
On Startup Capital Efficiency - prostoalex
https://stevecheney.com/on-startup-capital-efficiency/
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doctorpangloss
Capital efficiency is a great point of view. The take that every dollar from a
customer is worth 5 is a really good conversation to have with a CEO.

It bucks the trend that showing revenue (and then, showing profit) are
liquidation events, not just investment opportunities. So it's not saying much
that if you show revenue, you get a chance to liquidate or raise an up round.
People have known that forever.

The more valuable perspective here is that many startups deliver products that
are copies of stuff that already exists. That's just what VCs fund. So capital
efficiency is your special sauce.

It would be nice to have a conversation about where capital efficiencies lie
_generally_ in technology. My feeling is that it is still in some sort of
user-generated content. This is totally opposite of the trend to fund AI
companies, which seek to replace the human being. Seems so much more capital-
efficient to get the human being into doing expensive labor for free.

This leads to the most interesting counterpoint to the POV advanced here:
capital efficiency is super important, but it's also super boring. Maybe there
are investors who want to line up outside your door to do your thing capital
efficiently. But the people working for you, especially at the beginning, _do
not care._

People want to be thought leaders, not penny pinchers.

~~~
stevedc3
OP here. Thanks for reading. Good comments.

As far as winning out vs competitors, efficiency can be key. There is no
question there.

One of the things about frontier tech (autonomous, AR, sensor networks, ML) is
that many people are funded and do it too early. So they need to somehow last.

Most startups spend the money within two years or less. It’s programmed into
the psychy. A Sequoia would never admit this but they want you to spend your
money fast and move on to the next thing if you aren’t growing fast enough.
Buying one more year can be crucial.

~~~
adamqureshi
I need to build my v2 and am avoiding accepting angel funding from an investor
who wants 30% for $250k. Sales are not stopping at this point. I am using
stripe for all sales. Do you have a suggestion for me to get a loan? I need
$150k to build v2 AND keep the lights on for say 12-14 months. Thanks.

~~~
Qworg
Check with SVB or Lighter Capital?

~~~
adamqureshi
I spoke to these guys: [https://stripe.com/works-
with/fundingcircle](https://stripe.com/works-with/fundingcircle)

But they want tax returns and credit score. Thank you and i will look into
Lighter Capita. SVB is silicon valley bank?

~~~
Qworg
Yes.

Tax returns and a credit score for your business? Or are they asking for a
personal guarantee?

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corry
In early-stage SaaS, a rule of thumb I've often heard is that it's great if
you're maintaining a 1:1 ratio of cash burned to ARR generated.

So if you net burn $6M cash from Day 1 to now, and get to =>$6M ARR, you're
doing great. Presumably that ARR has an LTV(lifetime value) that's some
multiple of ARR.

But in early-stage, that "net burn of cash" figure includes both client
acquisition costs, COGS, and initial R&D costs. So it's a pretty messy metric
IMO beyond a back-of-the-napkin kind of thing.

Almost immediately you'd expect to focus on the king of the "classic" SaaS
metrics - CAC:LTV, where LTV takes into account gross margin, and making sure
you're above the 3x line.

Investing big $ in R&D for product expansion/improvement etc is almost a
different question - it's its own ROI calculation.

Final point - in SaaS, the pay-back on the initial CAC cash outlay is also
super important. If it's tight (good), you are "re-cycling" the initial CAC
spend on add'l clients, and each is creating a stream of future cash flows.

In a perfect world, you're taking $100 of investor money, deploying it into
CAC to produce x # new clients, which represents ARR streams, and who pay back
the $100 CAC almost immediately. Then you re-deploy the $100 to get the next x
# of new clients, etc.

This is the magic of compounding in SaaS.

\--

All this to say - capital efficiency should be understood in context (in my
examples above, capital efficiency in go to market has it's own rules and
dynamics, whereas other uses of capital may be different).

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skrebbel
> _Many people say growth is the only important metric, and that’s actually
> wrong. The reason is simple—only 5% or fewer of startups are growing so fast
> that efficiency doesn’t really matter._

I'm confused. Isn't the _whole point_ of VC to try and find that 5%? And to be
comfortable writing off the remaining 95% as acceptable loss? Isn't that why
VCs encourage startups to irresponsibly increase their burn?

I mean, it makes sense if the author wants to offer startups some weight in
the battle against that pressure - after all, the VC has 30 other investments
and the founders have all their eggs in one basket. But that's not the
perspective of this article - it's very much written from an investment
perspective. If I talk to my investors about capital efficiency, they tell me
they think we should pour more money into everything to try and grow faster,
runway be damned.

