124 – How AI and Market Shifts Are Breaking the SaaS Business Model w/Dave Lambert

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[00:00:17] Vic: Okay. Welcome to Health Further. Today, we have another guest episode, Dave Lambert. Dave and his firm, RightSide, have been partnered with JumpStart, IVC firm for a long time. Dave, thanks for doing this. Really appreciate it. Happy to be here. So it's a fun times in venture and SAS models, maybe for the audience, just give a little perspective on your background, how you came to be a VC.

[00:00:39] Vic: And it's sort of a little bit on our right side. We'll get into it more, but just a quick synopsis of your background. 

[00:00:44] Dave Lambert: Yeah, yeah, yeah. My sort of one to two minute history is I grew up in Denver, Colorado, came out to the San Francisco Bay area to go to college in the late eighties. To early nineties and then for the next 17 years.

[00:00:58] Dave Lambert: I was mostly an entrepreneur. I [00:01:00] was CEO and founder of 2 tech startups. 1 was a computer hardware company. The other was a software company in the 2000s. I was a moderately active angel investor from the mid nineties to mid two thousands as well. And then, you know, right side capital, uh, started working on that in the late two thousands.

[00:01:19] Dave Lambert: We launched in the early 2010s and right side capital is a quantitative data driven approach to what we call pre VC stage investing. So I think the sort of three unique things about us. Um, our number 1 that we focus on these small round sizes. So it's primarily 150, 000 to 500, 000 dollar total round sizes.

[00:01:43] Dave Lambert: So that's sort of an area that's largely ignored by the professional fund world. Uh, the 2nd, unique aspect about us is this quantitative data driven decision making process. So we gather up a lot of quantitative data points about a company, and that lets us [00:02:00] make a yes or no decision usually in about a week or less.

[00:02:04] Dave Lambert: And then we use that the 3rd thing is we use that to build out ultra diversified portfolio. So each of our funds has many hundreds of companies in it. We're currently investing from our fund 6, but we have over 2000 portfolio companies since the early 2010s. 

[00:02:19] Vic: Yeah, excellent. Very good. So maybe let's just unpack for a minute how those kind of aspects of your background and right side, um, offered maybe a different alternative to teams of founders trying to raise money.

[00:02:33] Vic: So, uh, you were a founder yourself and now you've evolved first angel investing and now fund investing. Uh, and that quick decision making is very unique in the market and I think really welcome from founders with, you know, tell me that that it's possible and let's move forward or tell me that it's not right.

[00:02:54] Vic: And I'll move on. But just an answer, you know, obviously I prefer yes, but no, a fast no is also [00:03:00] useful. Um, and then that. several hundred assets in the portfolio, those three differentiators, how have they benefited right side or how is that, um, useful? Why is that important to right sides results? 

[00:03:14] Dave Lambert: Yeah. So I think, you know, our sort of part of our core philosophy is Both from being in the startup world and having been on the investor side, you know, my partners and I came to the conclusion early on about two things.

[00:03:28] Dave Lambert: One is we were talking back in the late two thousands about the fact about sort of power law distributions and about how skewed the return curve was. And that the math sort of works a bit differently on top of power law distributions. So we knew. You know, capturing these tail outliers was a key part of the investment strategy that we would wanted to design.

[00:03:49] Dave Lambert: So, basically, our philosophy is that most of the returns are locked in the. Really one in 20 to one in 100 outcomes in a, in very early [00:04:00] stage venture portfolios. And we were even going earlier than traditional early stage venture. And you can't have a portfolio of 15 or 20 companies or even 30 and think you're going to get a one in a hundred with high certainty.

[00:04:12] Dave Lambert: So our idea was, well, let's have hundreds of companies and we'll get our fair share of those one in one hundreds and certainly of the one in twenties. And then if we could do that. And so both of us, how do we do that? Well, you have to make quick decisions if you're going to have ultra diversified portfolios and what sort of the data logic and philosophy behind doing that and basically both, uh, you know, a lot of it's from both entrepreneurial sort of entrepreneurial investor and economic theory and engineering sort of backgrounds from myself and one of my other key co founders came to the conclusion early on that it.

[00:04:55] Dave Lambert: For startups at this early stage, you can't know a lot more than the starting point [00:05:00] at which you're investing. And there's so many variables of uncertainty. That our belief is that, you know, humans were really using our brains to fool ourselves to believe that we can predict all these various variables of uncertainty, not just that we can predict them, but we can predict them far out in time, you know, and that that could be the case when, you know.

[00:05:19] Dave Lambert: Nobel Prize winners in economics can't predict economies six and twelve months out. And we felt there's more variables of uncertainty with startups almost than an economy, or there's more uncertainty with them. Um, so anyway, that's sort of the, the reasons and the premise behind everything. Yeah, 

[00:05:36] Vic: so a lot of my audience is, uh, learning about venture.

[00:05:39] Vic: Maybe they're running, maybe they're a physician or running a health system or. Um, they're in a startup, but they don't know the power line in detail, maybe just unpack that a minute. So one out of 100 companies, um, will drive some very large return. Um, and then, uh, so [00:06:00] it's like, it's kind of the 80 20. rule Pareto policy, uh, thesis, but then, you know, even more so where like 9 percent of the return is in that top 10 percent and even the 1 percent of a hundred is, is, uh, massive.

[00:06:17] Vic: And so that's, is that a fair representation of how you would characterize it 

[00:06:20] Dave Lambert: or? That is, most people don't even understand the Pareto distribution correctly because The Pareto is the 80 20 rule. If you say, you know, 80 percent of our returns are from our top 20 percent of outcomes, but within that top 20, 80 percent of those returns are also in the top 20.

