The Importance of Capital Efficiency in Corporate Venturing

Total VC investment across regions from 2019–2021. Source: Factset
Change in deal size by each funding round from 2021 Q4 to 2022 Q1. Source: Carta
  1. The amount of money a company raises until it can be sustain itself on internally generated funds (i.e., Total Equity + Total debt needed until cashflow positive)³.
  2. The ratio of net burn to net New ARR (what David Sacks calls, the “Burn Multiple.”, i.e., Monthly Burn / New Annual Recurring Revenue).
David Sacks’ rules of thumb for venture-stage startups
  1. No product-market-fit. The high cost of acquiring customers may suggest that product-market-fit has not yet been achieved.
  2. Inadequate margins. Customers are not willing to pay enough for a product or service.
  3. Stalling growth. Ever-increasing expenditure is required to maintain the same rate of growth.
  4. Undisciplined leadership. The management is unable or unwilling to control the burn rate.
  1. Approving large amounts of funding too early, sometimes even before a relevant business plan has been validated. A VC-style funding strategy across several rounds would have better managed the risks by giving the corporate the opportunity to re-examine the results at various stage gates.
  2. Ignoring platform costs (including the innovation team, management bandwidth, internal development costs, etc.), especially when these costs often eclipse the funding or traction of the venture itself.
  3. Failure to align incentives with the operating team within the corporate, overestimating the future value of the venture, underestimating the risk, and not understanding the contributions required to achieve success.
Corporated need to identify clearly what to build
Non-corporate-backed startups require an average of USD2 million to get to a Series A. Source: Pitchbook (2020), Dealroom (2021), KPMG (2020); in USD, M
  1. Limiting the expenditure on the venture (including the ideation sprints and infrastructure costs allocated to a given venture). A start-up typically spends up to USD2 million to get to initial product-market fit before raising Series A investment (see picture above). Corporates should strive to achieve this too if they are seeking similar returns on their capital. Establishing such limits allows the corporate to benchmark its efforts against the market. In addition, it prevents the corporate venture founders from adopting a low-risk mindset that would hinder the venture from achieving its potential.
  2. Have a clear and efficient two-way governance system. It is important that the balanced governance system results in both the venture and the corporate being aligned in helping the venture succeed in the most capital-efficient manner.
  • For the corporate, as ensuring capital efficiency requires leveraging corporate unfair advantages (e.g., access to customers, bundling with other corporate products), the governance system should encourage collaboration between the venture and the corporate divisions.
  • Explicitly give incentives to both the corporate and venture actors to improve capital efficiency, while managing the risk-reward trade-offs.
  • Solve problems in the fastest and best manner.
  • Reaching customers who have the problem you hope to solve and get them to solve their problem by using your product.
  • Spending too much time on navigating corporate compliance and corporate departmental politics — this usually results in death by a thousand cuts for a corporate venture
  1. https://techcrunch.com/2022/03/16/new-data-shows-how-far-vcs-are-pulling-back-on-us-series-a-b-and-c-valuations/
  2. https://www.linkedin.com/pulse/capital-efficiency-startups-howard-love/
  3. https://medium.com/craft-ventures/the-burn-multiple-51a7e43cb200
  4. https://medium.datadriveninvestor.com/how-to-be-capital-efficient-when-building-your-startup-b40ff2ca61db

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We build risk-aligned investible corporate ventures