Neil Callahan (Pilot Growth Equity): You need to put your own money and time into your company because you make better decisions and you are more focused.

Neil Callahan is Founder and CEO at Pilot Growth Equity. He has over 25 years of technology investing and operating experience and is a successful bootstrapped software entrepreneur. He has advised many of the world’s leading technology companies on strategy, product management, sales & marketing, infrastructure and operations. Prior to Pilot Growth, he was Co-founder and CEO of Sitaro LTD., which was acquired by CoActive Marketing Group. At CoActive, he was a member of the executive team as the President of the Digital Business Unit and as the EVP of Business Development where he led M&A and strategic partnership initiatives and completed several acquisitions. He Neil was also a Vice President of Marketing Technology & Strategy for Young & Rubicam / Wunderman where he created integrated digital and media investment strategies for AT&T, Citibank, IBM and Sony.

How it all started? How did you decide to enter the venture investment business?

I decided the enter the VC world after a career in technology. I have started my career as a programmer, and I programmed in COBOL DB2, in C++, in JCL, and in SQL – in all those great transactional systems that use lots of data. I built systems with a company called Andersen Consulting and I had a great first part of my career building Systems for large banks and global retailers building supply chain systems, and finally in telecommunications building telephony products – in local and long-distance, in data. When I was working in telecom, digital advertising was invented when people started to advertise on the internet and in email. It was new mediums, and I built the company that I had a digital asset management platform that helped large companies manage their digital assets so they could use them over and over again, modify them, etc. I had a great experience of growing a company then selling it. Over 10 years ago I thought that I wish I had an investor back when I started my digital asset management because I grew it without any outside capital. So maybe I can go and build a platform for folks who have similar interests and similar talents to build their businesses and grow them not just with capital but with a network. We created Pilot Growth which helps emerging B2B software companies.

What surprised or impressed you the most when you started working in venture capital?

I guess it was the diversity of ideas and the diversity of business plans. In venture capital, you meet a lot of people who have really no experience and really don’t have any argument for the world when they start a company. And you have to meet a lot of people and understand their thoughts around building a company, having a good idea, what it takes to transform a good idea into a successful company. What surprised me most was how unprepared many entrepreneurs were in terms of thinking how easy it is to raise money or how easy it is to build a successful company. To build a company from an idea to do a great success is incredibly difficult and requires a massive amount of dedication and hard work and a lot of friends. As they say, “Success has many many fathers and failure is an orphan.” You need to understand what it takes to found a company from an idea and create a successful business.

What was the most unusual, or maybe even exotic startup you ever supported? 

I think it is a company called CB Insights. It is based in New York and it is an authority on private markets data today, where venture capital, corporation, investors all over the world use their technology and data to help to make decisions around technology investments in future technologies. What is my favorite thing about CB Insights is the way they build their company: they build a product and offer that on the right market, making sure that what they offered may really help their customers. They were having incredible relationships with early customers and getting their feedback. What we also like about finding the company is the way it was funded. You need to put your own money and time into your company because you make better decisions and you are more focused. CB Insights create it as a bootstrap company and focused on their customers and customer’s needs.

How startup teams usually find you? Do you wait for inflow or scout actively? 

My job is to find companies that I’ve never heard of that need my money. The hardest thing about venture capital is finding great deals. It’s very easy to find good deals and bad deals are all over the place. My job is to find great deals – not to have them find me. We built a proprietary machine learning platform that monitors over 30,000 companies every day and sends us a daily email about 10 companies that we must call now. This system which is called NavPod is also setting priorities in the company’s list. You don’t want to engage too early because you’re wasting everyone’s time, and if you engage too late, you miss your opportunity. So we call companies all over the US and in Israel and talk about Pilot Growth, talk about what we’ve done as entrepreneurs, about the platform we built, and how, we think, we could be a good match. We meet founders, CEOs, entrepreneurs talking about how we can partner with them. Our goal as a venture is to become the first institutional capital in a company. We are investing in companies that have a real business, real product, real customers but have not yet taken institutional investments. 

How many startup projects do you review per year?

Our goal every year is to analyze about 500 companies. We’re actively tracking about 3,000, monitor them on a daily basis. We start with a pool of over 30,000 companies. We have at any moment of time about 150 hot deals – the companies we are calling and building relationships with. These 500 companies are come and go on and it translates into about 4 investments a year.

