RightSide Capital Management is about to shatter the funding landscape. Led by David Lambert, Kevin Dick and John Lee, RightSide Capital believes that seed-stage capital needs a complete overhaul. RightSide will make 100-200 investments per year, and literally manufacture companies in a way that no firm has ever done. The fund, announced at TheFunded.com’s Future of Funding event last Thursday, will debut in the second half of 2010 and may give the angel funding market a much-deserved shakeup.
Partner Kevin Dick went on stage during a panel on alternative funding methods and laid out what he believes to be the future of funding. Quantity, not quality, is king in the seed stage. Entrepreneurs looking for funding won’t have to go the traditional route of begging for a meeting and then having a second meeting and then waiting 3 months for traction until finally closing a deal. Instead, they will fill out an application – similar to applying to College – and receive a response in 2 weeks.
Other aspects of the fund are equally revolutionary. The term sheets will be determined by a computer, and everyone will receive the same legal terms (the valuation and funding amount will vary based on the application). The fund will have a ranking method to rate applicants on a variety of categories such as experience/technical ability and systematically provide a pre-money valuation. They will also ask founders to put in their own money to ensure they have “skin in the game” and that they are invested in the future success of the company. The amount of money required will be determined based on financial documentation the founders are expected to provide.
RightSide explicitly claims on their website that they do not care about $100M exits. They are fine with a large number of $10-50M exits. The irony pervaded the room when Mike Maples later gave a speech on investing only in Thunder Lizards at the same event. Mike Maples proclaimed that he only wants to do 10 investments a year, and often makes his decision on investing within the first 30 min of talking to an entrepreneur. RightSide seems to balk at that philosophy, and seems to believe that identifying Thunder Lizards requires more luck than skill. Their website proudly proclaims: “Suspicious of ‘Gut Feel’”.
The RightSide model represents a stark contrast to the “traditional model” of raising early-stage capital. Entrepreneurs meet face-to-face with associates or partners of seed-stage funds. Seed fund managers are extremely elusive and often require multiple introductions to get a meeting. If you’re lucky enough to get this far, after a few meetings over the course of 2 weeks to 3 months (and sometimes longer), the fund gives you a term sheet.
The term sheet is kind of a “promise” that the investors will fund your company, and provides you with details around pre-money valuation and funding amount. Then, the lawyers draft the legal documents required for closing a funding round, which can cost between $10-40K depending on the type of deal. Finally, if everything works out (and it can all fall apart at any stage in that process), the startup gets a check and they are officially part of the seed fund’s portfolio.
RightSide believes this model is broken. First, they think that investors are generally unable to predict success of a company at the seed stage. As such, they are trying to systematize the funding process and minimize human bias. Second, Partner Kevin Dick argues that entrepreneurs shouldn’t have to pay thousands of dollars in legal and accounting fees. Instead, they are providing standard terms for all applicants, so the legal costs will be much less. Third, they are applying a “spray and pray” model of seed funding because they believe that they need to make a lot of investments to net a return. That’s why they’re going to do 100-200 investments per year.
If RightSide seems like an incubator on steroids, it isn’t. Unlike Paul Graham’s Y Combinator or Adeo Ressi’s Founder Institute, startups will have no set curriculum and may never meet each other in person. Kevin Dick says that they will set up educational sessions and events for portfolio companies, but will not be able to provide significant one-to-one mentoring for early-stage companies.
Pre-money valuations will be set by a formula, which takes into account the background of the co-founders and the stage at which their idea is developed (i.e., idea on a napkin gets less points than a working prototype). During the panel at the Future of Funding event, Kevin said that this formula would probably have given Mark Zuckerberg a poor valuation, but at least he would’ve gotten funding. He notes that many seed investors passed on him, but RightSide would not have.
The standard terms are yet to be finalized, but you can find a lot of the information on RightSide Capital’s website. Some tidbits have been provided: it will include preferred equity and not require the startup to give up a board seat.
With the state of the global financial system the way it is I welcome this system with open arms.
Looking forward to watching this over the next 12 months
Agreed. Sounds like a more analytical approach vs investments based on a sales pitch or based on known contacts. The standard “It’s not what you know, but who know” should always apply.
Interesting development. As the CEO of an early-stage venture I can speak directly to the challenge of raising angel money. When you need less thant $2MM for the next round, like we do, it is a hard space to go get recapitalized.
The formula used sounds a lot like YouNoodle’s model, but differs by actually putting cash behind the company.
http://techcrunch.com/2008/08/05/the-highly-controversial-younoodle-startup-predictor-is-coming/
I don’t think this fund will be very successful.
