Capital efficiency. It’s almost become a dirty phrase in recent years. A lost art, if you like.
You have to spend, or rather burn, money to make money, right? This is usually the mantra of any up and coming startup worth its salt, right? Or any startup for that matter.
A tale of capital efficiency
But what if there is a better way? I have a story for you. And it goes something like this:
Once upon in time, not long ago, and nowhere near Silicon Valley…
– Do you already have revenues?
– Yes, we do.
– No, I mean significant revenues?
– Well, we think that they can be considered significant.
– OK, can you please share the details with us?
– Well, we in terms of ARR we recently surpassed this milestone in the range of $Ms, and in terms of MRR, either this or the next month we shall surpass this other milestone in the range of $x00k.
– I’m sorry. Excuse me?
– Yes, here are the data from Baremetrics as well as our books on xero — they are updated automatically, you see.
– Impressive! And when do you expect to break-even?
– We have already broken even, three years ago actually!
– Wow! And what is your EBITDA?
– Well, during the last three years that we’re profitable, it has ranged between 40% and 50%. We think that this year we may hit something like 55%.
– There’s no way that this can be true! You’re cooking the books!
– Why don’t you take these read-only accounts and look on our books, our platforms, our live KPIs for yourselves? Basically, do whatever kind of due diligence you need, for as long as you like.
– Unbelievable. And, being profitable, how much is your growth rate?
– Anywhere between 80% and 110%, year on year.
– You’re kidding me! And how much capital have you raised in order to make this happen?
– Well, this business has been built on the back of investment well south of $1m.
– No, you didn’t understand me; I mean the total amount of funds raised, not your seed round.
– No, I’m afraid that you are the one who did not understand; this is the total amount of funds we have raised. *
(*at this point a mic drop would not be out of place on the part of the founder).
Truth is stranger than fiction
The discussion above is anything but fictional. It took place several times with growth equity investors who were knocking the door of some of the Starttech Ventures’ flagship portfolio companies.
“What sorcery is this?” They simply could not believe it. But there is no sorcery involved. Just capital efficiency. An alien concept for some.
You see, something is broken in Silicon Valley. And in all the other places doing their best to copy it. All of a sudden it began to look reasonable, to be OK, for a business to operate deep in the red – as far as their financials go.
This can have, and most of the times does have, fatal consequences to the behavior of the organization. Not only that, but also on the collective mentality of the company which had the “bad luck (!)” to raise a lot of capital.
You see, as long as you know that you’re working to develop something ‘awesome’. And that in the meantime there are several deep pockets which will keep pouring money to you and your team, guess what? You feel no pressure whatsoever to rationalize your expenses and to start making profits anytime soon.
Right action, right time
A true tragedy. This is where over-supply of capital actually leads.
So, how did we manage to make it with TalentLMS? Quite simply. We followed Ash Maurya’s advice from his great book “Running Lean”, where he provides the simplest, and greatest, definition of bootstrapping:
Right action, right time.
That’s the only way to uncover something so valuable, but which is still forgotten – the quality of capital efficiency! And you can achieve this by following one simple rule. Make sure that you are taking the right action, at the right time.
In the end…
You see my fellow entrepreneurs, in the end its about more than money. Please listen to a colleague of yours from Greece. Most of you think that what you primarily lack is money. Wrong! What you actually lack is a deep, applied understanding of the right methodologies.
And, having suffered that very own mistake numerous times ourselves, my partners and I at Starttech Ventures have come up with our Venture Building program which has one simple aim: To make sure that our companies always take the right action, at the right time.