[00:06:36] Dave Lambert: So even in a Pareto it's yeah, 80 is in the top 20, but that means 16 is in the top 4 percent or, you know, or, uh, you know, Uh, of that, or sorry, more than 80, it would be, yeah, 80 percent of the 80, 64 is in that top 4%. So it's just a lot more skewed than people intuit. And so you can't really solve that at these very early stages by just saying, well, I'm going to pick those one in a hundred [00:07:00] outcomes, but I'm going to do it.

[00:07:01] Dave Lambert: One out of 10 or 20, we just feel. 

[00:07:04] Vic: One of the ways that I would maybe simplify the right side model, but it's probably unfair, but just for illustration purposes. If you were to not know anything about a hundred assets that you might invest in in the next year or two, let's say, say three years, um, if you want, if you really thought it was a power law and one out of a hundred is going of these unknown assets are going to be really good picking a normal portfolio of 12 or 15.

[00:07:33] Vic: Out of that would be foolish, right? Like you sort of blindly grab 15 of the hundred and pray, hope, um, that they're positive 

[00:07:43] Dave Lambert: expectation investments still, but it's, they're really, it's really risky to have a portfolio, 

[00:07:48] Vic: right? Right. 

[00:07:49] Dave Lambert: Well, that's what most people don't get. Yeah. 

[00:07:51] Vic: Right. So if you, if you lower the investment amount and get exposure to not 15, but.

[00:07:57] Vic: 100, then you have much [00:08:00] more freedom of, um, opportunity. You're going to be in whatever that is, six, seven times more assets. And then you begin to, uh, make the law of large numbers move in your favor as opposed to against you. 

[00:08:14] Dave Lambert: Yeah, exactly. And I mean, most people misinterpret what we're doing and sort of use the term, the derogatory term shotgun approach.

[00:08:22] Dave Lambert: And that sort of implies you're just shooting and aiming at any and everything. And you'll just take whatever you get. And that's not true. Like we're very picky and we say no to almost everything. We look at most of the things we look at still. So you can still have very selective, uh, sort of target investment criteria and profiles you're going after and build out ultra diversified portfolios.

[00:08:42] Dave Lambert: So that, you know, we aim, we sort of do both of those and we've come up with this quantitative data driven way. 

[00:08:48] Vic: Yeah. The other thing that I, uh, Bristle at is people talking about doing an index of all of the, you know, let me just grab, like you would in this public markets, I'm going to buy the S& P [00:09:00] 500 and I'll get a broad collection that represents the overall market in venture.

[00:09:05] Vic: That's a negative thing. Cause the overall market's not going to return an appropriately risk adjusted return. And so you don't want to just invest in. Everything that comes across your desk, you have to be selective. Yeah, 

[00:09:16] Dave Lambert: there's also a high bar to even just, a somewhat high bar to even just have become a public company in the first place.

[00:09:22] Dave Lambert: So there's been a lot of narrowing and winnowing down of companies to get there. Anyone can decide they want to go fundraise for a startup. So you, you can't just say, I'm going to index everyone who just thinks they have an idea worth funding. 

[00:09:36] Vic: Yeah. And then, um, part of what the magic at right side is, is you have focused on SaaS companies.

[00:09:43] Vic: And maybe talk about that. Um, I can guess about why but maybe you talk about why that niche Made sense. 

[00:09:51] Dave Lambert: Yeah, I think there's two or three reasons why we evolved to be very sass focused You know, we're not exclusively sass investors, but very heavily emphasis on that throughout our history [00:10:00] Um, I think one is personally I knew the model well So my software company in the 2000s we pivoted a couple years in and had a we didn't even call ourselves I don't know the term sass was being thrown around then but we pivoted to a subscription Business model and part of our sort of the dna of right side capital in the early 2010s Was that the investor world as a whole still underappreciated how much stronger and bulletproof subscription business models were, whether relative to transactional ones.

[00:10:31] Dave Lambert: You know, back at that point in time, companies with SaaS business models that were public weren't trading. They were trading at slightly higher multiples than their transactional, transactional comparables, but nothing like today. And so. So that was one of our basic premises. And then also it turns out that in the very early 2010s, it was cheaper to build a consumer product than a B2C company than a B2B company, because, you know, [00:11:00] there were really huge headwinds selling into the enterprise space.

[00:11:03] Dave Lambert: They were reluctant to buy from startups. And if you could just get a tech crunch article written about your. Consumer app or or startup, you got 30, 000 users overnight, you know, and as the 2010 sort of played out and the cost to build software products got less expensive. The, the barrier and cost to build a B2B product actually became much cheaper than B2C because you could acquire customers by just doing the calls yourselves as founders and selling them.

[00:11:34] Dave Lambert: And the cost to acquire initial users for a consumer startup became very expensive. You didn't get 30, 000 by getting an article written about you anymore. It 

[00:11:41] Vic: got much more crowded, much more noise. Yeah. So 

[00:11:44] Dave Lambert: I think it's a combination of sort of a realization of sort of an underappreciation of SaaS. And so we felt they were mostly all undervalued.

[00:11:52] Dave Lambert: In the early 2010s to us sort of being at the right place in the right time. And that's really also just following the market. You know, if the market had gone such [00:12:00] that consumer became a lot less expensive and is more capital efficient to build consumer startups. Maybe we would have actually almost certainly we would have had an emphasis on consumer, but because that was where the capital efficient trend went, we naturally became pretty heavily focused on B2B SAS.

[00:12:18] Vic: And then that focus on the business model being not 100%, but a large portion of what you invest in is is B2B SaaS that then allows you to sort of take that data driven approach. And you can use that, uh, business model to inform what metrics you're looking at, even if a company is in healthcare or gaming or fintech or, I mean, almost different industries, you get diversification across the industry, but that same business model, um, is that close?

[00:12:48] Vic: Like some of the metrics you're asking sort of are tied. 

[00:12:51] Dave Lambert: The unit economics translate across industries and verticals a lot. So, you know, I don't care who you're selling to. If your price point is, once you start [00:13:00] getting below 300 a month, it's really challenging to have a short enough sales cycle to sell.

