1Mby1M Virtual Accelerator Investor Forum: With Todd Belfer of Canal Partners (Part 2)

Sramana Mitra: I’m in agreement with you, by and large. Let me then parse what you said. You’re talking about $1 million to $3 million investment in a company that is doing $1 million ARR. What is the calculation here? Are you going to exit the company with that capital infusion or are you expecting that company to go through another round of financing and still exit for relatively smaller amounts of money? How do you think about deals?

Todd Belfer: We built our businesses in the 80’s and the 90’s before there were venture capital markets. We didn’t take on a lot of venture capital to build our software company. Our philosophy is, the $1 million to $3 million should get these companies to a place where they’re cash flow neutral. At that point, we may decide to do another round of financing, but that’s an elective to us. It’s up to us if we want to put more gas into the company.

Sometimes we will go into a negative decision if the growth rate is above the model. We have a company that we just funded. We are in a position now where we’re burning $200,000 a month. That company is also growing 300% a year. We don’t mind burning capital as long as the growth rates support that.

Sramana Mitra: What kind of exit expectations are you working with? For your numbers to work, what is the exit assessment?

Todd Belfer: The exit expectations for us are between 6x and 10x investment. The only other way we can accomplish that is without doing multiple rounds of financing.

Sramana Mitra: Exactly.

Todd Belfer: Out of 15 companies that we’ve funded, we’ve already done follow-on rounds in four of them. Usually, that is because the company has not performed and needs additional capital, and we’re not ready to shut down the company. The usual suspects of the company that need more capital are the ones that don’t perform to the budget and need additional capital to pivot or change direction a little bit and keep the lights on.

We just sold an investment in Atlanta where we gave them $2 million three years ago. They didn’t even spend that money. That money literally sat in the bank. I would say 25% of the companies need additional funding. That’s usually because they haven’t performed to budget and plan.

Sramana Mitra: What is your TAM requirement for the scale of money that you want to put in and the type of investment that you’re talking about? What is the minimum TAM that you are looking for to participate?

Todd Belfer: We don’t mind playing smaller markets. We’ve had investments in the physical therapy market which is a couple of hundred million dollars or less. We’ve had investments in the veterinarian space, which is a couple of hundred million or less. We actually prefer to play in markets that are under $1 billion. We just think there’s less competition. We look for smaller markets.

Sramana Mitra: One of your companies that we have covered extensively is WebPT. Can you actually give us a bit more details from your point of view of how you looked at that investment opportunity? What are the mathematics of that? I know you have sold a portion of that to private equity. How did that all play out?

Todd Belfer: WebPT was doing about $75,000 a month. They were in their 3rd year in business. We saw a market where the majority of the physical therapists are using Excel or pen and paper. We saw an opportunity to come in with a really simple product and turn the market from pen and paper into a SaaS solution. That’s what we did.

We did compete a little bit against some old software companies that have been around for 20 years but there weren’t any new SaaS companies going after that market trying to win that space. We thought it was a solution where they can make a decision within a day and can be live within a week.

Sramana Mitra: How much did you put in?

Todd Belfer: We put in $900,000.

Sramana Mitra: That company went to significant revenue with that capital infusion.

Todd Belfer: That took them to $18 million in revenue before they took on additional equity.

Sramana Mitra: Are you comfortable discussing what kind of an exit you engineered with that company?

Todd Belfer: I can’t give you the exact numbers, but we made a little under 20x our money. It was our best investment so far.

This segment is part 2 in the series : 1Mby1M Virtual Accelerator Investor Forum: With Todd Belfer of Canal Partners
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