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.