[00:13:05] Dave Lambert: I mean, even once you're under 500, it can be challenging, but you know, so if you're going to have a product and it's 149 a month product. And you're planning on doing that with the sales force, your, your chances of success are really slim. It's just hard to do and it doesn't matter what industry you're selling into.

[00:13:21] Dave Lambert: So those are sort of true facts across that, that are true on B2B SaaS. 

[00:13:26] Vic: Yeah. 

[00:13:26] Dave Lambert: For where you're selling to. And there's a lot of other examples. 

[00:13:29] Vic: So the, um, that makes sense. The unit economics are really driven by. The unit price and then some kind of how long is this is one customer going to last, which would be the lifetime value of that customer and that compared to the cost it takes to to get that new customer and there's a ratio there that needs to be the right right level.

[00:13:52] Dave Lambert: But I think, you know, one of the things we've learned in the 2010s and in the early 2020s. Sorry, is that, uh, you know, [00:14:00] macro matters. And we also were in an environment in the 2010s where there were a lot of tailwinds at the back of the SaaS business model. And I think there were two main ones that were going on that people weren't aware of or didn't appreciate as much.

[00:14:14] Dave Lambert: And I'd say we didn't. You know, just like you don't realize you're in a bubble when you're in a bubble usually, um, and one of those that we did, we're aware of that was this transition in the psychology of enterprise customers in 2013 and 14, if you had a 3, 000 a month or a 5, 000 a month product that you were trying to sell to large enterprise and you were a startup.

[00:14:36] Dave Lambert: Your sales cycle could be two years, like large enterprises, mid large enterprises did not engage with startups. If someone bought your product, they felt like they could get fired if that product didn't work out and it was at risk. And somewhere between there and the end of the 2010s. There was a sea change and it became acceptable and mid to large size startups realize not as it only is it just acceptable, but the efficiency [00:15:00] gains are enormous.

[00:15:01] Dave Lambert: If we start using lots of SAS products and people realize they won't get fired, you know, they use one from a startup and that startup stops existing. Like you can adjust to that and that presented major tailwinds and then the other tailwind that we didn't. Weren't aware that was happening. I think nobody was with, was the labor war that sort of broke out in the tech world from like the zero interest rate policy being around for so long.

[00:15:27] Dave Lambert: So, you know, SAS was sold by seats and you had existing customer bases with. You know, no recession happening for a decade. So, and these labor wars, so the number of seats were growing. So it was really easy to be a SAS business and just to have revenue go up continually, even from your existing customer base, they were gaining employees, which were seats and both those tailwinds turned around completely.

[00:15:54] Dave Lambert: Post the valuation bubble popping in late 21, 2021, early 2022. So I [00:16:00] think that that purchasing tailwind still existed for much of 2022, like all of our portfolio companies for the most part hit their numbers. And then in 2023. Almost every company of ours missed their numbers because in 23 and 24 companies tightened their budgets when interest rates started rising and they said, Hmm, we're going to put a ban and any new costs on new projects and all of a sudden there was a headwind to selling to new customers that hadn't been there before.

[00:16:31] Dave Lambert: And then in addition to that, you had this shedding of all these excess jobs, and you had a lot of startups going under that were laying off people and those are all seats. And so you had both an elimination of the, the tailwinds became headwinds for selling new customers and your existing customers started shedding seats instead of gaining seats from laying off people.

[00:16:53] Dave Lambert: And then that has funneled into companies shedding seats. because of AI efficiency. 

[00:16:58] Vic: Right, 

[00:16:59] Dave Lambert: right. So [00:17:00] that trend is going to continue. I 

[00:17:01] Vic: mean, just to connect it back to where we started, if you built a portfolio of 150, 200 assets, when you had those strong tailwinds, You might have gotten, uh, maybe another, another two or three really outsized winners in that 150.

[00:17:17] Vic: Uh, not because you chose particularly differently, but, but all boats rose a little bit. Yep. Um, and now it's, it's a harder market. You have to be more selective or more careful. Uh, is that, is that Yeah, 

[00:17:30] Dave Lambert: that's very much true. I think people didn't realize the extent to which not only did you have these, the two tail ones that I said, but you had also Rising valuation multiples, the whole 2010s.

[00:17:40] Dave Lambert: So yeah, you could be mediocre and have good results, you know, uh, a true thing to say. 

[00:17:50] Vic: Yeah, we didn't, we should have covered this a bit, but you have, um, a lot of experience investing in SAS or, uh, businesses. 14 years, I [00:18:00] think I wrote down over 2, 000 investments 

[00:18:03] Dave Lambert: across 

[00:18:03] Vic: eight different funds and over a thousand active portfolio companies today.

[00:18:08] Vic: So you have a very wide perspective of how this entire SaaS market is evolving in a way that not many other people do really. 

[00:18:18] Dave Lambert: Yep. I would say that's definitely. 

[00:18:21] Vic: Now, RightSide also has really worked hard at adding other things besides capital and support for your portfolio companies. Maybe just talk about how you think about that and then some of the, some of the handholds or support pieces that you provide.

[00:18:37] Dave Lambert: Yeah, and when we started investing in 2012, it was just the three founders, RightSide Capital, and there was, we were sort of limited in what we could do. We all had a lot of entrepreneurial experience. So we could help there. But as the decade went on and we got larger and we had more budget, we started looking around and saying, all right, what are the areas where we thought, you know, we could impact the outcomes and [00:19:00] returns of our investment the most and be most beneficial to our company.

[00:19:03] Dave Lambert: So the first two things we highlighted were sales help. Because most of what we're investing in are technical founders who aren't that experienced with the basic blocking and talking and tackling of selling. So we brought in someone who's an experienced VP of sales, chief revenue officer to provide free sales help and support on all things sales related.

