Responding to a popular request, we are now sharing transcripts of our investor podcast interviews in this new series. The following interview with Todd Belfer was recorded in October 2017.
Todd Belfer, Managing Partner of Canal Partners, talks about financing early-stage niche B-to-B SaaS opportunities.
Sramana Mitra: Tell us about Canal Partners. What is the focus of the firm? How big is the fund? What size investments do you make? Where are you based?
Todd Belfer: I started Canal Partners nine years ago because I saw need in the South West to fund early stage software companies that didn’t have access to capital and, more importantly, human capital. We fund software companies that are doing a million in recurring revenue in the first four years of life and have not done any institutional funding. We only fund SaaS companies. We are in five geographies now— Colorado, Atlanta, Southern California, and Arizona.
Sramana Mitra: How big is the fund?
Todd Belfer: We do not have a fund. It’s mostly the money from the partners. We have about 20 or 30 LPs who participate on a deal-by-deal basis. We set up special-purpose LLCs for each individual investment and we have put about $20 million of capital over the last nine years.
Sramana Mitra: What is a typical deal size?
Todd Belfer: $1 million to $2 million.
Sramana Mitra: What is the background of the human capital that you mentioned? What is the resource pool?
Todd Belfer: We built a pretty deep bench of partners within the firm. I’ll start with my partner Jim Armstrong. He is the founder and former CEO of JDA Software. It’s a billion-dollar software company in the supply chain inventory management space. I had started a HR payroll company back in the early 90’s called Employee Solutions and grew that to over $100 million in revenue before we sold it.
We have a pretty deep bench of former CTOs, former Founders, VP of Sales, mostly in Arizona. We got a few in Atlanta and a couple in San Diego. We use that bench based on the type of opportunity or company and what their needs are. Sometimes the need is financial. Sometimes the need is on the technical side. Based on the problem, we put in the right person.
Sramana Mitra: Double-click down on the stage for me. You said $1 million ARR in the last four years. Did I get that right or are you saying that the company has to have reached $1 million ARR within a maximum of four years of existence?
Todd Belfer: We like to invest in a company that is in its first four years of life. We’re not really interested in companies that have been around for 10 years. We’re looking for companies that have been around for four years or less and have $80,000 MRR.
Sramana Mitra: What types of trends are you seeing in your deal flow right now? Where are you seeing the activity?
Todd Belfer: There’s activity everywhere. There is a tremendous amount of capital out there right now.
Sramana Mitra: I’m more interested in the deal flow. What are you seeing in terms of ventures that are interesting and that are hitting your criteria?
Todd Belfer: Trends tend to be subsets of bigger problems. I’ll call them feature sets because a lot of the big ideas have been solved. There’s a lot of Salesforces and Marketos out there that have solved big problems. What you’re seeing is subsets and feature sets that companies have created around. We still fund those but they’re much smaller markets and the exits are much smaller than the big ideas.
I think it’s important to know that we’re not going to create a hundred more Salesforces in our lifetime because the big ideas have been sold. That playing field has been won. Now we’re looking at feature sets for different business problems. A lot of those get gobbled up by strategics trying to round out their product suite.