1Mby1M Virtual Accelerator Investor Forum: With David Lambert of Right Side Capital Management (Part 4)

Sramana Mitra: Pivot is a very tricky thing to manage. It’s a very tricky thing to manage from a cap table point of view. If you need to raise more capital to support a pivot, that means that your early investors didn’t really get a lot of valuation. Nonetheless, that happens. It happens very regularly.

Here’s a question that is a slightly more subtle question. I was actually coaching one of our premium members yesterday. This is a B2B SaaS company that has a couple of paying customers and has three POC’s going on right now. Their paying customers are not in the vertical where they think they’re going to build the bulk of their business.

In the course of figuring out the product, they have decided that there is a vertical that they want to go after but the initial traction is not yet there. These days, seed investors want everything checked. They do have some recurring revenue. Is this a kind of company that would fit in your investment thesis from a B2B SaaS point of view?

David Lambert: Potentially. If they haven’t raised a lot of capital to date and they only need a relatively small round, that would be a company that would make it to our front-end screens that we would look at and dive deeper.

One of the mistakes that a lot of entrepreneurs make when they look at our website and hear me talk, is that they think, “I’m a startup. I’ve got over $5,000 a month in revenue. I’m looking to raise a round that’s below $500,000. I’m looking to do it at $2.5 million. I check everything on your box. Therefore you’re just going to fund me.”

Those are the criteria for you to just get in the front door and for us to take a look at you. Almost everything we fund fits into that profile. For a company like that, it would really depend. Are those POC’s just very short deals where they have $5,000 a month but that’s for the next 60 or 90 days. Then that goes away.

Are these ongoing indefinite pilots where these are companies that are debating whether to scale out and be much larger. If it’s that and the price point is fairly high where we’re convinced that it can support a sales force, that will probably be the profile of a company that we could potentially invest in.

Usually though, we discount POC and pilot revenue. If they’re that same profile and they just had $5,000 in revenue of customers that have gone through pilot and are using it live, we wouldn’t care that those customers weren’t necessarily the main market. 

Sramana Mitra: I’m just using this to see how you think about deals. These guys have real revenue from a couple of customers. Let me probe one point you made which was, how much capital has gone into the company? Can you elaborate? For a company to have gone to $5,000 MRR, what is comfortable from how much capital has gone into that?

David Lambert: I’m going to give you my 2019 answer to that. Then maybe I’ll give you a little bit of a backstory. That changed substantially from 2012 to 2019 as far as what’s possible in the entrepreneurial world. In today’s world, the average company that we’re investing in that has $5,000 MRR has probably raised $100,000 previously. Maybe he has raised nothing.

For a company at that stage to be a fit for us, it would probably be a max of $150,000 that has gone in. As you get to some higher numbers if we’re investing in a company that has $25,000 or $30,000 MRR a month, it’s a wider range. It can be anywhere from they haven’t raised a penny to having raised $250,000.

This segment is part 4 in the series : 1Mby1M Virtual Accelerator Investor Forum: With David Lambert of Right Side Capital Management
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