[00:19:22] Dave Lambert: And then we thought fundraising was the next thing. And we had always had later stage investors reaching out to us or paying us saying, Hey, you guys can be a great source of deal flow when you have such a large portfolio. You can, you know, you only have so much time to connect the dots. So we brought someone in who 

[00:19:39] Vic: I'm living that every day today.

[00:19:40] Vic: Yeah. 

[00:19:41] Dave Lambert: So we decided we have a large enough portfolio that we have someone who's put a lot of structure and process behind that now. And the large, largest part of what they do is exclusively building out our investor network, keeping track of what it is their current focus is on, because that focuses are on, because for any given [00:20:00] investor that can change in any given six month period.

[00:20:02] Dave Lambert: And then working with our companies that are raising at all different stages and helping connect them to the right sets of next round investors, whatever. 

[00:20:09] Vic: I would think it's a curation process for like, You want to get, uh, the right investor connected with the right portfolio company or several portfolio companies so that it matches up 

[00:20:19] Dave Lambert: completely.

[00:20:20] Dave Lambert: Cause if we blast a company out to a list of 140 investors and it's not a good match, a, that doesn't do much for that company and B, then those investors start feeling that we're sort of, you know, so we do a lot of work to curate them and we get a lot of feedback from our later stage investors, whether they're a seed investor or a series B investor.

[00:20:41] Dave Lambert: But hey, you know, the stuff we send them is almost always right in their wheelhouse and therefore our emails to them get opened with a higher rate because everyone's email boxes are, you know, filled to the rim these days. And, uh, yeah, it helps our portfolio companies out a lot. So, in addition to that, now we offer some, you know, [00:21:00] marketing help and support.

[00:21:01] Dave Lambert: We have monthly webinars. But, you know, the two things we identified earliest on were, you know, you have to be able to sell and you have to be able to raise next rounds of funding. 

[00:21:10] Vic: Excellent. Now, um, let's talk about healthcare. You invest across industries. The way we got together is you're interested in healthcare.

[00:21:20] Vic: Maybe talk about your views of healthcare and how it compares maybe to other industries in a SaaS investing perspective. 

[00:21:27] Dave Lambert: Yeah, we are interested. I think, you know, if you look at us historically, there's two areas that were slightly underweight. Compared to, you know, the rest of the world and in the SAS world, and that's probably FinTech and healthcare because those are two areas that as it got cheaper to build products, you're still often selling into a regulated environment and longer sales cycles.

[00:21:47] Dave Lambert: And so it's. You know, it's, we were mostly investing since the late 2010s in companies that already have revenue, and it was hard to get to a point where we already have revenue, um, in those sectors, or it's [00:22:00] harder. So we have a little less exposure, but healthcare is attractive to us on many fronts. One, it's just, we have an aging population.

[00:22:07] Dave Lambert: It's going to be a growing sector, almost guaranteed for decades to come. Number two, uh, it's got a unique dynamic in that there are acquirers that every size and every stage you grow to. There are a lot of sort of verticals and sectors where you can outgrow your acquirers. And, you know, maybe most of the acquisitions in that space happen at 50 to 150 million ranges.

[00:22:33] Dave Lambert: But at healthcare, there's almost always buyers at every stage, whether it's other private companies, private equity firms, you know, there's a lot of large strategic buyers. So that makes it attractive. 

[00:22:43] Vic: Yeah. Okay. Excellent. And so, um, let's talk about Uh, I think you've referred to it as risk capital in the past, but like the amount of money it takes to go from like zero to one in a software business and how that's evolved [00:23:00] from the 1990s through the 2000s to today, obviously everyone understands it's come down, but I don't know if, if people listening understand the extent to which it's come down.

[00:23:11] Vic: So you've been in this market since. I don't, I don't want to teach you exactly, but, but before 2000, and, um, you were building software businesses then. So just give a frame of reference, uh, so that, uh, you know, a doctor or a healthcare person can understand how it, how it's evolved. 

[00:23:27] Dave Lambert: Yeah. That's, I think that people can appreciate the change there as much.

[00:23:31] Dave Lambert: I'll go through that. Cause we're, I think we're both good, but we were also in the right place at the right time. So if you go back to the. Early to mid 1980s, you know, it's 20 or 30 million to build a first version of a software product and get it into the hands of consumers to even just see if your business model would succeed or fail.

[00:23:48] Dave Lambert: It's really expensive. Get that 

[00:23:49] Vic: first 

[00:23:50] Dave Lambert: product 

[00:23:51] Vic: to be usable by a 

[00:23:52] Dave Lambert: customer. Let alone market it on TV or radio and go through distributors and buy in retail stores. And [00:24:00] then by the early two thousands. You know, through a combination of lots of things, including just software, tools, becoming more powerful.

[00:24:07] Dave Lambert: It was down to You know, single digit millions and at the time we thought, gosh, that's so inexpensive compared to how it's been 

[00:24:15] Vic: because of the cloud and open source or is that even before those effects? 

[00:24:19] Dave Lambert: I think it was a combination of like, you know, you started to have more powerful programming languages, software tools, libraries.

[00:24:26] Dave Lambert: Like in 1980s, you had to, you're building every single line of code from scratch. There aren't libraries you could call on if you built a video game. Everything was bespoke to that game from scratch. 

[00:24:35] Vic: Yeah, I remember, I remember when this thing called Power Builder came out in like 1993. It was incredible, because it was basically a higher level 4GL set of UI and libraries.

[00:24:49] Vic: And you could build things probably 10 times faster, but 100 times slower than today, really. 

[00:24:55] Dave Lambert: Yeah, so yeah, by the early 2000s, it was a combination of lots of things. You know, better [00:25:00] languages, developer tools. Uh, co location facilities where you can store your servers, you know, um, open source, all these different things.

