me why this problem space is important to you.

So, when constructing your narrative, think through the following:

1. What problem are you trying to solve?
2. Why does it matter to you? Why is it the first thing you think about when you get out of bed?
3. How are you going to solve the problem? What is the product or solution?
4. Why is this a big problem? What's at stake if the status quo doesn’t change?

WD: Are there things you'd leave out in the pitch where you think people spend too much time?

MG: Including a slide on any fundraising terms is one of the biggest mistakes I see. You want to let that conversation happen last. And please, leave out any slide(s) with your company advisors—it's cosmetic and means nothing. VCs are more interested in who you are as a founding team and your first few hires or planned hires. Too many people put stock in the wrong direction highlighting their advisors.

Metrics

‍WD: Let's talk about metrics. This may be an unfair question, but I'll ask it anyway: some of the earliest age founder sentiment is, "Well, look! I could build that product that people really love IF someone gave me money to build it. It feels like there's a chicken-and-egg problem here, like how do I actually get this thing off the ground?" How do you react to that question?

MG: There is a chicken-and-egg problem, but if you stay within your cost means, the more you can control your destiny. The more you can control your destiny, the less you have to meet with people like me. You have the leverage, which is a wonderful thing. So to the extent you can find ways to be very lean in getting to your own conviction around product-market fit, the more you can control your destiny getting there. You want to demonstrate a deep customer pull—i.e., there is pent-up demand and enthusiasm for what you're doing—and with a little more capital, you can take it further into the world.

WD: One of the challenges for an early-stage startup is that you're often pre-revenue or even pre-product. Knowing what numbers to focus on to effectively demonstrate your success can be challenging, especially during a downturn. What key metrics should founders focus on when pitching to VCs?

MG: So, there's something beautiful about not having metrics—you break the seal once you show the metrics. Now we're talking about what we think of your metrics relative to the market. But even in this environment, there's some magic to the storytelling more than the metrics. Instead of "Hey, we have 50k of AR," try telling me, "Hey, we have the best product, and we're going to have 5 million a year from now." That's much more compelling. So tactically, there's something more appealing in your story before you have actual metrics and data to show.

Metrics are important, but for me, it's all about customers. Our early investments at Index Ventures focus more on customers as a proxy for product-market fit versus metrics. Revenue is a proxy for that—if you have 1 million dollars, that's great; it means people are paying you money for your product, which is a good sign of product-market fit. But I'm looking for something else; I want to know if I can call a handful of customers and ask them, “What would happen if I took this product away from you? Would your life go on as normal? Would your business stop? Would you be unable to operate your company without this product?” And if the attitude is that I would have to pry it from their cold dead hands, so to speak, we're going to lean into the company.

Also, metrics can be a red herring at the early stages where the signals of product-market fit can come very much from your customers, and I would lean into that as an early-stage company. If you tell me your net dollar retention and you're less than 1 million dollars in monthly recurring revenue, I don't care because the number is so small that you might have just six customers. So it does not matter; I care more about whether your customers love the product.

As your company scales, tracking key metrics become even more essential in helping your business achieve its strategic and fiscal goals. If you find yourself unsure of how to set up your company’s key metrics, book a 1:1 CFO Office Hours session where you can connect with a CFO to ask questions about your company's metrics, and more.

We hope you enjoyed learning about the VC landscape and how to set your business up for success at an early stage. If you want to hear more from VCs at our live events check out our upcoming schedule here. 

About Waseem

Waseem Daher is Co-Founder and CEO of Pilot, which specializes in bookkeeping, tax, and CFO services for high-growth technology startups. He is a three-time entrepreneur with two successful exits: his first company, Ksplice, was acquired by Oracle in 2011 and his second, Zulip, was acquired by Dropbox in 2014. He has a degree in computer science from MIT.

About Mark

Mark joined Index in 2015 and leads investments across fintech and software, from seed to pre-IPO stages. He's the board member or lead investor from Index in Plaid, Persona, Lithic, Pilot, Motive, Built, Pave, Intercom, and many others. He has been featured or quoted in the New York Times, Bloomberg, TechCrunch, The Economist and other publications. Before becoming an investor, Mark was an early employee on the business team at Dropbox and helped the company grow tenfold during his tenure there. Mark is a graduate of Brown University and majored in International Relations. He lives in Berkeley with his wife and two young sons.