At Earnest Capital we talk a lot about the need for “funding for bootstrappers” to help entrepreneurs build calm profitable sustainable businesses.
While we think that thesis represents a huge market that could apply to a broad range of entrepreneurs and companies, we only invest in within our circle of competence. Our existing portfolio may give some guidance to the kinds of things we’re interested in.
Like all investors, we don’t have anywhere near perfect ability to forecast all the kinds of founders and investors we might want to invest in, so while we are trying to give some guidance here toward the kinds of opportunities we are likely to invest in, we will definitely break these rules and invest in companies that don’t meet every single criteria. Take all this with a grain of salt.
Various things we are particularly interested in right now are:
- B2B SaaS targeting niches or specific industries
- Developer tools
- Remote tools for remote teams
- The “picks & shovels” of online entrepreneurship (software that enables building online businesses)
- Online education and personal development communities, membership models, platforms
We do not invest in pre-product or idea stage businesses. We believe that most businesses we are likely to invest in can be bootstrapped to some kind of early launch. We’re okay with a Minimum Viable Product but it needs to actually “work” on some level and provide value to customers. We can invest in an MVP, but not a proof of concept.
Broadly I describe the minimum stage of investment for Earnest as having at least one solid answer in each of three buckets:
- Can you build it? We need to see that the team can build at least a minimal version of the product. We don’t invest if the plan is turn around spend that investment capital hiring an outside team to build the real product.
- Will people pay for it? We need to see evidence that customers will pay a reasonably full price for the product. We don’t do pre-revenue and also can’t invest yet if you just a deeply discounted pre-launch or pilot program. A growing number (even if small) of real customers paying full price is ideal.
- Can you find customers? We need to see evidence of at least one repeatable channel of acquiring customers that isn’t just your friends, colleagues, or people you know. Any channel will do.
The ideal stage for our model is typically in the $2k – $25k in monthly revenue range. Though we’ve invested in businesses already nearing $1m in annual revenue and (one time) pre-revenue.
The way I describe this is that our center of gravity is B2B software-as-a-service (SaaS). Recurring revenue, high margin, software businesses are our bread and butter and represent the bulk of our investments. It’s a model we know well and what we optimize Earnest Capital for.
That said, it’s a center of gravity not a rule. We have done a substantial number of investment in companies that don’t have this exact business model.
Recurring revenue, high margin, but not software? We can get there.
High margin, software, but not recurring? Not a dealbreaker.
But we are highly unlikely to invest in a low margin, inventory heavy, one-time sale, physical product. For example.
Here we tend to be wide open. We love to back entrepreneurs going after niche B2B markets but we don’t have any high level constraints on markets we will or won’t back. If VCs have been telling you your market is not big enough or too niche… we definitely want to chat.
We are not the best fit investors for founders who have a business plan of raising millions more in capital every 12 to 18 months. We’re not opposed to our founders raising more capital later on, but we have a strong preference for opportunities where the Plan A after raising from us is to get to break-even and grow the business through cashflows. Typically founders raising more than $2m will not be a fit for us.