Building startups is becoming cheaper everyday. Its not just the money that entrepreneurs need, its the mentorship, networking and learning that has more value.
They really aren’t giving startups any value except for money, and capital alone cannot significantly increase the chances of success.
Unless this capital allows you to live to fight another day, another day where you find mentorship, networking etc.
I think that this is a welcome change.
You make a valid point. But there are also those startups that only need funding. This solution will be perfect for those type startups.
Love this idea. As a company going thru the seed funding process right now, I feel like this fund has a great idea.
There are plenty of other opportunities for mentoring – we get a lot of that from our advisory board, working at DogPatch Labs, and finding other helpful people. The money and the mentoring don’t need to be linked if the team is responsible.
I love the idea two. Still though, 100-200 startups a year, that’s a lot of money. I hope they can pull it off though.
i cant imagine many startups that wouldnt fall over themselves to apply for seed funding that they could potentially raise within 2 weeks.
most business angels take at least 2 months and it took mine more like 6.
VC’s and angels are not the only guys who can give mentorship. In fact, finding quality mentors is easier to find than financiers. Specializing in providing funding vs. funding and mentorship is fine. It’s at least half the answer for the busy entrepreneur.
I love witnessing when an evolution takes place. Especially in an domain that obviously needs one. Can’t wait to submit my own application for funding.
Love the idea! And I almost never have anything positive to say about anything
Without money you can’t do anything. Finally someone telling the truth about seed funding. Investing in something that MAY become huge is a pure luck thing. It’s all BS when most people talk about traction, “hockey stick” model, etc. Each business is different and when VCs apply the same model it everyone it actually hinders innovation. I hope this fund is successful and prove that there is a second way to investing.
Agree with Ron. The model you pitch while raising seed funding is almost never the same model you’re pitching in a Series B. Thing change within the business and the environment. You don’t know where you’ll find your traction and it’s all guesswork at that stage anyway. At least with a formula, you can make modifications to the algorithm over time and get better results.
Let’s see RightSide is not an incubator, will make 100-200 investments per yr, cannot provide 1:1 startup guidance, will use formulas to assess/make investments in startups.
RightSide will literally manufacture companies in a way that no firm has ever done <<<< ahh this is what these guys do ;)
I applaud the effort because
a) we need more of this kind of manufacturing in America today since it only comprises about 11% of GDP and is looking more grim.
b) it's a shot across the bow of the traditional VC model where management value add is overrated
BOL to RightSide !
Very interesting! I will be watching this closely…
This is what should be done, 100-200 smaller investments with the aim of smaller exits (who knows though, some may still hit the jackpot!)
And what’s the average funding amount? I hope it not some Y-Combinator or Tech Stars 10-30k.
enough for potato chips!
I think they mentioned 200k
I have a feeling if they’re investing in 100 to 200 startups a year it’s a sub-50k seed investment. They will see huge application volumes but very few deals accepted by founders if this is the case.
I have a feeling you are wrong. If they were offering sub 50k seed money then it would be nothing new. You are also calling one of the founders a liar, which I don’t believe he is.
Great Post! I was there too and the Maples presentation was one of the most self serving, arrogant skits I’ve seen – and that’s saying alot given the room full of traditional VCs and Google alum seed fund babies. Unfortunately there was not much new about the Future of Funding. Each class of investor claimed that the others were broken and that things will only get worse and the most start ups are doomed. Gee, thanks. Very inspiring indeed….
Extremely interesting. I think this could help spark the industry, and hopefully – if it works, it will help out everyone in the industry.
I applaud these guys for thinking outside the box, but as a serial entrepreneur think theirr model is flawed. Based on what they describe on their website the pre-requisite that the company is truly seed stage does not jive with wanting entrepreneurs who can afford to take a 50% salary reduction and put up a significant portion of their own capital. Entrepreneurs that can afford to do this will instead bootstrap to the point of being able to attract institutional investors, or no VC at all which is increasingly possible given the lower capital costs of starting an “information intensive” business.
Their incentive system also rewards selling businesses upstream to VC’s and giving them potentially multiple board seats (may be misunderstanding this from the website?) – in order to get the Preferences on shares removed. In effect they become a deal big funnel for VC’s…BTW are they trying to have VC’s as their LP’s?
