What VCs Look for in Early-stage Startups

What VCs Look For In Early-Stage Startups

Jason Kirby: (00:01.918) Hey everyone. Welcome back to Fundraising Demystified. Today we have Dave Lambert with us, founder and managing partner at Rightside Capital Management, as well as an exited founder before it was cool, you know, back in the early 2000s and nineties. Welcome to the show, Dave.

Dave Lambert: (00:18.818) Hey, thanks, it's really great to be here.

Jason Kirby: (00:20.862) No, I'm excited to have you on here and you have full disclosure to the audience. I'm an LP in the fund. Um, you know, I've been in—think what, forgot the specific fund—uh, yeah, but then you guys for quite some time and, really love the unique strategy that you guys have. But before we go into the details, let's talk about some of your portfolio wins. Let's talk about some of the bigger companies and the big successes that you guys have had with your strategy.

Dave Lambert: (00:30.360) Yep, for a little while. Yeah.

Dave Lambert: (00:46.284) Yeah. So, mean, we were very early investors in a company called TradingView, which is a B2C consumer fintech company, financial charting software started out going after at home active traders, mostly stocks, commodities, currencies. And then, you know, as the crypto world sort of exploded in the late 2010s, became one of the dominant players there. They're still doing really well. We invested back in 2012 or 13, actually forget exactly when now—we sold half in the early 2020s, well actually sold half and then all in the early 2020s. And that's one great story. I can go into some of the details of these. Let me just reel a few off. Another one was PillPack, which was an online pharmacy, which was acquired by Amazon in the late 2010s. We're a cool company that just hadn't—we had an exit for.

Dave Lambert: (00:46.284) In the fall of last year, was called Kami, K-A-M-I, which is probably the second most successful startup in New Zealand after Canva. There was pretty big gap between Canva there, but we invested in them back in, I think, 2015 or 2016. What's cool is that almost every really big success that we have, you know, it's never been the case that we just invest and everything goes as planned and it's straight up and to the right.

Dave Lambert: (01:51.378) I would say, you know, a lot of our really big successes have near death experiences along the way and sometimes multiple pivots and changes and don't look anything like what we invested in. And I think for all three of those, that was, you know, a variation of the case just in all those.

Jason Kirby: (01:51.378) Yeah.

Dave Lambert: (02:10.766) Really big successes have near death experiences along the way.

Jason Kirby: (02:26.952) Well, and that's refreshing to hear, I imagine, for most founders who, you know, I haven't met any founder that's had any material success that didn't have a life or death moment at some point or multiple. But, and you guys come in real early. Walk us through how you guys, like what your strategy is for founders that have an idea of where Rightside Capital might come in.

Dave Lambert: (02:49.902) Yeah, so it's changed over time. So back in the 2012, 13 and 14 period when we were just starting to invest, most of what we invested in was pre-revenue. So maybe even if we step up a higher level, the description I would have given to you in 2012 of what we do is we invest in capital efficient tech companies that are raising sub $500,000 rounds at sub $3 million valuations.

Dave Lambert: (02:49.902) And in today's world, I'd give you almost the exact same description. I'd say we invest in tech companies—capital efficient tech raising sub $500,000 rounds at sub $4 million dollar valuations. Not any substantial change in the description, but what a capital efficient tech company looks like has changed dramatically. So that's the big difference. So back then, you know, it took a half million to a million dollars to be able to build most software products and get them to the point where you could go live, generate revenue and sort of prove or disprove your initial business thesis. So most of what we invested in was pre-revenue. They had a prototype, maybe some customers using it and a small percent had revenue, but they had like, you know, 800 a month in revenue usually. But, you know, in today's world, that's very different. Almost everything we're looking at has revenue and it usually has somewhere between five and 30K of MRR. And it's just what, you know, two things have happened.

Dave Lambert: (02:49.902) Since then, one, the cost to build the first version of a software product has just fallen through the floor and is essentially almost free for most business models, if you're a technical founding team. And then the amount of entrepreneurial activity has exploded as it's gotten cheaper to build a product. So as there's that many more startups out there, you know, and it's gotten cheaper to build a first version, there's more companies looking for smaller rounds and the cream of that crop looks better and better every year. And I think that's the, you really—the biggest change that's happened over the last 13, 14 years.

Jason Kirby: (04:55.558) And you kind of mentioned earlier, like the technical co-founders—like, you feel that for companies to thrive in today's market, historically, it's like, if you didn't have a technical co-founder building a technical product, it's always pretty frowned upon if you didn't have that, you know, technical co-founder. Are you still seeing that being the case or do you still think that, you know, maybe business-only people could maybe get off the ground?

