#102: Practical VC Shares Advice for SaaS Founders From Over 2000 Investments – Dave Lambert
Jul 19, 2024
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Dave Lambert, a venture capital investor at Right Side Capital Management, has funded over 2,000 startups since 2009, specializing in early-stage SaaS companies. In this discussion, he unveils why traditional VC routes may hinder a successful exit and emphasizes capital efficiency. Lambert also sheds light on the effective use of AI in startup growth and the current state of acquisitions in the SaaS space, revealing valuable insights for founders aiming for smaller exits but significant impact.
Right Side Capital focuses on investing in pre-VC stage SaaS companies, typically funding smaller rounds to empower founders with control.
The firm employs a data-driven selection process that allows for rapid funding decisions, significantly differing from traditional VC practices.
Founders are encouraged to use AI technology strategically to enhance efficiency and drive growth, viewing it as a tool rather than a standalone solution.
Deep dives
Unique Investment Approach
The investment strategy employed focuses on funding pre-VC stage companies, which typically require smaller funding rounds, ranging from $100,000 to $500,000. This approach contrasts with traditional venture capital, which usually engages in larger funding sizes, often several million dollars. By concentrating on these smaller rounds, Right Side Capital Management caters to capital-efficient startups that are generally already generating revenue and have a live product. This enables the firm to identify high-potential companies at a stage often overlooked by other investors, allowing founders to maintain control of their ventures while seeking capital.
Quantitative Data-Driven Decisions
A key feature of Right Side Capital's strategy is its quantitative, data-driven selection process, which allows for fast funding decisions, often within a week. This process relies on a range of data points gathered from potential investments rather than subjective analysis typically common in VC practices. By prioritizing objective metrics, the firm can identify companies with strong performance indicators while executing a high-degree of diversification within its portfolio. This unique method has proven beneficial for both the firm and the entrepreneurs, making the funding journey more transparent and streamlined.
Capital Efficiency and Exit Strategies
The firm values capital efficiency and encourages founders to manage their expenses carefully until they have a scalable sales process in place. This philosophy aligns with the trends in the startup ecosystem, where lower initial costs enable entrepreneurs to focus on building sustainable businesses before scaling. Right Side Capital is open to various exit paths, whether substantial sales or smaller transactions, distinguishing itself from traditional VC firms that usually pursue only unicorn outcomes. This flexibility allows founders to explore multiple opportunities without the pressure to achieve astronomical valuations prematurely.
Navigating the Funding Landscape
Many founders misunderstand the implications of raising large funding rounds, often believing it correlates directly with success. In reality, taking on greater capital can amplify operational risks and lead to increased failure rates. Founders should recognize that the ultimate goal is to build a sustainable, profitable business rather than securing significant funding as a badge of honor. By coaching entrepreneurs through the complexities of funding options and helping them understand the various implications tied to specific investors, Right Side Capital empowers founders to make informed decisions about their growth strategies.
Embracing AI and Market Adaptation
Companies are increasingly integrating AI tools to enhance efficiency and drive growth, reflecting a broader trend across the industry. This evolution demonstrates that AI should be viewed as a tool for product enhancement rather than a standalone value proposition. Many startups utilize AI to solve niche problems that customers are only beginning to recognize as possible solutions. Entrepreneurs are encouraged to leverage AI internally to optimize operations and explore innovative product applications that can accelerate revenue growth while keeping their teams lean.
Dave Lambert and the team at Right Side Capital Management are the most active venture capital investors, having invested in over 2,000 startups since 2009.
Right Side Capital is a “pre-VC” institutional investor that operates very differently from traditional VCs: investing when SaaS companies have just a little revenue using a submission form on their website, then responding quickly and making investment decisions in a week. They also invest in practical SaaS founders with capital-efficient approaches who expect to sell their companies someday for less than $100M.
In this expert episode, Dave shares practical insights for SaaS founders who don’t expect to play the big VC funding game:
Why raising Series A or B funding rounds from VCs reduces your odds of a successful exit
What founders should be focused on when they get their first customers and revenue
Why most VCs don’t invest when you have just a few customers and a little revenue
How the founders they invested in are using AI technology to grow more efficiently
What’s happening right now with acquisitions of SaaS companies for $25-$100M enterprise value
Quote from Dave Lambert, Right Side Capital
“More often than not, at the stages that we’re investing and someone has $4K, $8K, $20K MRR, the founders are still supremely confident and think they figured out their exact ICP and how it’s going to grow in scale. They think, We’re just going to take your money, and it’s going to be straight up from here. And it never does, or almost never does.
“We’re having conversations with founders where we’re sharing, Hey, just so you know, 90% of our companies miss their revenue targets massively in their first year. So you should assume that you are going to as well.
“But guess what? They all spend exactly what they thought they were gonna spend or more, usually. Just know that that’s gonna be the case and have a plan for where you’re still alive if things don’t go as expected.”
Tune into the Practical Founders Podcast for weekly in-depth interviews with founders who have built valuable software companies without big funding. Subscribe to the Practical Founders Podcast using your favorite podcast app.
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