Based on what they are laying out, founders don’t really seem to be their customers (or at least, not experienced ones). They seem to be setting up these seed co’s to perpetuate many elements of the VC model that are broken to the detriment of the founder.
no apostrophes for plural…”VC’s” should be “VCs”…maybe take note before you start writing them
can’t find the pdf form on the website
You will have to wait a couple months (Summer 2010)
Simply brilliant and I always knew something had to change in the way early stage companies received funding. This is what America should be about new innovative ideas and those who are not afraid of risk.
Just think of all the little guys who never got funding and who may have engineered the next big thing, but the idea died on the drawing board for a lack of funding. If I had to set up a funding VC I would use the same model. Go guys we will see you in May 2010.
this is crazy…if you had a quality idea why would you play minor league ball with these dregs? guaranteed failure by newbies.
If you can tell the good ideas from the bad ones then you must be extremely wealthy.
100-200 with seed money.
Sounds like a farmer sowing a big field to get a crop instead of trying to grow a few perfect wheat plants to win a prize.
Works even better when spread over the many vagaries of timing (like seasons) and markets (like weather).
Let’s take that idea a step farther and make it 10000 – 20000. (where is that new head of SBA who was supposedly a VC? – what is she doing?) (banks don’t belong here, just like they don’t need school loan subs either)
Have SBA underwrite risks via these angels and VCs who understand entrepreneurs and start-ups, instead of banks who do not.
Let’s take that another step-up and take-up Obama’s cap gain exemption on start-ups.
Then too, there’s a ‘jobs’ thing in here somewhere…
This is fantastic, great way to shake up the staid VC business model… Hopefully the other guys will change with the times…
Why is their solution based off of research a decade old ?
Why is gut-feeling decision making suspicious when NY Times author, Malcom Gladwell’s Blink, highlights the power of thinking without thinking.
If you lower the barrier to entry you’re going to see a lot of ‘well its worth a shot’ companies coming in to raise capital. People who don’t have their heart in it, are throwing darts at the wall or lack the skills necessary to bring an idea to a traditional investable level.
That said, RSC doesn’t care. They figure the spray and pray method might just play out well.
Just my opinion. I can just imagine the deal flow as well.. finding 100-200 companies worth giving even $20 to is going to be a feat by itself.
As a serial entrepreneur that has bootstrapped, raised VC funding, and had my ventures close down due to lack of funding, I think this is filling a huge void in the start-up landscape.
Simpplify the process, reduce the time needed, and have some internal subjective criteria on what kind of businesses will need funding, and this could be big. Especially if some % of the exits are via future VC investments.
They will need to take care of a couple of things: Avoiding fraud and embezzlement, and maybe having a meeting with companies that qualify to do an in-person check.
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I have a classified web app/mobile app, that I need to prototype, I think it can be done for 80k, and its a 6 billion dollar market place.
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The shotgun approach, very interesting. I do see a flaw, however.
For the entrepreneur, the seed stage round has more to do with the mentorship and support rather than the money. Ycombinator gives out 10-15k for a 5% stake (IIRC), but the value comes from the community and environment that the startup becomes enveloped in. Similar experiences are seen at techstars, capital factory and others.
Giving money to 100 companies is going to dilute the value that the fund is going to be able to provide. It’s akin to getting an online degree–sure you’ve got a bachelor’s, but the “college experience” can be of value as well.
What happens after YC? Spend six months and more money than YC gave you looking for additional funding? YC and incubators are valuable and I know many people who have used them. Just the same, there are tons of successful entrepreneurs that have not. This does not discount the potential value RSCM intends to provide.
Why is this on Mobile Crunch instead of the main site? Extremely interesting Gagan, thanks for the article!
I speculated a little on my blog about the analytical process that might make this feasible. The goal is to find a relatively simple model that’s a good predictor of start-up success. If you can do that, then you remove human bias and the problems associated with combining information.
Here’s the link to the post. Kevin Dick from RSCP left a comment with some interesting details: http://sigmahk.wordpress.com/2010/02/24/predicting-a-start-ups-success/
Finally someone who seems to understand that entrepreneurs do not have time to mess around with VCs for months on end. Entrepreneurs are busy building their company and any smart VC want the entrepreneurs to focus on the business, and not spend inordinate amounts of time, or money, messing with stupid legal matters and wrangling with uptight, full of themselves VCs. The only problem is, as mentioned by some posts, that they ask entrepreneurs to come up with funding too. As an entrepreneur I have already spent every dime I have bootstrapping. If i had more money I wouldn’t need VC funding, now would I? VCs need to realize that most people do not have money laying around and most people need to keep a day job just to get by. It seems that the gap between the real world and the VC world is still wide… But this is a good start and seems promising. I only wish they would accept applications now. Why advertise something that is several months away?