Dave Lambert: (05:17.134) It's changed a bit. So what I would say is if we went back to the early to mid 2010s, boy, like 95% of the time plus, you just couldn't do anything capital efficiently enough for us to be an investor if you didn't have technical co-founders. I think that began to change a bit as we got to the late 2010s. It became more common that startups would have most of their development being done overseas by overseas teams. And as you had more developers overseas that had worked with startups for many years, that became less fraught with potholes and speed bumps. I'd say we, you know, so from that period forward to now, maybe instead of 95%, it's more like 80 to 85% technical founders still, but that's maybe still doubling or tripling of sort of non-technical founders. I think that could change a lot over the next five years, you know, as AI—maybe it's five, I don't know if it's five or three or 10—but at some point in the future, you know, software is going to be written by AI. And maybe you don't need that. You know, the language to write it is English and you explain what you want, and that's going to come eventually. And then you don't need to be so tight.

Jason Kirby: (06:34.622) It's not…

Jason Kirby: (06:38.974) I think eventually, even if I play around with it, you still need to know how to deploy, manage, maintain and scale. Um, but like to get a prototype and to kind of get some initial validation, you really can get pretty decently far without writing code, but I wouldn't, I wouldn't, wouldn't be something I'd throw money at.

Dave Lambert: (06:40.620) Yeah, right now.

Dave Lambert: (06:59.694) No, we're not, not where I was saying I already close to there yet, but I think it's moving the line a little bit where, you know, what an outside development team can do or just in-house developers that aren't the founders is just—they can do so much more now than they could have three or four years ago. So, you know, maybe it's gone from 95/5 to 85/15, and as you know, a year or two ago—and we haven't done this analysis, but maybe it's 75/25 now because of…

Jason Kirby: (07:02.919) Hey!

Jason Kirby: (07:30.814) So let's take a step back, give the audience a little more context on Rightside. Like how big is the fund? Like you guys have a ton of portfolios that you’ve invested in over the years and have a massive, much larger portfolio than most traditional venture firms. Can you give a little context?

Dave Lambert: (07:46.318) Yeah, we're on our investing from our sixth fund. Right now we have two to 300 million—I forget the exact number under management. And we've invested in over 2000 portfolio companies since 2012. So that, the most unique thing about us, really two unique things. One is that we take this quantitative data-driven approach to selecting investments. So we gather up a bunch of quantitative data points, and then we make a yes or no decision, usually in a week or less, about most companies. And number two is instead of having a portfolio of 15 or 20 or maybe even 30 companies—as a more active early stage fund—we have many hundreds of investments in each of our funds.

Jason Kirby: (08:31.678) And do you guys structure like a traditional power law theory kind of venture fund? Do you guys take more of base hits and doubles? Like how do you think about it?

Dave Lambert: (08:41.678) So it's yes to all of that. When this was sort of an idea on paper in our head in the late 2000s, we were already well aware of power law, how that worked, power law math—a little bit different than regular math and more complex. So we'd done all our calculations then on what diversification we need and how to tail that with high certainty.

Jason Kirby: (08:46.942) You…

Dave Lambert: (09:10.870) And so we've always known that it would be these large outliers that drive most of the returns to our fund. But that doesn't mean we take the Y Combinator approach, which is more like trying to have every company step on the gas, raise a lot of money, and drive to that unicorn home run or bust. You know, I don't think it's bad what they're doing because they're very transparent and open to entrepreneurs. So that's what's happening.

Dave Lambert: (09:10.870) We take a bit of a different approach because we focus a little more on capital efficient tech. We like a lot of our companies to achieve significant progress without massive amounts of venture capital flowing in. Some then go the venture capital route, some become very successful without that. And we're open to pretty much all outcomes. So we just do enough investments that the ones that are naturally going to become these crazy home runs will do so on their own.

Dave Lambert: (10:33.598) And for the others, we're more consultative. Like, does it make sense for you to raise venture capital or private equity, or should you go to individual investors and family offices? What exit markets are you keeping in play or eliminating? You know, based on your market—are you taking a lot of risk if you grow beyond 150 million? Because all the exits happen below that. These are nuanced things to consider. And we don't try to force a square peg in a round hole.

