David Lambert: To talk about pivots a little more, we’ve got data across a thousand different companies that we’ve seen evolve over time. The most important thing at these early stages is cash burn.
What ends up happening is, if we invest in a company that has $10,000 MRR, they go out of the gate burning $40,000 to $50,000 a month. They probably raised a round where they’ve got 10 months of runway. Just a few months in, the company is starting to stress about the cash wall that they’re going to hit.
Subconsciously, those founders and that team is going to have blinders on. They’re going to be of the mindset of, “We’ve got to make this business model that we’re on work or we go out of business soon.” If you take that exact same profile and instead of $40,000 or $50,000 revenue, they’re burning $15,000 a month.
That entrepreneurial team is not going to have those blinders on. They’re naturally going to have their heads up looking, “Is there any opportunity that is greater than what we’re currently doing?”
If by talking to their customers, they discover a need that’s much greater than the one they’re addressing, they might feel comfortable throwing out their entire business model and pivoting to that new product even if they get from $10,000 to $20,000 MRR. They’re going to be okay doing that because when you’re burning that small amount, you still might be running out of capital in six to eight months. It’s not as stressful if you know, “I’ve got another year.”
That’s what we look for the most. I could walk you through an example. We invested in a company in May of last year. They had somewhere between $5,000 to $10,000 in MRR. I think it was around $8,000. It was a B2B SaaS product for the SMB market. By the end of this year, they’re up to $30,000 MRR which is pretty impressive. They had raised less than a hundred thousand before we invested. Interestingly along the way, they had multiple of their customers ask for a specific product that was substantially different than the product they made.
In November, they made the decision. They built a prototype and took it to market. They built this new product and they did a pitch to 50 different customers. Around 80% to 90% of them signed up. Here’s a company that had just gone from $8,000 to $30,000 MRR. They tossed their old product out and made a new product. They’ve gone out and they’ve just signed up $70,000 worth of MRR in two months for this new product.
The only reason they were able to do that is because they had low cash burn. If they were burning a lot, their answer to those companies would have just been, “We can’t build that. That’s not what we do.”
Sramana Mitra: How many deals do you see a year?
David Lambert: A large number. We have a lot of sources of deal flow. It really depends on the channel. One of our major channels is really just random people coming to us. We drive everybody to a page in our website. If you go to rightsidecapital.com/submit, we spend a lot of paragraphs explaining what it is we look for in companies.
At the bottom if you think you’re fit, you can fill out that pre-screening form and we respond to 100% of people that fill that out. Through that channel, it’s a very small percentage that we end up going to the next step. Most of the time, we say “You’re not a fit in here.”
On the other hand, we’ve got over 2,000 existing founders that are out there and are scouts on the ground. They have a really good idea of what we are looking for. They are referring deals in. Because they’re a bit curated, there’s a higher chance that we’re going to invest in them. That might end up being in the 10% to 20% number.
Then we work with a lot of startup accelerators. We have a handful where we provide the capital that they use to run. Then there’s a number that we work with where we’re one of the few investors that can move quickly and will invest in companies on the way in or during the first month of a program.
The question is, if a startup Managing Director gets 800 applications and screens it down to 10 that they let in, then gives us three that they think would be a good fit and we say yes to two of those, did we just invest in two out of three or two out of 800? I’m not sure what the answer to that is. There are other channels beyond those. It varies a lot.