[00:25:07] Dave Lambert: But that was just the beginning. By 2010, it was probably a million dollars on average to build the first version of a software product. But it collapsed after then. By 2016, it was probably 100, 000. Before you 

[00:25:17] Vic: leave, 20 things. I think people won't appreciate the scale unless I, I underline it. So, in the 1990s, 85 or 90, 20 million to get your first version out.

[00:25:31] Vic: By 2010, it's 1 million. So that's a, that's a 95 percent reduction, right? And then it kept going from there. So 2010, it was a million to get 

[00:25:45] Dave Lambert: out. Yeah. And then it just accelerated. So it was, you know, 95 percent reduction, but over like a 20 to 25 year period. And then in the next, we'd say six years, it collapsed another 90%.

[00:25:55] Dave Lambert: So by 2016. You know, an average of 100, 000. It doesn't mean there aren't [00:26:00] some areas like maybe fintech and healthcare where the average was higher, but there are certain a lot of areas where you're two or three technical founders. It was zero. It's just your time to build that product. And that was a huge sea change.

[00:26:13] Dave Lambert: And what's interesting, I'd say there's a couple interesting things that you can tie into today's world is that the only area where consistently got cheaper and cheaper over those decades was in building the first version of a software product. It did not become cheaper to scale out sales. marketing, any of those other things.

[00:26:32] Dave Lambert: But that first software product version, you know, became less and less expensive over time. And so that meant there was an explosion of new entrepreneur activity in the software world. Every year in the 2010s, it just got larger. And that was sort of a unique time period as well. 

[00:26:50] Vic: Yeah. And 

[00:26:50] Dave Lambert: I think 

[00:26:51] Vic: once you got out there and you had a product that people started liking, you had to raise money to grow and to fight off competition and defend your [00:27:00] market.

[00:27:00] Vic: Uh, which, which is useful if you're a venture capitalist, like right side, where you want to be able to deploy money. Um, that has also been evolving over time. 

[00:27:11] Dave Lambert: Right. But you're still. But raising money usually to build out a company where you've at least proven some basic tenants of your business model, whereas in the 1990s and early 2000s, when I was running my computer hardware company, we were doing network services and selling workstations and rack mount servers.

[00:27:28] Dave Lambert: To all the dot content, 1. 0, you know, internet companies. And I, you know, most of the customers we were selling to were burning through millions or tens of millions of dollars just to build a product. They had no clue if it would work or not. 

[00:27:44] Vic: Yeah. Big difference. So, so in 2016, 2017. It gets to be free. I agree with you in health care, more regulation, more infrastructure, human life is at stake at times.

[00:27:57] Vic: Um, and so it's not maybe [00:28:00] quite as cheap, but the relative change has been the same, right? So maybe it was 10%, 20 percent more in the 1980s and 90s. It's still a little bit more, but the, but the change, the Delta has been similar. And now what have we seen since then? 

[00:28:17] Dave Lambert: So what's interesting, and this is where sort of AI comes into play.

[00:28:21] Dave Lambert: The big change that we've seen on our end is that trend of first version, getting cheaper, kept playing out into the early 2020s. Like, you know, even in the late 2010s, we rarely saw someone. That could build a high ticket enterprise SAS product and have been bootstrapped or not raised a lot of dollars.

[00:28:39] Dave Lambert: But by the early 2020s, we were starting to see that somewhat regularly. The big change has happened in the last two years with AI because as companies have integrated AI into their operations, it's made, you know, code writing that much more efficient and effective. You can do social media content generation.

[00:28:59] Dave Lambert: [00:29:00] You can do your customer service and support more efficiently using AI tools. So I think this last 18 month period to two year period is the first time that I've been around Now we're starting to see this capital efficiency trend hit other areas operational areas of the business You can actually now do more with less In a lot of areas post developing that first version of a product and you never could before.

[00:29:25] Dave Lambert: That's sort of exciting times from that perspective. 

[00:29:28] Vic: Yeah, and just to unpack that the way I think people Everyone has gone on to chat gpt or others and like tested it for their own, you know intellectual curiosity and certainly entrepreneurs and management teams of small growing businesses can use those tools directly, but then in addition All of the, uh, Enterprise SAS tools Like, I use Slack, HubSpot, Asana, Zoom, you know, they all have AI in them too, and you can integrate them together.

[00:29:59] Vic: So [00:30:00] on both fronts, you're able to use the tools to write your code better, or do your particular job more effectively. So instead of hiring 10 people in the first year, maybe you only have to hire three, four, but then all of the software tools that you're Maybe they're not core to the business, but they're all the infrastructure, the table stakes.

[00:30:20] Vic: I got to send out bills. I got to host things. I got to host a meeting like this. I got to communicate with my team. Those all have gotten much more effective too. 

[00:30:29] Dave Lambert: Yeah, exactly. So we're pretty excited for the, you know, for the coming years, because, you know, there's going to be companies that. Grow to very large revenues with much less employees than it was possible to do previously.

[00:30:42] Dave Lambert: I 

[00:30:42] Vic: mean, I remember Instagram really, uh, just my jaw dropped in, in seeing sort of, they sold to meta for something like a billion, a little over a billion, like 12. 14 employees, something like that. That was the first time I [00:31:00] really realized how impactful technology could be, but they were pre all of this, all this stuff.

[00:31:06] Vic: So we're going to, I think we're going to see multiple billion dollar exits with one, two, three founders, just as like part of, part of the landscape today. 

[00:31:17] Dave Lambert: Yeah, yeah, they're sort of the canary in the coal mine. They're the sort of signal of things to come. It's, you know, taking a little longer, you know, but, but what happened there could, there can be explosion of companies like that over the coming five to six years.

[00:31:30] Dave Lambert: Yeah, 

[00:31:32] Vic: and so how does that change your, uh, perspective as sort of finding the right Portfolio to invest in, in this market. And then in addition, this is having an impact on the SAS business model. So maybe take that however you want to go. Like how does it affect right side or how is the SAS business itself changing?