Jason Kirby: (10:33.598) It's something that's unique about you guys—this kind of price sensitivity as well. Like, you know, coming in at sub four million. Is that the case for all your investments? How do you guys perform in actually sticking to the sub four million?

Dave Lambert: (10:52.590) Yeah. I would say that probably 80% of the investments we make are between two and four million valuations, the other 20% above or below. So sometimes that's investing at four up to maybe six for higher traction levels and growth rates. And sometimes that's investing a little below—maybe at one and a half for something that's a little under our traction bar or has some other unique characteristic that makes it worth doing, even though maybe it's technically pre-revenue.

Dave Lambert: (10:52.590) And I would say that there's two reasons we're able to consistently do that. One is the value of speed—where we're not taking three to six months of an entrepreneur's time for a yes or no (usually a no). We're doing it very quickly. And that's one thing. Number two, it's small rounds. We're not doing $800,000 rounds at a $2.5 million valuation. If you're at a $2.5 million valuation, it's probably usually a $400,000 or $300,000 round, so it's relatively low dilution. And most of the companies we're looking at have raised either zero or just a small amount of capital. And then lastly, it's all the value we bring. We're not just a check. We give a lot of operational support—access to sales experts with nearly 30 years of experience, monthly founder webinars, and connections to a network of later-stage investors. Ultimately, it's that speed and certainty of a quick transaction that is most impactful.

Jason Kirby: (12:58.620) Yeah. I always found it interesting with being able to compete and get checks in when so many founders are raising at high valuations just because they throw AI into their name, and suddenly your valuation should go up by 10 million. Exactly, right?

Dave Lambert: (13:10.327) Yeah.

Dave Lambert: (13:14.426) Just like in the late 90s—add.com or mention XML in your quarterly report and your stock doubles. I think one of the interesting things is that when we started, we designed this fast, transparent funding process for our own selfish needs to make quick decisions. But it turned out our value proposition resonated strongest with repeat entrepreneurs. If you're a repeat entrepreneur, you know how painful and distracting fundraising is. That's the type who'll give you their information and expect a yes or no next week to close immediately. Whereas younger teams that haven't done it before tend to get more enamored with valuation and don’t appreciate how long fundraising is going to be.

Jason Kirby: (14:28.924) Yeah. As a founder, I couldn't agree more. It's some of these things where the first-time founder gets hung up on percentages and how much they own, but if you need money to build the outcome you're trying to create, you have to bring people along and share. But that idea of maximizing equity or ownership becomes immaterial when you need to execute.

Dave Lambert: (14:51.213) Yeah.

Dave Lambert: (14:55.212) At every stage, and we're the same way once we're on board and getting diluted in the next rounds. If someone's coming in to one of our portfolio companies and making an offer, they move really quickly. There's a lot of value in that. We make sure the founder is aware of that value and the cost of spending another five months on fundraising. So there's value in speed.

Jason Kirby: (15:26.078) And when you're looking at this market, you guys see tons of deal flow, move quickly, and have lots of data. What trends are you seeing at the pre-CE kind of angel round stage?

Dave Lambert: (15:40.428) The biggest trends over the last few years are massive valuation inflation in the late 2010s and early 2020s, and then a bubble popping in mid-2022 through the end of last year. Funders left the market, venture firms went out of business, and angel investors stopped investing. Funds got smaller, and the marketplace dynamic around fundraising changed completely—from too much money chasing too few deals to many more startups existing with less capital available. And then, of course, AI is coming on the scene, which is another major factor.

Jason Kirby: (17:32.360) Let's talk about AI because that's always the hottest topic. How do you define AI from an investability standpoint?

Dave Lambert: (17:41.056) Our official Rightside Capital view, which we defined about a year to a year and a half ago, is that most companies labeled as AI aren't truly AI companies. An AI company is one that is either foundational in its approach or doing real hard science around AI. Otherwise, most so-called AI startups are merely integrating AI tools into their product or backend operations to gain efficiency. It’s similar to when the internet emerged in the 90s—early on, selling online made you an “internet company,” but that later became table stakes. AI is following that pattern. In the near future, having AI integrated into your product or backend will be essential to stay competitive.

Jason Kirby: (19:49.534) So you're saying if I add .ai to my domain name, I don't get a $10 million bump in my valuation anymore.

Dave Lambert: (19:55.180) Yeah, you don't. You miss that window. There was a nine-to-12 month window of craziness after ChatGPT was released where anything with AI in it got a rush of investment at high valuations, but many of those investments aren’t working out because there's still little or no revenue to justify those numbers.

