When you’re a fast growing, cash burning startup with limited capital, cash efficiency is as important as growth. The measure of cash efficiency we like using for Series A companies is revenue/total capital invested. When you’re in early revenue, the metric will look abysmal, but as the business grows and realizess economies of scale (generally $2mm+ of revenue), the measure improves. Below we show the cash efficiency of various tech “startups” prior to going public.
-The measure varies by industry. For instance, the median is $0.58 of revenue per $1 of investment for SaaS, $0.62 for social media, $0.50 for marketplaces, and $0.50 for content distributors.
-Why is it ok to generate less than $1 of revenue per $1 of investment? Because the customer comes back often. For instance, publicly traded SaaS businesses tend to have net revenue retention of 100%, meaning their customers return and renew every year spending $0.58 per $1 of revenue annually. Therefore 5 years from now, a SaaS business will have earned $2.90 in revenue per $1 of investment that was needed to build the business. Businesses with stickier customers can afford to be less cash efficient in getting those customers.
-Some businesses that are profitable quickly require less capital and are therefore more efficient. For instance, the median cash efficiency is $3.63 for hardware, $1.10 for payments, and $2.11 for e-commerce. They’re not necessarily better businesses though, as their customers may not come back as often (hence they have to be profitable on the initial sale). For instance, how often do you find yourself changing out your MacBook/laptop? It’s probably not annually, whereas you’re probably paying every year to use software on that laptop.
Once you’re at the Series A, watch cash efficiency closely and make sure the metric is always improving. If it is and you’re growing, you may be well on your way to joining the ranks of the companies on the list above.