Tech companies often overlook the importance of cash efficiency. In our view, cash efficiency, measured as revenue per year / equity + debt invested, is every bit as important as revenue growth. After all, if you’re spending too much to grow you’re simply diluting away your return.
We did an analysis looking at the revenue, equity, and debt of 42 publicly traded tech companies at the time they filed to go public. Using the equation above (revenue/[equity invested + debt]), we were able to observe the cash efficiency of each company. As you would expect, cash efficiency varies by industry: for instance, hardware is the most efficient generating $4.38 per $1.00 of revenue and marketplaces are least efficient, generating $0.45 per $1.00 of investment. Below is the data.
|Line Corp (in yen)||LN||2015||120.4||0.0||31.4||$3.84|
|1-800 Flowers.com, Inc.||FLWS||1998||220.0||31.3||20.0||$4.29|
|Blue Nile, Inc.||NILE||2003||129.0||0.0||61.0||$2.11|
|LightInTheBox Holding Co., Ltd.||LITB||2012||200.0||7.8||68.5||$2.62|
A few observations:
-While hardware was the most efficient at the time of filing, generating $4.38 per $1.00 of investment, it’s not necessarily the best business: hardware businesses have to generate a lot of revenue because the customer buys very infrequently (how many iphones do you need at once?), whereas other businesses can afford to be less cash efficient because the customer comes back more frequently.
-The amount of cash required to get to IPO has changed dramatically. For instance, Apple in 1980 filed to go public having invested $22mm in equity and debt in the company. On the other hand, Fitbit which filed in 2014 had total investment of $207mm, nearly 10x Apple.
-ecommerce figures are all over the board. Despite being a stock market dog, Blue Apron has managed to generate $2.70 in revenue per $1 of investment, while Alibaba, which is an ecommerce darling had taken in $14bln of cash prior to its IPO but generates only $0.39 of revenue per $1 invested. Indeed some of the most cash efficient ecommerce companies are the ones you don’t hear of as often (BlueNile, 1800Flowers, etc).
-Content Distributors, which is a broadly broad defined segment of companies making money off other people’s content, is a somewhat tighter range with median revenue per $1 of investment of $0.80. Again, because the customer comes back so frequently, making less than $1 of revenue per $1 of investment works for the business.
-Marketplaces are the least efficient, generating only $0.45 of revenue per $1 of investment while Social Media businesses generate a median of $0.93 per $1 of investment, with Snapchat being the worst in the group at only $0.15.
The data should give you a good sense for how efficient your tech co should be based on what industry you’re in. So long as you can get close to your larger peers, you’ll be well on your way to going public.