Introducing Index.Talk #1, the inaugural session in a series of webinars aimed at providing invaluable insights for tech entrepreneurs and first-time founders. Throughout the year, we'll host experts who share insights on startup success, raising capital, and building thriving tech ventures.
Our first guest was Zach Coelius, known as ‘The Unicorn Whisperer’. Having served as a founder, super angel, and now focusing on early-stage tech investments, his successes, like Cruise Self-Driving Cars and HelloSign, speak volumes about his expertise. Moderated by Sergiu Matei, CEO of Index.dev, the event offered invaluable advice from Zach's diverse experience as a founder and angel investor.
Zach emphasized a key rule: "If you don't bring value, you won't succeed." In this session, Zach and Sergiu discussed investor expectations. Key topics included understanding market valuations, navigating uncertainty with resilience, identifying niche markets, adopting an investor mindset, reaching out to investors, fostering strong founder-investor relationships, and leveraging the benefits of a global workforce.
Watch the full video on our YouTube channel →
Now, let's embark on a journey to explore these insights further, beginning with an examination of the shifts in market valuations and the implications discussed by Zach Coelius.
A Frothy Market for Tech Valuations Followed by a Sharp Sell-Off: What Happened?
The tech world has been riding a rollercoaster of uncertainty, with questions looming about whether the so-called "tech winter" is over or if we're only halfway through. Amidst this uncertainty, Zach Coelius sheds light on what really happened with those sky-high valuations that characterized the last decade. From an era of abundant capital to the demise of billion-dollar unicorns, Zach breaks it down into three key factors:
1. Appraising Mismatch
During the Disrupt era, startups saw an unprecedented surge in valuations fueled by an abundance of capital. Money flowed freely, and investments poured into startups at an unprecedented rate. It seemed like the easiest job in the world. Everything went up. We were all running 50% plus. We looked like geniuses. However, as with all good things, the party eventually came to an end with a resounding boom. This led to a significant problem – an appraising mismatch. Startups got used to easy money and built their entire business models around it, including their cap tables or NPLs. When the tide turned and valuations plummeted, it caught many off guard, forcing them to reassess their strategies and tighten their belts. Everyone had to pull back.
2. Industry Pullback
In 2022, SaaS software purchases decreased, and industry growth slowed significantly. Nearly every startup faced a major challenge, hitting a wall. As an investor in nearly 80 companies, I witnessed this firsthand. The tough times forced entrepreneurs to reassess. Those who adapted cut costs, focused their efforts, and became more selective. Now, 18 months later, resilient entrepreneurs have found their footing. They've right-sized their businesses and reignited growth. While not as rapid as before, they're back to providing value to customers, acquiring new ones, and sustaining momentum. This highlights a fundamental truth:
It doesn't matter how much capital you have, if you have a good product, you can reignite growth every day.
3. Mindset Shift
There's a notable shift in mindset. It's not just among entrepreneurs but also employees and partners. Across the industry, there's a recognition that things have changed. Money is no longer freely available. Startups face challenges. Cash is hard. Progress is hard. Traction is hard. Success is hard. Those unwilling to put in the work may struggle. This adjustment is taking time, especially for employees who got used to easier days.
The Key Traits Founder Should Learn to Stay Resilient
Here, Zach outlines crucial strategies and principles that can help tech founders stay resilient and lay the foundation for rapid growth and successful fundraising.
1. Go Back to Basics
In the past, it was simple: you had an idea, and investors would come running. Those days are over. Now, it's about returning to fundamentals. If you're a seasoned entrepreneur, you likely have connections with VCs, especially those big firms redirecting their focus to seed rounds. For less experienced entrepreneurs, it's tougher. Focus on core startup principles: What's your product? Does it offer unique value? Condense your pitch to one sentence and reach out to VCs.
2. Do New Things and You'll Get Noticed
I invest in things that are genuinely innovative. When you can pitch your startup as something truly unique, that's when you catch my attention. If it's just another AI analytics tool for HR, it's not all that exciting. Even if the founders are incrementally better, smarter, more hard-working it's not enough to stand out. But if you're doing something completely novel, something that makes people go, "What is this?", that's when I get intrigued. That's where the real potential lies.
I'll admit, when Bitcoin first emerged, I was skeptical. I thought it was a crazy idea that would never take off. Look at it now. That's the kind of innovation I'm always on the lookout for.
3. Find Your Niche Market and Address Their Needs
Nobody reads cold Linkedin messages. They're terrible. But if you email people about something that they desperately need, they will respond to your cold Linkedin messages.
Identify the group of people who genuinely need what you offer. Locate those individuals who frequent the same conferences, mingle at the same bars, and share common pain points. While this group may not be vast, tapping into their needs is crucial for gaining traction and building a loyal customer base. You can say, “Okay, we have these customers. We're executing against them. Let's go to the next one. Let's grow from there.”
