1Mby1M Virtual Accelerator Investor Forum: With David Lambert of Right Side Capital Management (Part 6)

Sramana Mitra: You gave a very good and interesting answer to a different question. The question that I was trying to ask you is across the deals that you see, what trends have you seen?

David Lambert: The biggest trend is an extension of a trend that we’ve seen the entire time we’ve been investing. That’s an extension of 30-year trend in the software business.

At the earlier stages of product formation when you’re building your product, it’s gotten cheaper and cheaper every year to build that initial product prototype and to get to that stage where you can go to the market to prove whether you can generate revenue or not.

That was probably $25 million in 1984. It’s $5 million in 2004, and $1 million in 2010. When we started investing in 2012, the average company probably had to spend $250,000 to $500,000 to get a product to the point where it could take it to the market and see if they could sell it at all. In 2015, that average cost is below $200,000.

In today’s world, it’s even lower than that. The biggest trend that we see is there’s a lot of startup activity, particularly in the software space. Each year just has more and more revenue without having to raise that much capital. They’re able to sell to customer profiles that you wouldn’t have thought possible to sell to without that much capital.

A year and a half ago, we said, “This is really interesting. We’re now seeing a lot of companies that haven’t raised anything and have a product that’s generating $20,000 revenue a month.” We weren’t seeing companies that had enterprise products.

In the last 12 to 18 months, we’re starting to get a steady trickle of those. These are companies that have raised anywhere from nothing to less than $150,000. They have $5,000 a month products and actually have customers paying them. It would have been unheard of two or three years ago.

Sramana Mitra: I have a slightly different analysis of this trend. It’s not just that it has become cheaper to build these products. It has become cheaper of course. I think it’s because entrepreneurs have become savvier about bootstrapping. I will take some credit for pushing this message heavily. I think people realize that it’s a much better deal to bootstrap first, get to a level of validation including paying customers before going out and beating on VC’s doors.

People are starting to understand that entrepreneurship doesn’t equal financing. You don’t wake up in the morning and go start beating on VC’s doors and expect anything to happen. People are realizing that they have to put in 12 to 18 months, sometimes 36 months, of bootstrapping before they go out to raise financing.

David Lambert: I think that contributes too. At the end of the day, there’s just a lot of factors. Also developer tools are so much more powerful than they were three years ago or 12 years ago. Two developers today can do what it took six to do five years ago.

You just have so many more cloud products, tools, and services that you can leverage as a startup that you may have to pay for at much higher prices. A lot of factors have gone into this.

At the end of the day, there are a lot more companies that have been able to generate capital with relatively little raised. These days, they even generate off of enterprise products with relatively little raised.

Sramana Mitra: That was a fascinating conversation. Thank you for your time.

This segment is part 6 in the series : 1Mby1M Virtual Accelerator Investor Forum: With David Lambert of Right Side Capital Management
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