[00:31:53] Dave Lambert: Well, I think there's, there's, I'm going to ask you that second one first, cause it's, it ties into what we were talking about previously is that [00:32:00] fundamentally. The SAS business model of the 2010s is a permanently distressed business model in the 2020s because it was all built off of per seat pricing.

[00:32:10] Dave Lambert: And that worked great when we had a growing economy with companies that were net hiring, um, in your current, in current environment, like look in the Bay area, in the tech world, like most of the large tech companies. Their revenues grown like crazy and their stocks are up a lot and you know, Google might be on its sixth round of layoffs since, you know, 2021 or 2022.

[00:32:30] Dave Lambert: So your existing customers are losing seats. So what do you do? Well, you know, the, the subscription business model. Is starting to, and we'll probably very quickly move to, instead of seat pricing, sort of some sort of consumption pricing model across the board for almost every product. 

[00:32:50] Vic: And that's needed in software because of the way that software is, uh, developed and deployed, right?

[00:32:57] Vic: The incremental cost, the marginal cost to add [00:33:00] another user is very low. Maybe it's not zero, but quite low. And so companies need some way to measure. How much are our clients using this tool? What, what, what is the value? How should we price this so that it reflects the value? And this per person or per seat license model made sense because the more people that are using this tool, probably the more indicative it is of how valuable it is, but companies are now growing without adding team members.

[00:33:32] Vic: And yet they're gonna use the software more and more, uh, with fewer people. So how do you measure that? What, what's the way? Yeah, 

[00:33:39] Dave Lambert: it's gonna vary and I don't think there's been like enough, uh, you know, there's not, I can't just say, Hey, it's always these two or three metrics. 'cause it varies on the business model.

[00:33:48] Dave Lambert: If you're selling a software product that helps people, you know, a customer service support platform, software product per seat made a ton of sense. But now if you've got AI in your product and it [00:34:00] allows one of your customers to service the same number of customers with. Eight people when it would have previously taken them 28, right?

[00:34:07] Dave Lambert: Well, you want to be able to charge them a similar amount so you can't do it on per seat Maybe it has to be per tiers of tickets or tiers of something, you know, it can be api calls on things It can be bandwidth that can be You name it 

[00:34:21] Vic: Yeah, because, because that dynamic is shifting itself. Like using my tool, if I'm a SaaS provider, you can serve, just use a call center, you can service three people last year.

[00:34:31] Vic: You can serve as eight people this year, next year, you can probably service 15. And I need some model that will scale as, as the tool gets better, that sort of aligns my customers and me. Is that close to what you're saying? Yeah. And what are the best two or three ideas? So you said bandwidth and tickets.

[00:34:51] Vic: Are those what people are playing around with or what if you how are you measuring 

[00:34:55] Dave Lambert: this? It's varied a lot So like I've I mean, I don't think you know, we have some [00:35:00] company. I think most startups in the sas world still start at per seat When they're starting and starting to get their initial customers because you're mostly selling into smaller clients then and that's actually still valid And then as you get larger You sort of pivot and change and you start to price it on something else.

[00:35:18] Dave Lambert: And sometimes that pricing is for some consumption. Sometimes that pricing is just for customer. Like our, our product is now pick a price 750 or it's 5, 000 a month. Yeah, no matter what. And or maybe it's tiered on something else. You know, it's it can be 750 2500 or 5000 a month. And I'm just basing it off some size that you are, you know, and I don't whether that size is revenue or measure of something else.

[00:35:44] Dave Lambert: So it can be in tears. It can be actual consumption usage. I think in general, you have to have tears of something because your customers want to have a known budget that they're going to pay for. But I think the SAS world is just in the early stages of figuring that out. But when I say early stages, you know, within the next 12 or 18 months, I [00:36:00] think it's going to be, that's going to be the default best practice for pricing.

[00:36:04] Vic: Yeah. Well, what'll happen is some group will find that it's an effective way to align them, their interests with their customers, and then others will follow it and you'll end up with two or three standard, uh, business pricing models that is then populated through the whole market. Yeah, yeah, exactly.

[00:36:27] Vic: Okay. Um, maybe let's shift to sort of startup and financial markets. I mean, you mentioned and I, I Learned the lesson over the last few years. I think all VCs learned the lesson that maybe we're not correlated directly to public markets, but we are really impacted by public markets. So how do you see the startup market as far as like deal flow, volume, quality, and then where do you see financial and exit markets headed?

[00:36:55] Vic: Yeah, I think, uh, we're, we're talking now on [00:37:00] February 11th. Uh, the Trump administration is changing Every minute it seems like and so something could happen before this airs, but just what are your thoughts in general? 

[00:37:10] Dave Lambert: Yeah, I I what i've learned over time is is really trying to predict the future as sort of a fool's game like You know I don't there i'd never met anybody in the last 14 years who along the way said there's not going to be a recession over the next 14 years or Might be 15 now.

[00:37:27] Dave Lambert: So it's just You know, you just have to sort of be prepared for all outcomes. I think what happened in the 2000s, you know, the rising tide of valuation multiples, backwind of economic activity, all this hiring is a lot of people in the venture world just and a lot of new entrants. Ended up thinking a that they had ability picking ability that they necessarily probably maybe they didn't have because everyone was picking well and be that it was easy, you know, and the reality is ventures really hard.

[00:37:59] Dave Lambert: It's a [00:38:00] really long game. And macro Trump's micro. So it doesn't matter if you're in an environment where valuation multiples are shrinking your company, your portfolio company's revenue can be going up, but their valuations are still going down. Right. And that just hadn't happened in public or private markets.

[00:38:15] Dave Lambert: And so long that people forgot that that can happen. And I think. That's just hit home hard. Now, I think we had such an expansion of economic growth and zero interest rates and people looking for more risks that a lot of money was plowed into venture way too many venture firms formed in the late 2010s into 2021 than should've, and now there's a calling of the hurt and, you know, venture firms are going out of business left and right.