What are the verticals or industries you are interested in? 

We are focused on B2B software, and this business is also evolving, going from processing to more of a consumption basis and using not only software but also data that is provided by the company. We look at the market in 3 aspects: Supply Chain, Core Technology, and Go-to-market Technologies. We like all 3 areas but we spent a lot of time on the Go-to-market Technologies – anything to do with Marketing sales or Advertising or Customer service or Customer care, even Human Resources. And we really like the Go-to-market aspect of the VC landscape because here corporations give money to their employees, spend money to grow, while in other aspects your goal is not to reuse cost. In Go-to-market people invest in new things and new ideas more often because they’re looking to generate revenue. Here is our sweet spot. 

Can you name industries you really like, yet will never invest in?

We had an experience investing in Insurance-related topics and it is a huge industry, an important part of the economy, but there’s no real reason for them to change. Insurance is about keeping things steady. We haven’t had much luck with innovation in insurance being adopted quickly, the adaption curve is very slow because there’s really no catalyst why change should happen. For an investor in adoption rates, speed and size are critical. We like to focus on industries where when people see innovation and products that can help them they adopt them, they use them, and they make them better and make sure their customers’ experience is better, make their companies more healthy. So we tend to stay away from industries that are led by people and companies that are adverse to change.

At what stage you prefer to enter?

We call what we do “Growth.” It’s not the current definition, rather more traditional definition. We invest in companies that have a product already, the product has passed the technology wrist, it works, and customers are paying for it. So we like to enter a business where there was product introduction, many customers using it (they don’t have high customer concentration – they have a few dozens customers), the product works, and it’s delivering value. We can enter and say that we could work with a company, build out a proper Go-to-market strategy, and plan, and build a team. We also can help them identify areas on product roadmap to accelerate, to expand within your current customer base, offer more to the market. We’re looking for someone who has experience, who is from the industry, who have coded the product themselves ok with their team, made all the initial sales. At this point they usually think, “What’s next? I haven’t taken any money. My business is booming, but I’ve got competition. Should I sell the company or should I continue to fund it with customer revenue? Or should I take on capital to grow my company instead of selling it out?” Those are the types of companies we want to partner and there are thousands and thousands of such companies, thousands and thousands of people who don’t start a company by writing a pitch deck and raising money, but just by doing it, by selling their product to the customers. 

Geography of your interest is the United States only?

We primarily focus on the United States as well as Israel. We focus on the US market as being the easiest and the largest market in the world to do business in, that hasn’t many barriers to growth; it’s the most friendly market to try new relationships, new technologies. We believe this market has the most growth potential for new companies in B2B Tech. 

What is your due diligence procedure and how long does it take for you to cover the whole way from the first meeting with founders to contract and check signing? 

We take our time. Usually it’s 3-4 quarters where we meet an entrepreneur, we learn about the business, we learn about them, they learn about us. We see if it’s a performing business quarter over quarter, we see if that business is continuing to expand, if it’s healthy. Then we have a conversation about what type of deal would work for everybody – in terms of structure of a security, the amount of capital to be invested, types of activities, value added, etc. We’re patient. Also we write our own term sheets, we don’t participate in other’s fundraising processes – we work with an entrepreneur directly on a timeline that we both agreed to. And we invest in companies that don’t need to raise money to stay in business but are looking for the right long-term partner. That’s why it takes so much time.

How big is a check you usually issue?

Over the last 10 years our average check size has been about $8-9M. We like to say that we write $10M in total checks with the initial size of about $8M and some money reserved for follow-up.

What qualities you’re looking for in startup teams?

We’re looking for a team – multiple people in a company who are capable. It is very risky to invest in a single person who doesn’t have a team yet. We’re looking for teams where people are playing different roles whether it’s a technology role or a product management role or a business development role or a sales and marketing role. We like to see teams where are multiple high-quality people who understand that there are different roles to play. We are looking for people who we can do business with, people who do what they say they’re going to do, people who set goals and achieve those goals, and people who are honest with us and with themselves – when they make a mistake or miss a target, they understand it. We are looking for people with whom we can have transparent and honest relationships, we can work through tough times, make hard decisions, and struggle together. They should also have passion, energy, and commitment to doing something that most people say can’t be done. They’re trying to do something new, and the majority of the customers in the market don’t believe it, because it’s new, it’s changing the way things have been done. They can improve what they doing in a significant way. That passion and energy are really what carry through the long haul of building a company. 

