Companies Orphaned by Traditional VC's with ARUN MITTAL

Sure, thank you for having me. I started in the late 90s as a web developer, co-founded a company that failed within 18 months, then spent six years in Japan in a private equity turnaround of a Japanese bank, doing operations, tech, and finance. After that, I invested in specialty finance companies in New York, which led me into fintech. I later joined an investment firm focused on banks, then in 2014-2015 joined One Zero Capital to turn around a data analytics portfolio company. That experience, where we ran it for cash flow rather than chasing unicorn growth, inspired me and my partner to start MBM. I ended my formal employment in 2018, invested in Ledger X, advised Klarna, and co-founded MBM in 2021.

Sure, so MBM is our last names, nothing fancy. We got to the point where we had 15 names on the board and just couldn't pick, so we had to get started. In terms of the journey, bank or specialty finance, I spent three years in the public market. I was a junior partner taking over a small public REIT that owned a railroad. It was a crazy story: I did everything from proxy fights to sourcing deals to investing in real estate — buying land under wind farms and solar farms and leasing it back. I probably spoke to 300 different projects, traveling the country talking to farmers. I was a land man, like in the oil days, trying to buy land or concessions for these projects.

The experience at the REIT was really interesting because it was a very small organization. There were only two of us, and when the organization is that small, you do everything. You're signing NDAs but also negotiating them, doing custody, figuring out law firms, dealing with 2500 shareholders and getting dividend payments out. We had a proxy fight and huge litigation. I was looking through boxes of records from 1967. The railroad was built in the 1890s by Jay Gould. The company went public in 1967 as the first REIT to go public. Their first deal, an apartment building in New Jersey, fell through because of Mafia links, so the board got spooked and did absolutely nothing for the next 50 years. We took it over — it was Pittsburgh and West Virginia Railroad — and turned it into Power REIT. I was there for three to four years, we had litigation with Norfolk Southern. It was formative: I was deposed several times. You go through that and then you feel like you've seen every spectrum of business.

So I'll start with: zero to one is really hard. I'll admit it is very hard to start a company and get it to the first million, first 10 million. We back people who can do that; they are like gladiators in the arena. In terms of the fund, starting in 2014-2015, I met Lauren Bonner, my partner, and we had portfolio companies at One Zero. Some were doing well, some not. The ones not doing well still had real products, real revenue, real customers, passionate teams. They were real businesses, just small — not venture-backable. They might raise a couple rounds but not the next one, or they stagnate and economically it doesn't make sense to raise more. So we started working on that at One Zero. After I left, we developed a reputation and started seeing more founders coming to us stuck. We saw a bunch of deals, gave advice, invested in a few one-off. Then we realized there's something big here. Our thesis: we back companies that have been venture-backed for the most part, that can no longer raise venture capital but still have a journey ahead before an ultimate exit. We use a private equity style because it's not venture-backable, not going to be a unicorn. We value companies as they are today, not as they may be, and work with them. We tested this among founders, funds, banks. They said we were crazy because in 2020-21 everything was going up and to the right, and we should start another fintech venture fund. But I come from a credit background, and from a valuation standpoint the cash flows didn't match. So we launched MBM in 2021. Fundraising was tough. We had a lot of positive feedback but 2021 was a tough year. One of our early backers had done our strategy in a smaller sense in the 80s with Tom Perkins and did phenomenal turnarounds. So we knew we had something. The journey: talking to lots of investors, getting feedback, introductions. Even investors who didn't invest often referred us. Fundraising has fun in it but it's not fun; it's a grind. But we've met amazing folks and have a great set of LPs.

Very similar. We've probably spoken to over 500 folks at this point. It also depends on strategy. AI seems very hot; if you're a second-time founder with an OpenAI adjacent business, maybe it's three meetings and you're funded. But if you're doing something really off the wall, like our strategy, which is new and not many others do it, it is similar to a company trying to disrupt — not immediately evident.

The new thing is just interesting. The question is what do you do with it afterwards. Sometimes they say they can't do it because it doesn't fit their box. So how do you come up with your investment thesis to talk to them about their thesis and make sure everything matches up? No pivots. We really believe in what we're doing. It's a structural element of VC: if you look at the power law, a good VC fund gets returns from one or two portfolio companies. The question is what happens to all the other companies that have been funded? Tens of thousands of businesses find themselves without access to capital. We see that as our opportunity.

It's interesting you pose the question that way because it sounds very much like an investment banking question. The point is you have to have conviction in what you're doing. If you think about the capital markets, if you go build a product to absorb money where the money is, that will generate poor returns for investors. If you go out without conviction, it's a recipe for disaster. For a first-time fund manager, you need that portfolio to perform. Chasing the herd will inevitably be a disaster. For us, we think we are unique capital in the ecosystem. It is a relationship game. We also have a placement agent helping us talk to institutions.

First of all, in terms of portfolio construction, we're definitely not VC. That's one in ten, one in twenty. We're very close to private equity. We underwrite with a credit lens, thinking about downside. We build a portfolio where eight or nine out of ten will be successes, with maybe one or two where something goes wrong. We don't look for thousand x returns. We invest in companies with revenue and product-market fit, but too small for strategic buyers yet on a path of consolidation. They can grow slowly, not growth at all costs, to a size that allows an exit to a strategic. We look for sustainable growth, free cash flow, EBITDA, gross margins adjusted for customer acquisition costs. We want a business model that makes sense today, with a reasonable growth path over three to five years, and we exit at private equity multiples like 10-12 times EBITDA. The math has to work.

We see a lot of family offices that have invested in these companies along their journey. Cap tables are complex. Some family offices will continue to fund if the business is adjacent to theirs, or they may become the acquirer. We have family offices as investors in our fund. They like our focus on fundamentals and value investing. It's not for everyone.

Every situation is a little different. We've been speaking to many venture funds. For funds that can't invest, they may see a company that's not venture anymore and refer it to us. For funds that are on the cap table, there's a process of coming to grips with reality. By the time we talk, they've tried raising, maybe bridge notes, but hit the end of the road. Many are realistic. Without sharing names, there was a company we absolutely loved: great data architecture, Forture 100 clients, solving a real problem. We got far in structuring, but ultimately it came down to personalities and social dynamics. We couldn't get through to the team. Much of this business is about people, not just Excel. The term sheet is just the start; you have to negotiate employment agreements and such. It's like dating—you learn about the team through the process. This one we were so close but couldn't get there.

When I lived in Japan, there was a tax regime that taxes global income. A group of entrepreneurs went to a South Pacific island and convinced the country to tax at 25% as a loophole. Companies could invest through that island to wherever, and the individuals essentially became taxing authorities through a country, getting a piece of the tax revenue. That's the craziest thing I've seen in 25 years.

We invest in fintech, HR tech, data, SaaS, and e-commerce enablement. We look for companies with three to five million dollars in revenue, not needing 100-200% growth. We're patient, differentiated capital. The social dynamic is important: are founders willing to change behavior and expectations? We respect the zero-to-one journey, but the path from 10 to 100 is a different journey from 10 to 25. We want founders who have a chip on their shoulder, want to win, and are almost there—80% of the way, needing capital and operating expertise to get the last 20%. You can find us on LinkedIn; we talk to everyone who reaches out.

Thank you.