[00:38:40] Dave Lambert: They're investing their current funds and can't raise their next funds. And it's a slow motion train wreck that happens, you know, it doesn't happen quickly. And that's. Healthy for the ecosystem long term, but boy, it's really painful for the startup world because just like there are that many more venture firms launched, there are that many more startups launched.

[00:38:58] Dave Lambert: And so there's, you [00:39:00] know, 60, 000 tech startups out there just, you know, probably in the U. S. that are looking for a serious seed in later rounds. And the number of investors writing checks is going down every year. And it's just way out of whack. You know, the supply and demand imbalance of capital for the startup world right now.

[00:39:18] Vic: So 

[00:39:19] Dave Lambert: two positive things that we've seen post election. You asked sort of, sort of regime change. Um, I would say there's been a psychological change that's been positive. So we've, I've had multiple portfolio companies. Say that amongst the corporate world, their pipeline has loosened up massively since November election that suddenly profiles of companies and companies who were had, you know, freezes on new cost centers or on buying new things.

[00:39:45] Dave Lambert: And, you know, that that's gone away and a lot of companies that have had some, you know, better months in December and January than they had had in a really long time. Um, so that's a net positive. I think we've also had companies. Hit by just the [00:40:00] very sort of, like you said, things moving fast and changing in the early weeks of the Trump administration, we've had a number of companies who've felt they were very close to getting funding rounds done.

[00:40:12] Dave Lambert: And maybe they are in an area that was affected by grants or by. At risk for regulatory change or and other things and those investors have all sort of taken a step back and said hey Let's revisit this in maybe three or four months When we can see how this all plays out So I think some of what's happening for a few weeks has had some as negative in the in the in this startup 

[00:40:36] Vic: Yeah, so, um, so there's, there's two aspects to this.

[00:40:39] Vic: I agree with the psychological shift. I think, uh, people are optimistic about like the economy in the longer term, like say six, 12, 18, 24 months, and are interested in innovative products and new ways to approach things where maybe pre election, just with the uncertainty [00:41:00] of who's going to win, what's happening.

[00:41:02] Vic: Um, almost, I don't know if it would have mattered who won, but getting past that point. Uh, and then with the Republicans winning, it's definitely been, uh, positive. And then the regular, definitely in healthcare, the regulation is. complex. There's a lot of worries. Um, I don't think we, I mean, we're going to have to take care of our people that need healthcare as a country.

[00:41:26] Vic: And so the system is going to be there, but how the 4 trillion is spent and, you know, are there places to cut back? They're good for taxpayers. I mean, not good for startups. It's hard to know that. Yeah. Like 

[00:41:41] Dave Lambert: there's a lot of business models in the healthcare world that are predicated on A large portion of your dollars coming from Medicaid, you know, consumers, like you're servicing that over 

[00:41:53] Vic: half the revenue on an annual basis comes from the federal government.

[00:41:57] Vic: So certainly a lot of regulatory. 

[00:41:59] Dave Lambert: [00:42:00] Yeah. So people got, investors got freaked out when, uh, when all the grants and everything was shut down briefly and Medicaid was sort of unfunded for a day or two, a lot of aspects suddenly. Any healthcare business model where suddenly that is going to have a big impact, investors are like, uh, I think we'll wait a few months and see what happens before funding you.

[00:42:19] Dave Lambert: So yeah, those are just some of the real healthcare challenges right now. I mean, the flip side is that, you know, we've had some other companies, you know, we had a company, I won't name the company, but they were in a sort of an insurance area. And there was some concern by a lot of investors. Leading up to and after the election that trump might be a headwind for this type of product And it's turned out that it's likely a tailwind so you don't always know how things are going to go So some things have played out more favorably But yeah uncertainty is is going to be the the the enemy of a lot of health care well 

[00:42:53] Vic: the uh, the timing is just Different for the founders and the management teams than it is for the [00:43:00] investor really an investor can see the first month of the trump administration and say Gosh, I'm going to pause investing for pick the amount of months, right?

[00:43:09] Vic: Three months to see what happens, but there are companies that they counted on getting this deal closed by March 1st and they're out of money. And so they can't just take a pause. 

[00:43:19] Dave Lambert: Yeah, that's the pain part. Exactly. And that's just, that's going to happen. 

[00:43:25] Vic: And what are you seeing on the deal flow side? You see probably the most deal.

[00:43:29] Vic: I mean, I see a lot of deal flow and you see probably five X that cause you're across everything. What's the deal flow side of things? What are entrepreneurs feeling? 

[00:43:37] Dave Lambert: Yeah. So I would say from the deal flow side, you know, as an investor that's had investor dollar investment dollars to invest over the last bunch of years, you know why it's the hardest fundraising environment.

[00:43:48] Dave Lambert: You know, in a long time for startups and maybe ever receive VC firms, if you're investing and writing checks, it's one of the best environments ever, right? So it's sort of like the dream environment for deploying capital. So, [00:44:00] you know, that's the flip side of the coin is we've never seen a better timeframe, you know, the combination of just sort of the acceptance of buying products from startups from the larger corporate world, you know, the general capital efficiency trends and building first products.

[00:44:15] Dave Lambert: AI capital efficiency, like all that's coming together, and it's sort of as good as it's ever been on the technical side. 

[00:44:22] Vic: Yeah, the difficult reality of, I'm going to say half, maybe more than half, of venture capital firms that existed in 2022 will not exist. In 2026, they just passed on 

[00:44:39] Dave Lambert: exactly 

[00:44:39] Vic: that's really hard if you're raising money, it is beneficial if you're trying to deploy money because obviously there's fewer people to compete with, 

[00:44:46] Dave Lambert: but, but here's a change that we've seen and witnessed that we hadn't sort of factored in that's really positive from all this, everything that's happened over the last couple of years, which is in the late 2010s and early [00:45:00] 2020s, without knowing it, a lot of the startup world, both on the investor side and entrepreneur side had almost absorbed a lot of the sort of the spoof Silicon Valley TV show mentality.

