Non-Consensus VC - Learning from 1800+ Deals

[00:00:00] Welcome to Non Consensus Investing. I'm Ram Ahluwalia, your host and CIO at Lumida Wealth, where we specialize in the craft of alternative investments. At Lumida, we help guide clients through the intricacies of managing substantial wealth so they don't have to shoulder the burden alone. Through this podcast, we draw back the curtain to reveal the strategies employed by the best in the business for their high net worth clients so that you too can invest beyond the ordinary.

All right. Welcome to the next installment of Non Consensus Investing. It's a podcast from Lumida. You can find it on Apple, Spotify, YouTube, here on Twitter, LinkedIn, all the rest. I'm joined by Dave Lambert, who's Managing Director of RightSide Capital. And RightSide I put in the bucket of non consensus venture, and we're non consensus investors.

We're going to unpack what that means. They're a top decile venture fund, and they take a very unique approach. [00:01:00] And I want to get into that, right now. Dave, do you want to frame up right side capital? What size, stage, typical check size? Approach. Certainly. Certainly. So our one minute description is we would describe ourselves as a quantitative data driven approach to what we call pre VC stage investing.

And I think, there's many unique things about us. The fact that we're quantitative and data driven instead of qualitative driven, we address the stage of the market that everyone else ignores. And, pre VC stage for us is companies raising rounds that are generally too small for the venture world to address.

So we're focusing on companies raising sub 500, 000 total round sizes. And then probably the most unique thing about us is that our funds are ultra diversified. So instead of having 15 or 20, maybe 30 companies in each fund, each of our funds has many [00:02:00] hundreds. There's a couple, quite a few things already touched on there.

Number one is you're taking advantage of the power law of returns. Number one. Number two, you're first money in, which means you're getting a fantastic valuation. We'll come back to that. And that goes back to another principle we have at Lumida. It's called, you make your money on the buy. And there's some other features about your approach.

If you don't exercise, You know, your prorata as a general rule. So can you talk about the approach you take? Most VCs have a thesis or a theme that they're tracking. And when you're writing that many checks, how do you make that work at that size and stage when you can't cover that many names or do that level of diligence?

Yeah, I would say that like our thesis or theme is actually an entire segment of the entrepreneurial ecosystem. That just is largely ignored and unaddressed by professional investors. And therefore, [00:03:00] supply and demand tends to be solidly in our favor. And it's the segment of the entrepreneurial ecosystem where founders need the money the most.

We would say that in most traditional stages of venture capital, seed stage and beyond, even really often pre seed and beyond, it's a pretty crowded market. That's got getting more and more efficiently priced as time goes on. And, information parity becomes more the norm and the, this, the market that we focus on is just more, a much more inefficient, dysfunctional market.

It's where, a lot of people view that friends, fools and family lose their money. It's these small rounds where the check sizes and total round sizes are just too small for professional investors to generally address. And so we think this entire segment of the market is just substantially outperforms the general traditional venture capital stages from our perspective.

So that's our big thesis is going after this stage. And then we do it in a very unique way because we have this quantitative data driven approach. So we [00:04:00] really invest in profiles of companies at this stage more than we invest in an individual company. And that's, yeah, let's come back to that too in a moment.

So you're going after this underserved segment where there's a capital imbalance, which I also like to, cause you're not facing competition from other VCs. There are a couple thousand VC firms out there. There's 700 VCs in crypto by my count alone, where everything valuations have run up quite a bit. We had a temporary VC bear market valuations recalibrated.

What is your entry valuation look like? Yeah, we're typically entering anywhere between, I'd say 80 percent of our investments are somewhere between a 2 and 4 million valuation. So that's the primary driver, I believe, of your outstanding performance. Because you're getting in at such a low valuation, and you combine that with the QSBS tax exemption, we should double click, you should define that, so that you can get an exit at a 30 or 40 million.[00:05:00] 

And that's a home run. And the exit for you, that valuation might be the entry for another VC who's doing a seed stage deal in an AI startup. Yeah. Almost every stage at which we can potentially invest, whether it's tens of millions, hundreds or even the low billions. It's not uncommon that we're selling to new investors that are coming in, so our exit, which can be, tens or hundreds of X and multiples, is where other people are starting.

And that's just because we're beginning at this stage that's much earlier. And one of the sort of the misnomers is when people hear the term pre VC stage. They assume that refers to a traction level, and that the companies that we're investing in are all ideas on paper, but that's actually not true at all, almost everything we invest in has revenue, it usually has 5 to 30k MRR, and it's just that we're picking the cream of the entrepreneurial crop, these are companies that are very capital efficient, And they [00:06:00] often have traction levels that are consistent with what, might, you might see in a million to 2 million pre seed or seed round, venture capital, round, and, we're just getting companies that don't happen to have that same level of traction, but they only need 300, 000 or 400, 000.

