Why capital efficiency is critical for SaaS and subscription businesses

Edited excerpt from The Long Lost Myth of Capital Efficiency by Brad Feld:

Do you remember all the blog posts about how companies needed so much less money? All the articles about how capital efficient businesses were — a result of AWS, better software development tools, easier starting points, better scaling technologies, and lots of other things?

This was all just five years ago. Oh how things change.

I’m going to assert, based on the successful, capital efficient companies in our portfolio, that it’s a parallel universe of happiness. We’ve learned that it is a lot easier to make a 10x return on capital on a company that has only raised $10m then it is to make a 10x return on capital when a company has raised $100m.

When a company can become cash flow positive on a small amount of capital (say $5m – $10m) and grow over 100% year-over-year without raising another nickel of equity, well that’s a silent killer.

Notes:
(1) Capital efficiency gives you time, which is critical for businesses that scale steadily but without viral growth, such as SaaS and subscription businesses.
(2) Cf. Ben Horowitz’s Profitability = control of your own destiny and this quote from Warren Buffett.

2 thoughts on “Why capital efficiency is critical for SaaS and subscription businesses

  1. In the original version of this post, which was sent to the 3,325 people who have subscribed to A Founder’s Notebook by email, I mistakenly attributed the article I quoted from to Alan Feld, instead of Brad Feld.

    Alan Feld is a VC and all round great guy who runs Vintage Ventures — see http://vintage-ip.com/

    Brad Feld is a VC in Foundry Group who lives in Boulder, Colorado. He blogs about investing in and building startups. One of the things I love about Brad: he gets the psychology of startups, and writes with remarkable candor and honesty — http://www.feld.com/

    Apologies to Brad for the mis-attribution, which I’ve corrected. And thank you Zach Abramowitz (founder of ReplyAll https://www.replyall.me/) for catching the error.

  2. Pingback: Why you shouldn’t raise too much money in your early funding rounds | A Founder's Notebook

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s