There is no longer free money anymore. Investors are cutting costs and focus solely on essentials. You must do the same by honing in on your core audience—the ones who truly need your solution.
Being a founder is like being in a dark room with Mike Tyson, and on one hand he has an ice cream cone, and on the other hand, he has his fist, and you never know which one's gonna hit you in the mouth.
4. Grind Against the Wall of Entrepreneurial Pain
Being a founder often feels like being in a dark room with Mike Tyson, and on one hand, there’s the prospect of success akin to an ice cream cone, and on the other hand, there's the constant threat of failure, represented by Tyson’s looming fist. You never know which one's going to hit you in the mouth and which blow will come next. So are the founders, those of you who keep going back into the dark room to get beat up.
From my perspective, as someone who often sits on the opposite side of the table, I understand the immense challenges faced by startup founders. But despite the hardships, I like to view entrepreneurship as a rocket ship hurtling toward the walls of your own limitations. Look at Elon Musk, he constantly grapples with obstacles and setbacks. That’s how he’s going to get that great biography of Elon Musk. So, to all the founders out there, keep grinding against the wall of pain. Embrace the challenges, learn from the setbacks, and never lose sight of your ultimate goal.
VCs are drawn to big markets with clear value propositions.
5. Be a Fighter & Think Like an Investor
As a founder you encounter two realities that must be operationalized: Firstly, building a company involves building a company, identifying customers who truly need your product and are willing to pay for it. Secondly, it's crucial to determine the size of your target market.
Travis hadn't even launched Uber, but at a party, he shared the idea with me: "Push a button, get a car." While I thought it was brilliant, I also doubted its success due to potential opposition from the taxi lobby:”It's never going to work, cause the taxi lobby is going to eat you.” Travis insisted he was a fighter and would prevail. We debated for hours, and he turned out to be right.
A valuable lesson for me. VCs are drawn to big markets with clear value propositions.
As a founder, it's essential to strike a balance: focusing on a small, targeted market for traction and value delivery while keeping an eye on the broader market potential that can deliver significant returns for investors. In this game, there's inherent risk, and VCs are always assessing how big is the market size and how big it can get.
6. Build Strong Founder-Investor Relationships
There are thousands of answers to the question of the best way to reach out to investors. Undoubtedly, the best approach is to know them. Investing in someone I know, like Kyle from Cruise, is much easier. I've known Kyle for ten years and have seen him in action. So, investing in him removes a lot of risk as a VC.
Building relationships with VCs takes time and effort. There's no shortcut, but taking the first step is critical. Once you do, it becomes easier. The second step is getting warm introductions from people who know the VCs. This approach has worked well for me. I have a vast network, and you should leverage yours to get to me through someone who knows me.
Another strategy is building virtual relationships. Many VCs are active on platforms like Twitter and LinkedIn. Engaging with them by commenting on their posts or threads can help establish a connection. It's not the same as an in-person relationship, but it's a start. Over time, I've come to know people who actively participate in my online discussions. When they reach out, I pay attention because they've shown genuine interest and added value.
However, if you choose to engage in cold outreach, be mindful. Do that by adding value. I receive around a hundred cold emails a day from startups seeking funding. It can be overwhelming and challenging to give each one the attention it deserves.
If your company takes 10 years to build, it's better to prepare for the future rather than dwell on the past 100 years of in-person work.
7. Get the Advantage of a Global Workforce
I'm very bullish about thoughtful entrepreneurs who are saying, "Let's go remote. Let's be 100% remote, and let's just execute outside." A lot of companies still have offices and old management. They still have people who like to go to the office. Some opt for 2 to 3 days a week in the office. Should they bite the bullet and go straight to remote work? I don't know. It's unclear; in-person interaction is still valuable, but offices are not perfect.
What I'm highly optimistic about is entrepreneurs who are embracing remote work entirely. I've observed two stable configurations. Firstly, remote work is gaining traction because talent is global, more affordable, and often more motivated. If you build a company from the ground up with remote work in mind and optimize systems, processes, documentation, and communication, it will set a strong foundation for future success. Remote communication tools and technology will continue to improve, with advancements like AR goggles just being the beginning.
If your company takes 10 years to build, it's better to prepare for the future rather than dwell on the past 100 years of in-person work. Embracing remote work offers the advantages of accessing global talent and fostering a global workforce. Startups that pioneer remote work early on are likely to be more successful in the long run.
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Blitz: Zach’s Quick Answers on Startup Investment in 2024
Below, we've compiled a rapid-fire Q&A session with Zach, providing insights into investment strategies, top industries, entrepreneur selection tactics, preferred sectors for investment, industries to avoid, and his take on AI.
#1 Strategy for Investing
I focus on sectors where I have expertise and see potential for innovation. When entrepreneurs present new, exciting ideas, I'm eager to get involved. B2B software, in particular, catches my eye because of its scalability and high market demand.
