“Capital efficiency” is the latest phrase that’s been generating buzz in the VC world, but at Golden Section, we’ve been talking about it since 2019. How is it that we managed to identify one of the biggest trends in venture capital before our competitors? It boils down to our many years of experience building B2B software ourselves.
Let’s take a deeper look at what capital efficiency is and why we were able to identify it as a crucial component of startups years before other VC firms caught on.
What is Capital Efficiency?
Capital efficiency is more than just a buzzword — it’s an entire mindset that shapes the way a startup operates. It’s the difference between a startup that operates for the here and now and a startup that has the ability to thrive in the future.
There are many technical formulas to measure the capital efficiency of a company: the Bessemer Efficiency Score, the Burn Multiple, Rule of 40, Hype Ratio, and more.
While each metric has its own formula and unique take on how to measure capital efficiency, the idea is the same: we’re not only interested in valuation. VCs, founders, and investors who use capital efficient formulas understand that a high valuation doesn’t ensure sustainability. What does? Understanding the high value of the venture capital raised and having the ability to use it efficiently and effectively.
How Can a Start Be Capital Efficient?
While there are many formulas that measure capital efficiency, there’s no exact formula for actually becoming capital efficient. There are, however, several factors that capital efficient companies share. These include:
- Building your product right the first time: 80% of the products we’ve seen at Golden Section have intractable tech problems. Troubleshooting and R&D can cost millions of dollars, which is not an efficient way to use company funds, even if you’ve raised tens of billions. It’s much more efficient to build your product correctly the first time. Not to mention, it can save a lot of heartache.
- Focusing on high quality, not high quantity, development teams: Some founders mistakenly think that the more people they have on their development teams, the better their chances at building their product right the first time. This isn’t the case. It’s not a matter of how many people you have pitching ideas on your development team, but who these people are.
- Working toward revenue generating strategies/activities: Some companies invest too much of their funds in R&D while forgetting that their goal should be revenue generation. Capital efficient companies are those that succeed in creating impeccable products that are capable of generating revenue before expanding and scaling.
How We Zoned in on Capital Efficiency as a Crucial Component of Startups
At Golden Section, we are all founders, and we’ve served more than 400 SaaS companies since 2011. Throughout the years, we’ve kept our eyes to the ground, not necessarily focusing on the successes we’ve seen, but more on the mistakes — the mistakes are really where the gold is.
We’ve seen a founder who spent $6 million to build a company that only generated $500 thousand in ARR. We saw another founder invest $7 million in their company and make $350 thousand in ARR.
Another founder spent $4.5 million building a problem-riddled product with three different development teams. He managed to get to $1 million in ARR — but when you consider what he spent, he was still in the hole, big-time. When he came to us, we raised the ARR to $2 million while burning less than $1 million in equity.
We have seen first-hand how incredibly talented, and driven founders didn’t make it simply because they didn’t approach their venture with a capital efficiency mindset.
That’s where we come in. We believe that capital efficiency is one of the biggest drivers of success (in addition to a solid product, of course!). While other companies are just jumping on the capital efficiency bandwagon, we’ve been working this way for years and have many years of experience.