Jason Kirby: (20:24.798) Yeah, there's been a giant reckoning in the industry. Many founders still think they're amazing and deserve a 20-minute valuation bump, but maybe your data points are from four years ago.

Dave Lambert: (20:41.454) Yeah. One cool thing is that AI has helped shift the entrepreneurial mindset. By the late 2010s and into 2020-2021, many entrepreneurs had become accustomed to economic tailwinds and rising multiples. They assumed their goal was always to get the next round of funding rather than become a profitable business. Now, with the downturn in fundraising over the past couple of years, there's a healthy shift: more founders are aiming to be profitable and control their own destiny. AI tools, by making backend operations more efficient, are empowering that shift because the cost to build a software product has collapsed over time.

Jason Kirby: (22:49.782) And it's a different conversation now. There are founders who raised in 2019-2021 with lofty valuations but are now no longer on that venture trajectory because they raised at high multiples. They feel stuck with a cap table that leaves them with pennies on the dollar.

Dave Lambert: (23:13.634) They're structurally broken, basically. Even if they have a healthy business, if they raised too much at too high a valuation, their cap table ends up with too many liquidation preferences in front of them. That’s why many are moving toward a “one round and done” mentality.

Jason Kirby: (23:19.486) If you didn’t have the right cap table, even if your business is great, you might never realize its full potential.

Dave Lambert: (23:54.604) Exactly. There's a cost to raising too much money—dilution and a higher exit threshold. Founders need to understand the trade-offs. Sometimes it's better to raise a smaller round to keep more control and focus on execution.

Jason Kirby: (24:33.372) And what about the option of debt? Some companies might build a good enough business to attract healthy debt, which avoids dilution altogether.

Dave Lambert: (24:49.432) Yeah, the SaaS lending world didn't exist in the mid 2010s. Now, especially once you hit around 1.5-2 million in ARR, there are many alternative financing sources that didn’t exist 10 years ago.

Jason Kirby: (25:07.560) So from your perspective, you bring value add after the investment—helping founders decide on their next round or whether to pursue profitability. How do you handle that?

Dave Lambert: (25:40.042) It's very situational. We’re in so many deals that no single investment dramatically impacts our fund’s overall performance. Our philosophy is that we optimize for that last check-in that ultimately buys the company. We don’t optimize along the way. If a founder is contemplating a $10 million round but hasn’t proven their path to a much larger exit, we help them understand the trade-offs. Sometimes that means connecting them to venture investors; other times, it means advising them to take a lower round to avoid blocking a future, larger exit.

Jason Kirby: (28:25.426) Most VCs don't fall into that camp. That’s one of the reasons I'm an LP, because your mindset aligns with supporting founders with realistic expectations. It’s so common for founders to think a hundred million exit is within reach, only to have the board block it because the numbers just don’t work.

Dave Lambert: (28:52.066) Yeah, it's like a three-second conversation and they're just in shock.

Jason Kirby: (28:56.124) Yeah, math doesn't work. You need to work on it for another five years and maybe then you'll get a couple more options.

Dave Lambert: (28:59.640) Yeah, yeah.

Dave Lambert: (28:59.640) So the thing is, entrepreneurs don’t realize that VCs aren’t trying to hide things from them. They assume founders know their MO, and if you ask, they’ll be honest. The conversation just doesn’t happen enough because everyone makes assumptions.

Jason Kirby: (30:18.130) You say it like this—have the conversation. Founders are so scared of talking to their investors or board members for fear they might say something wrong. But if you actually have that blunt conversation, most investors will be on board. It might not be what you want to hear, but at least it removes the uncertainty.

Dave Lambert: (30:30.392) Exactly. I remember a company we invested in that was taking off. They got a term sheet from a premier VC for a four-on-16 or four-on-20 deal. The founder thought it was a no-brainer until I asked him if he’d take a 60 or 80 million exit in a year. He said yes, but then the investor said they'd block it to push for at least a 150 or 200 million exit. That conversation made the founder realize the reality—and we ended up finding a family office that invested at a lower valuation without blocking an exit.

Jason Kirby: (30:46.014) You say it like this—have the conversation. Founders are so concerned about upsetting their investors or board members that they avoid discussing these tough topics.