~~~
borski
I think your perspective reading it is different from mine - I read it more as
being somewhat from the founder’a perspective.

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conductr
On the cost side, it’s difficult for me to understand how most startups can
pay SV rates for talent and be considered efficient. The problem space usually
is just not difficult from a technical aspect, you don’t need top talent.
Maybe unpopular here due to the bias of SV talent in HN but from a capital
efficiency standpoint startups need to be designed in SV/US and developed
elsewhere.

~~~
bretpiatt
The SV salaries are why you're seeing platform B2C companies lead the pack and
build full engineering teams in the Bay Area. For many B2B, especially in non-
platform markets, building hybrid teams (or building completely outside of SV)
with Founders in the Bay and scaled operations often outside the US.

As an example for NFLX with $2.2M revenue per employee ($15.8B rev / 7,100
FTE) if they could save $150,000 per employee it's only $1B to the bottom-
line. By hiring "the best" and keeping operations as simple as possible paying
more per employee may actually be financially better for them too.

~~~
conductr
Idk, that “only $1b” is an annual bump to the bottom line. Net income only
crossed into the B’s for the first time in 2018. Was significantly less in
prior years. The question is how much growth would it take to add another B
and how long would it take. At this point, is the market even that big?

Also, Netflix is a great example of a product that could be engineered
anywhere with US based design/management (if you’re of the opinion that
innovative ideas start here). Especially since they’re on AWS for infra.

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clairity
it was hard to find a point here. it seems to boil down to "hey, don't forget
about capital efficiency!", which is not so helpful.

the importance of captial efficiency is already highly scrutinized because
startup success is most sensitive to growth rate (of profit, aka income minus
expenses). the challenge is that many early stage startups can't be measured
on profit, so proxy metrics (like user growth) are used to forecast future
profit and growth instead.

even revenue-oriented startups try to be measured on proxy metrics because
investors so easily misconstrue early capital efficiency metrics as
characteristic of future performance (this happened to my startup, on very
early unit economics).

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PaulHoule
You wonder if somebody is being disingenuous when they tell you that an
investor who is famed for investing in Uber uses capital efficiency as part of
their decisionmaking process.

~~~
brandnewlow
You should read the interview. It's candid and interesting and addresses your
comment: [http://fortune.com/2019/01/17/mitchell-green-lead-edge-
capit...](http://fortune.com/2019/01/17/mitchell-green-lead-edge-capital/)

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newfocogi
Why is every dollar from a customer worth $5 from an investor, as opposed to
$2 or $10. I understand the idea behind revenue dollars being more valuable
than investment dollars, but I question how the ratio is constant across
startups rather than heavily dependent on other factors like industry, stage,
round, etc.

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hn_throwaway_99
Does capital efficiency really matter as much though in "winner take all"
markets that seem to be more and more the norm in tech these days? The reason
it feels like so many VCs are pushing for growth at all costs is that in many
sectors now being 2nd is an order of magnitude worse that being 1st (and being
3rd is almost equivalent to being non-existant). Look at social networks:
Facebook's market cap is around half a _trillion_ dollars. Linked in was
acquired for $26.2 billion, very similar to Twitter's current valuation, Snap
is ~$16 billion.

And all of those companies had multi-billion dollar valuations before they
barely had any customer revenue at all.

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tschellenbach
Many investors care more about growth than capital efficiency. The investors
in the last round of your startup typically have a 1x liquidation preference
as well as protection against down rounds. For a company that's generating
revenue this provides with protection in case things go wrong. They also have
a portfolio. End result is that many investors are more risk tolerant than
founders and will push for growth at all cost.

To be clear, here at Stream we have super supportive investors. But I've seen
friends of mine struggling with their investors and the constant push for
growth at all cost.

~~~
stevedc3
Totally agree. Investors are the worst at pushing this. And they do it with a
lot of psychological tactics. We’ve been really fortunate to have great lead
investors who are available to us and support us too. I think it’s very rare.

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treis
>for every dollar you take from an investor assume you need to turn it into 10

I don't think that's the right way to look at it. It's more accurate to say
that for every dollar you take you need to generate $0.50 to $1 in ARR. Or for
something like a social network acquire one customer per $10-15 you take. VCs
are looking for an IPO or acquisition and that's how they're priced

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mrnobody_67
It'd be interesting to analyze the tech IPO pipeline with this perspective...