Who you would prefer to work with, Steve Jobs or Steve Wozniak?

I would say that it depends upon what you’re trying to achieve on a particular day. Obviously, Steve Jobs is one of the most innovative and impactful entrepreneurs of our time. He wasn’t technical and has no technical training, but he had that real passion for design and a real passion for driving his teams to perform, enjoying that or not. Wozniak was true to the users and true to the product and he was a steady end that kept Apple true to its roots. I think it’s important because it was a long time for Apple when they could get out of business, but they had a loyal customer base that stuck with them because they respected their products and respected the way they did business. That allowed the company to take advantage of innovation. They played different roles, and that’s what we are looking for in our teams – the ability to play multiple roles at different points in time to contribute and help the company. Ideally, I’d like to work with both Apple founders at the right time.

What are your red flags?

Financial plans that have no real basis, like someone coming to us saying “I don’t have a product yet, but I’ll have $4M in a few years.”Those just don’t make any sense and it’s a waste of everyone’s time. When you have entrepreneurs who are just trying to write presentations in hopes of raising money, this is a red flag. Who knows what it is going to end up looking like and what the performance of the company will be, but if you have passion, and if you believe in your product, and you show initial results – that’s what we’re looking for. The red flag is entrepreneurs who are in the market for the money and say whatever it is the investor wants to hear to close the deal. We just politely decline these proposals.

What works better for you during pitch desk – boring numbers or a show?

The numbers are not that important. The numbers are the reflections of outcome and reflection of value generation. The most important thing is building a valuable technology that is very hard to replicate. There are many businesses that could have large numbers, but they are not necessarily valuable businesses you want to invest in. You and I could start a water company tomorrow and create $5M selling bottled water if we spend $6M to do that, but I won’t invest in that. Valuable technology is much more important.

What is your process of working with startups once you invested in a company?

I look at every company in our portfolio as a new member of the family: you love every member of the family, but they have different needs and they have different stages they are going through. At times you need to be supportive and spend time with them every day, and at times they are thriving and moving along and you stand back and let them do what they are doing. We approach every partnership like that: you’re in for the long haul, you’re there when they need you, and you step in and provide your help and your opinion even at times when they don’t want it or do not want to hear it. We always join the board; sometimes our investment is a catalyst of forming that board. It is usually more informal than corporate boards, but high-performing. As I mention, we bring the resources from our large and extensive operating advisor network, helping with CEO coaching or meeting of new customers or regulatory advice – we can provide all of that. We really create an individual plan for each company.

Your target multiplication on exit?

Each of our funds is a portfolio fund. Across the portfolio, we’re looking for 3x gross return. Within each fund, we are looking for a relatively low lost ratio, about 10%, and this is much smaller than your typical early-stage investment fund. Obviously, we would be happier if we have higher returns, but we’re looking to provide lower risks than greater returns. 

What percentage of ownership of a company is fair to take for investment?

We typically own between 5 and 45% of a company. What we’re trying to do when we partner with an entrepreneur is to help them and their teams to change their lives, that they will achieve a life-changing event because we provide both capital and expertise to help them grow. We’re not coming into takeover or run their company but to help them achieve what they want and ensure that the proper business controls are in place and help them to make key decisions raising money or budget or compensations. It doesn’t matter how much we own as long as Pilot Growth has a voice in those decisions.

Have you ever rejected a startup and then regret it?

No. Opportunities come along every day and there is plenty of fish in the sea. We want to partner with the right folks and create growth. We’re not looking for a deal that everyone else wants to do and we don’t regret if somebody became successful without us – we wish them well. We certainly look at how we analyze and choose deals, reviewing our criteria, but never look back with regret. 

Has your VC approach changed after COVID-19 started?

The answer is no. Our approach isn’t affected by short-term events. There are thousands and thousands of really smart and motivated entrepreneurs who have ideas and experience about creating new technologies to help the Enterprise and B2B Technology space – they are on a long-term path. Things can change over the long term, but short-term events of the day don’t impact that space. 

But generally speaking, is COVID a threat or an opportunity to VC business?

