Can you invest in SaaS companies cheap and make money?

I have always worked for firms that considered themselves “value” investors.  We would invest in companies with reasonable or discounted multiples compared to the market.  We avoided the hype.  Seed stage investing for us was typically $1-$2.5M rounds with single-digit valuations.  Recently, achieving these terms has been difficult, due to an abundance of cash and some new players in the market.  It a frustrating fact that ownership percentages which used to be 15%-25% have shrunk to 10%-15%.  Additionally, there is a current perception that founders need more capital to achieve their milestones. 

In 2021 I started my firm, DWP Capital.  We went to market with the following evolving thesis.

“DWP Capital invests in early and growth-stage software and tech-enabled service companies.  We lead investment rounds with check sizes from $500k-$2.5M.  The ideal company profile has raised less than $3M, has a capital-efficient business model, and is headquartered in a non-core market.  We are industry agnostic.  We invest in companies that are solving real business problems for a specific market segment. “

I have concluded that finding deals that are small enough for me to lead but haven’t raised too much capital will be a rarity.  I have spoken to many seasoned venture investors and asked them what they are doing.  The consensus is that they are paying up for better companies and, in some cases, are investing earlier.   My view is that the strategy needs to be a mixture of both.

One idea I had been playing with was investing in B-rated deals (slower growth and/or missed milestones) for a better price.  I have talked to many investors about this thesis. Unfortunately, I have found that the consensus is “we tried it and were unsuccessful.”  To quote Jason Smith – “Once the luster of buying something at a discount wears off, you are still looking at a mediocre company.”

I will carry on and continue to learn.  I feel like the lens through which I evaluate deals is limiting.  I have decided that I am going to apply to the Kauffman Fellows program.  Being connected to a more robust network of investors and ideas will potentially make me a better allocator of capital.  More on that later!