And you're getting fantastic outcomes. Obviously, DigitalOcean is one. I was a late stage investor in DigitalOcean, actually. Then, of course, that went public, which is a cloud startup. TradingView, which I imagine a bunch of people listening now have used. I use TradingView as well. PillPack, which was acquired by Amazon.

So these are startups that people recognize. So your value drivers are, one, you get a good valuation. Two, you have a traction requirement. Free the QSBS and the torque on that. We'll come back to that in a bit. But why would an entrepreneur take your money at that valuation? Yeah, there, there are a few things here.

So number one, a lot of people think that it's [00:07:00] just easy to raise money, or if you're raising a small amount, it's fairly easy. It's incredibly difficult to raise capital at every stage for a company. It generally takes the same amount of time to raise 300, 000 as it takes to raise 30 million, and if anything at earlier stages, it often takes longer.

So we have two really strong value props to entrepreneurs. The biggest one is that we run this completely transparent, fast funding process. So you can just go to our website. We say exactly what our target investment profile is. We're gathering up data points on you. If we're investing, we give you a quick yes.

If we're not, it's a quick no, and we tell you exactly why. And if there are some metrics you could hit at some point in the future to turn us into a yes, we'll let you know what those are. And, a typical conversation with a founder might go like this. So let's say I'm talking with you, Ram, and you're, part of a founding team, and maybe you're looking to raise, a million dollars at a 5 million valuation, and you've got some certain level of [00:08:00] traction.

You've come into our fold. And I'll always be completely straightforward with any founders that come in contact with us. And I might tell you, Hey, Ram, I think at your level of traction, you can probably get the round done that you're looking to raise, but it's probably going to take five to six months of full time fundraising.

Your business model is very capital efficient. If instead of raising a million, you're interested in raising a three to 500, 000 round, we could gather up a bunch of data points, give you a quick yes or no. And if we got to a yes at your level of traction, we'd invest at a 3 million valuation, and we could give you a yes or no next week and fund immediately.

And it's very interesting what happens if you're the more experienced and repeat entrepreneur you are, the more likely your next question is. Did you just tell me you can give me a yes or no next week? And then fund right away and I'll say yes. And then the next response is great. What do we do now? You just saved me five months where I can now spend [00:09:00] time on operating instead of fundraising.

So you're seeing some positive select on the founder quality because they've got traction. They'll take some cash now, maybe less cash and then grow into a larger later round. Is that the idea? Yeah. And maybe they skip that million dollar round and they use our money and they grow in the next round to one and a half or 2 million round at an eight or 10 million valuation.

And the selection bias is something like when we started back in 2012, if you had asked me in 2011, what's the biggest risk to your model, I would have said negative selection bias risk. What if it turns out that it's only for some reason, the worst companies or the worst founders that are attracted to our model, and that's what we ended up selecting out.

We, as long as we had no bias, significant bias, we thought we were okay. But it turns out we actually have a very strong positive selection bias. Very young, inexperienced founders that have never done it before don't appreciate how [00:10:00] difficult it is to fundraise. And they're also very emotionally attached to valuation.

Whereas experienced repeat entrepreneurs know that fundraising is this enormous distraction, takes up 70 percent of your time. And that if it's a small round, the dilution isn't that large anyway. So it actually turns out our value prop resonates the strongest with the best entrepreneurs. So we're actually thrilled when we found that out, but it took a couple of years to fully realize that.

So what's the end to end turnaround time for a typical experience where a founder is ready to rock and roll. They've got all their data prepared. Yeah. So if a founder has all their data prepared and they come in, they fill out our pre screening form on our website, we'll recognize pretty quickly if they're, within our general sweet spot, we might ask a few questions, have a call with them, usually on that call, since we already know a lot about them from the pre screening forum and info they've provided.

I'm going into that call, or one of my partners is, knowing the four to eight questions we want to ask [00:11:00] already. Now, we don't end up having a five minute call, it ends up being a longer call. And, usually right on that call, if it's really in our sweet spot, I'm going straight to evaluation, what size round we would likely do.

I'm talking about our process, here's the, here's how it would work after this call. I'll send you an email with a list of diligence items. That we're going to want to look at before we get to affirm yes or no. And we'll, once you get that to us, we'll look it over and usually get back to you within a day or two with a yes or no or some follow up questions.

How do you validate the revenue? Because that's key, right? You have the traction and if you're moving that fast, you need that many deals, there's always going to be some kind of fraud that's trying to take advantage of that speed. So how do you ensure that the revenue that they're representing is valid?

It's actually much easier than you think because we're dealing with companies that have pretty low revenue in the scheme of things. So if someone has, 12 customers and 15K MRR, great, give me your list of customers, show [00:12:00] me signed contracts for the top 6 largest ones, and show me bank statements from the last 3 months and let me see the money flowing in and out, or let me see a Stripe report that's showing that.

‍