In our space, COVID-19 created an extremely strong tailwind that pushed all our companies forward. It accelerated the adoption rate of every company in B2B category, whether it is around digital transformation or work from home or e-commerce, or logistics management. Companies that were slow to adopt were compelled to adopt or they face demise. We see that through all of the Information Technology space. We think go some of those will still hold true in a post-pandemic environment. Also, I think that this crisis won’t last as long as it was predicted and we will be back to normal quite quickly. 

Can you name the three most breakthrough startups in history in B2B software industry?

The most important startup in the history of B2B software is Microsoft. They created a server platform in Windows and provided productivity tools in the office that basically made every company work the same way, and because every company works the same way, you have massive productivity gains. The next company that was most impactful in that area probably was Intel in terms of speed of computing with their chip innovation that made processing in business information very very quick, allowing companies to do more and more things. And my alma mater, Anderson Consulting, now Accenture: what they did on the enterprise level is made companies understand how to use technologies. It is still shocking today to see very very large enterprises still not fully understanding how they leverage information technology for the best. 

The greatest startup failure in B2B space?

Failure in B2B space?.. Hm…

My own opinion is that it was Lotus Notes Domino. Yours?

Yes, it’s a good example. When I was at Anderson Consulting, we were #1 global user of Lotus Notes. I think it was the right idea, but probably the wrong technology. There is a lot of companies that don’t understand that they need to reinvent themselves all the time. I think having very strong businesses in Enterprise Technology is really your biggest threat because you become focused on saving that business while every 18 months, as we know, business cycles and technologies are reinvented. If you have a very strong business generating huge amounts of revenue, you have to assume that within 3-5 years those businesses you monetize now will go away, so you need to think about your next business to go around. We’re going to see that with things like Amazon Cloud which is dominating the world today, but soon there will be lots of free cloud services, so Amazon needs to decide how to compete with these free services. Technology companies have failed because they don’t understand the importance of reinvention and innovation. 

What are the most important things you have learned from startup founders?

That hard work and dedication really do pay off. The amount of passion and effort they put into their company – not only in the development of the technology but into laying out the office space, developing employees, a way to recruit people – in every aspect of your business you’re involved in always pays off. It isn’t always about being the smartest guy in the room or having the best idea, but it’s about doing the best work. I do think that if you educate yourself and put the work into all aspects of your business, you can be successful.

What qualities do you think are important for a good VC?

A good VC needs to be a student of the market, spend time understanding what’s happening in the market you’re investing in what are the problems and challenges, what are the best ideas, and the techniques out there trying to solve those problems. When they’re meeting companies and talking to companies in particular areas, they have a good context of how good and new their approach is – and how this VC can help them. VCs need to focus on areas they know well and like. Everyone can buy a lottery ticket, but VCs make decisions based not on luck but on understanding their markets when they choose between several similar companies. 

Is VC business chess, checkers, backgammon, go, card games?

I see it more as The Sims 4 where you try to create a world, building your home, helping develop people, and your goal is to build a successful ecosystem or household or city. To me, that’s what we do. We’re not sitting across the table from someone trying to beat them. Venture capital is not a zero-sum game. there are thousands and thousands of potential Investments you can make, and just because you make one investment, it doesn’t preclude you from making another one. This is a sort of simulation game where you try to fit a growing market, impact it, create a new world, allocate resources to help that world grow. I’m not playing to beat – I’m helping to create a new world. 

Your three pieces of advice to founders

First: It really is all about your team. If you want to build a successful technology company, it’s all about your team and your talent, so be good to people and recruit and partner with people who have talent. That’s the key because you only be successful because you have a great team that is talented and passionate about what they do. Second: Expect failure. Life is a lot of failure with successes sporadically appear in the middle. You’re going to have challenges, things won’t go as planned, and you’re going to have to do deal with diversity and change directions. So it’s ok to fail, but you need to keep on track. When you feel that you fail, fail forward, as we say. The last piece of advice is this is a long game. People talk about serial entrepreneurs, starting this company, that company – you need to find something that you can commit to and enjoy doing for a long period of time. Starting a company, having it, grow very big very very fast than selling it – that happens and people have a dream of that, but you’re going to live a long life, and being involved with something you’re passionate about, something you can grow, create a large successful business – it can be very gratifying, something you could be very proud of.