Dave Lambert: (31:17.334) Yeah. You just brought up a whole other topic—what is the CEO's role in interacting with the board? First-time founders often see the board as their boss and try to only report good news. That approach will eventually burn you and damage your relationship with your investors. Corporations are set up so the board sets strategy while the CEO executes and also sits on the board. The CEO’s job is to execute on the strategy and give transparent views on what is or isn’t working. When you do that, even if the conversation is tough, it builds investor confidence. We’ve seen companies where transparent communication saved the day, even if the outcome wasn’t perfect. Conversely, there are founders who operate like a black box, only reporting rosy news, and that doesn’t inspire confidence.

Jason Kirby: (33:30.814) That’s an interesting, maybe counter opinion—have you run the numbers on black box founders versus open founders?

Dave Lambert: (33:40.610) We have. I wish I could say the numbers back up my argument completely, but we've seen both. Some large successes came from black box founders, but more often investors end up frustrated and pulling their hair out with those cases. The best approach is to communicate consistently—even if things aren’t perfect.

Jason Kirby: (35:03.550) Yeah, it's happened to me. I once invested in a company where everything was rosy at first—monthly updates then quarterly updates, then silence. Even in person, the founder kept saying, “Everything’s great,” until you finally got an emotional breakdown. It shows that sometimes the hard truth comes out later.

Dave Lambert: (35:32.429) Yeah.

Dave Lambert: (35:42.050) And the thing is, investors can help the most when things aren't going well. If you have an early warning, your board and advisors can provide alternatives or pivot suggestions—if you let them know what's really happening.

Jason Kirby: (35:46.494) Founders often wait too long to bring these issues up, which only hurts them. The earlier you have that blunt conversation, the better the chances you can save the business.

Dave Lambert: (36:13.090) Yeah. What I recommend is: go to our website and check out the blog section. One of my partners has written posts on monthly or quarterly investor updates—like the MVP of an investor update and the do’s and don’ts of investor updates. The key is that investors care about the KPIs. Even a five-minute update with just the numbers can be enough.

Jason Kirby: (37:07.196) Exactly—just a quick update to let them know you're alive and well, rather than letting silence speak volumes.

Dave Lambert: (37:12.781) Yes.

Dave Lambert: (37:28.076) And your investor network has value—you never know what expertise they have or who they can connect you with. Even if an ask seems bizarre, like needing contacts in a niche industry, just ask. I've seen investors make connections in the most unexpected ways.

Jason Kirby: (38:02.524) Yeah. What are some of the craziest asks you've seen come up with your board?

Dave Lambert: (38:09.006) Crazy asks, boy. Honestly, almost everything. Often companies are trying to pivot or find new market segments and need introductions to people in a very specific niche. I don't think I've ever seen an ask that was completely bizarre—they’re all fair game with investors because investors are like family. They can say no, but you have to ask.

Jason Kirby: (38:51.506) Have you had conversations where a founder essentially says, "Swung and I missed," like they lost out?

Dave Lambert: (38:59.598) Absolutely. Many times, even with entrepreneurs. I remember once in 2016-17, we had a company that was doing well, but seven months later they called saying the market dynamics had shifted so much that their value proposition was gone. They decided to wind down and return 40 cents on the dollar because continuing would have meant a zero outcome.

Jason Kirby: (40:32.146) Yeah, it makes sense. Founders sometimes stick with a failing business because they're scared to admit it isn't working. But if you have that conversation early, you might pivot to something that saves the business.

Dave Lambert: (40:52.694) Exactly. The sooner you talk to your board and investors, the sooner they can help you figure out alternative strategies or pivots.

Jason Kirby: (41:20.065) Well, Dave, it's been an absolute pleasure having you on the show. What would be the best way for a founder or anyone who wants to learn more about you or Rightside Capital to get in touch?

Dave Lambert: (49:50.284) If you want to learn more about us, just go to our website at rightsidecapital.com. If you want to email me, reach out at Dave@rightsidecapital.com. We list everything about us there—what we say yes to, what we say no to, and our investment profile. We're very transparent.

Jason Kirby: (50:11.228) That's super valuable for founders—to know if they check those boxes before engaging further.

Dave Lambert: (50:16.908) Exactly. And if you do fill out our form and meet our criteria, we'll dig in and see if it's a fit. It doesn't mean we're automatically investing, but you'll get a quick answer so you can save time.

Jason Kirby: (50:27.454) Super valuable to get that quick answer if you're in the right range. Thanks again for being on the show, Dave. It's been great having you. I look forward to sharing this with our community.

Dave Lambert: (50:34.220) Yeah, really great to have you on. Great discussion.

Jason Kirby: (50:41.278) Perfect.