#1 Entrepreneur Selection Approach
I don't have a rigid process for selecting entrepreneurs. Instead, I engage with individuals regularly, and when I sense genuine excitement about them and their ideas, I continue to follow their journey. I observe how they develop their products and navigate challenges, learning from their progress along the way. As they keep me updated on their company's developments, I watch closely, gradually recognizing potential opportunities. It's similar to the way certain people become a lasting presence in our lives—we connect naturally, and some relationships endure over time. This approach is organic and relies on genuine connections rather than predefined criteria.
Recent Investments
I recently backed a company named Shovels AI. Shovels utilizes AI technology to sift through vast collections of government documents, extracting valuable data and providing access to startups via APIs. It's an incredibly engaging product with promising potential.
Another exciting investment is Echomark. This innovative platform embeds an invisible fingerprint onto sensitive documents. Although imperceptible to the naked eye, this fingerprint acts as a security measure. If someone shares or photographs the document, they're immediately identified. It's a groundbreaking application, particularly for government agencies seeking to prevent document leaks.
Both ventures boast super great founders, and I'm enthusiastic about the work they're poised to accomplish. I have a few more investments in the pipeline that I'm eager to announce soon. This renewed sense of excitement is something I didn't experience much in 2023.
AI: A Reality Check
I believe Sam Altman's assertion that AI can create a one-person unicorn is a bit exaggerated. In reality, even billion-dollar companies require human interaction, especially in areas like customer support, legal matters, sales, and marketing. While AI chatbots have their place, they are still not as good as a human being who can take you to dinner, listen to your concerns, and provide consultation. As companies grow, they require various components such as legal support. Sales and marketing are areas where human interaction is preferred, as they require nuanced understanding and personal touch. While chatbots have their utility, they have not yet reached a level where they can scale and solve all problems. I'm not even sure if I know of a single company with a revenue or valuation of $100 million driven solely by AI. While such businesses may exist, they are not commonly known to me.
What to avoid?
Boom markets are oftentimes not your friend, even if you want them.
Crypto might be making a comeback. I'm not a crypto guy, but I recently had a nice dinner with a bunch of crypto enthusiasts. It was all about lobster tails, and they were feeling frothy. In such markets, there might be subsectors, some smaller sectors, where scammers thrive. They know they have nothing to lose, so they dive in, make their money, and then quickly exit. However, for those trying to build, it's a tough ride. Entering a boom market means facing fierce competition as every potential competitor secures funding, leading to numerous entrepreneurs entering your market, often resorting to non-economic tactics to grow. They overspend on marketing and other areas, making it challenging for you to execute your plans.
For me, it's all about delivering value. Yes, it can be costly and lead to significant dilution as you raise capital to keep up. However, you can grow, albeit more slowly, but in the end, you'll own a larger portion of your company and be in a stronger competitive position. Personally, I prefer these markets for building companies.
One More Out-the-Box Advice for First-Time Founders
The stronger the hate, the more compelling the concept.
Sometimes, it's the weirdness of an idea that yields the greatest rewards. The stronger people hate something, the more intriguing it becomes.
Let me tell you a story about an investment I made. I knew some guys who had a service company that went out of business. One of them was really into mushroom tea, but let's be honest, mushroom tea doesn't taste great. However, he started experimenting with blending Thai tea and various ingredients like cardamom with his mushroom tea, and suddenly, his friends loved it. I suggested he should sell it. So, he set up a Shopify page and started selling it. In the first month, he made $5,000 in sales. The next month, it doubled to $10,000. Soon, it reached $20,000, and they reached out to me for help. I was hesitant at first because I didn't know much about mushroom tea, consumer goods, or investing. But as sales hit $40,000 the following month, I realized I needed to get involved. I introduced them to some consumer goods experts I knew, and they were impressed. We put together a round of funding for the company, and MUD\WTR™ was born. Today, it's a global success with over $100 million in sales.
What's fascinating about this mushroom tea is that some people hate it, while others love it. This discrepancy was an eye-opener for me. I've learned that when something elicits strong emotions like love and hate, it's a sign that something interesting is happening. People tend to resist new things, but that doesn't mean they're bad. In fact, it often indicates innovation. Take Tesla, for example. When it first came out, opinions were divided. Some loved it, while others despised it. But that polarizing reaction is precisely what makes it intriguing. So, remember, the stronger the hate, the more compelling the concept.
How Fundraising Could Play Out
In conclusion, as we heed Zach Coelius's insights and navigate the landscape of fundraising in 2024, it's evident that investors are maintaining their optimism and faith in the market. There's tangible progress, with this year showing substantial improvements over the challenges of the past. The log jam in the venture market is gradually unfolding, indicating a positive trajectory ahead. While major changes may not be imminent, it's essential to recognize that downturns often follow a pattern of a swift decline followed by a slower recovery. We must persevere through the challenges, steadily grinding our way back to success. Yet, amidst the perseverance, there's hope for steady growth on the horizon. So let's remain resilient, continue pushing forward, and anticipate the rewards that await us.