[00:45:13] Dave Lambert: Like suddenly the goal of startups from founders perspectives. Was not to build profitable successful companies. It was to get to the next round. 

[00:45:22] Vic: Yeah 

[00:45:23] Dave Lambert: What do I need to do 

[00:45:25] Vic: get the breakfast bar and the foosball table? And all the trappings right around how to how to do something that makes money later 

[00:45:33] Dave Lambert: Perks to attract employees and what do I need to do to get to a next round?

[00:45:38] Dave Lambert: And then anyone on that path blew up and died or did massive layoffs and changed. It's been a sea change from a psychological perspective in the entrepreneurial world, you know, what's happened in the last few years. Suddenly we have this new generation of entrepreneurs. Who believe that they can't rely on the next round of funding being there and therefore they have to [00:46:00] build capital efficient businesses Whose primary goal is to figure out how do I get profitable and growing so I don't die if Something that like what just happened the last few years happens again, and I've never seen it where that's the default Mindset of entrepreneurs before so I think it's just super healthy for the ecosystem to have that be the default mindset going in for most tech founders because it certainly was not like that from 2017 to 2022.

[00:46:30] Vic: Yeah, yeah, that that's the um, tagline that people will throw around like default to live with like how can I organize my cost structure and my cap table and the way I run this business so that No matter what happens outside of this business and the, the team of people I've, I've associated myself with, customers might leave, investors might not show up.

[00:46:53] Vic: We are going to be alive and sustain ourselves through whatever, whatever challenges come. [00:47:00] That has not existed, I agree, I've been doing this 25 years, you've been doing it a little bit longer, ever. So it's really healthy just to see that now it might, um, we might lose some of the super growth, the exploded companies, but I will take that for more, uh, more efficiency, more reliability, more resiliency.

[00:47:20] Dave Lambert: Yeah, completely. I mean, it's going to be interesting to see how it plays out because it will cause some of those changes. It also brings into question, what's the role of the, the later stage investor world in the venture, you know, arena where, you know, large 50 to 200 million rounds were being thrown around and taken very easily.

[00:47:41] Dave Lambert: Will those be needed as much that it will definitely be the case that a lot of companies still go on that path and need that, but it might be a much smaller number over the coming five or six years than it was over the last. I 

[00:47:53] Vic: mean, I think I'm preaching a choir here, but as small fund managers, you know, our, [00:48:00] our funds are 20 to 50 million in size.

[00:48:03] Vic: Right side is maybe a little bigger. Um, but you're investing in a lot more companies. I think that's healthy. I mean, the, the billion dollar Series A investment is just not a, not a thing that is healthy, I think. 

[00:48:16] Dave Lambert: Yeah, no, I would agree. I think most people agree with that now, in hindsight. 

[00:48:22] Vic: Okay, closing out with, you've been doing this for a long time, and you have a perspective that is really broad across the whole software landscape.

[00:48:30] Vic: Where, where do you see, uh, the market heading? Where's right side? Sort of, uh, Making slight changes or big changes. How do you see the future, uh, playing out? 

[00:48:42] Dave Lambert: Yeah, I mean, I think the future for now is that we can see easily. Is that, you know, AI is just absorbed into everything. You know, it's AI, you know, you're not going to be considered an AI company in a year or two, if your product has AI built into it.

[00:48:57] Dave Lambert: And if you are using [00:49:00] AI and your backend operations, that's just going to be table stakes to be, you know, an organization that's efficient enough to compete with its competitors and to have a product that has enough functionality. To compete with everyone else and it's just, you know, it's going to be a renewed focus on business models and, and providing value to your end customer and AI is going to be a part of that product that solves that.

[00:49:24] Dave Lambert: And that's just the way it's going to be. 

[00:49:25] Vic: Yeah. So I've been talking about AI is similar to the internet where there are no internet companies today. I mean, there were in 1997. Because it was new and just like that, that, I mean, now we're a couple of years into AI, there are AI companies, but it just becomes, it's just one of the tools that everyone uses.

[00:49:46] Vic: And some people use the internet better than others, but everyone has a webpage and AI will be the same. It's just like part of how you build your business. 

[00:49:54] Dave Lambert: If you go back long enough, at one point, databases were unique, new and novel. And you know, almost no one used [00:50:00] them and web pages, websites, and being able to sell on the internet was unique and new, and you're a web company.

[00:50:05] Dave Lambert: If you just did that, even if you're a brick and mortar retailer. And that same phenomenon's happened with the term AI. Now it's thrown out towards companies. But it, you know, AI is just going to be a built in part of the landscape. And, you know, the AI companies will be the foundational companies and people doing really hard science around AI and everything else.

[00:50:23] Dave Lambert: We'll be using AI mingled into everything, just like how the web, you know, and the Internet's mingled into everything. 

[00:50:32] Vic: Okay, excellent. Now, where should people, uh, learn more about RightSide? Uh, is the website best? I'll link to it in the show notes, but how should they learn more about what you do in your portfolio?

[00:50:42] Dave Lambert: Yeah, if you go to our website, just, it's just rightsidecapital. com. You can learn a lot about us. Uh, if someone wants to reach out to me directly, it's email address is dave at right side capital dot com. 

[00:50:56] Vic: Show notes so that people can easily just link to it. But Dave, [00:51:00] really appreciate anything we didn't cover that we should have.

[00:51:03] Dave Lambert: No, I think we covered a lot. It was a great discussion. 

[00:51:05] Vic: Thanks for doing this. Really appreciate it. And have a good day there in California. Appreciate 

[00:51:09] Dave Lambert: it. Thanks. You too.