Being Broke Doesn’t Make You a Capital Efficient Company
The words “Capital Efficiency” get around tossed like word salad, often served with all the breadsticks of bad advice you can eat. In our frenzy to always “do more with less,” the contours of what it really means to be a capital efficient company are lost.
Why am I making a stink about this now? These days, “capital efficiency” is often used as shorthand for scraping by. Entrepreneurs, especially the first-timers, confuse being under-resourced with being capital efficient. Worse? Investors are doing it too.
We tend to discuss “capital efficiency” as though it is a singular status, a monolithic approach to simply spending less to run a business. Using “capital efficient” in this monolithic way may be convenient, but it’s also wrong.
What capital efficiency means to one business isn’t what it means to another. While we may use it to distinguish some companies from those that are constitutionally capital intensive (think heavy R&D), the practice of capital efficiency are highly relative to industry, stage, and a dozen other factors that no one needs me to list.
Not growing because you're broke is not capital efficiency. Accruing personal debt because to forego a founder salary is not capital efficiency. Missing opportunities and eeking by? Not capital efficiency. That’s being under-resourced. Calling it capital efficiency may feel better than admitting your business is broke, but it’s a little white lie that can come back to haunt you.
This is where understanding a textbook definition matters: Capital efficient companies strike a balance between growth and financial discipline. Read that last line carefully. Many founders (and investors) use a more casual definition of capital efficiency where growth and financial discipline are most certainly not “in balance.”
While I am a big fan of getting the most bang for your buck, the idolatry of always doing more with less isn’t any better than overspending on things are adding : both kill companies.
Here’s the kicker: the hallmark of successful capital efficiency is not never needing more money than you have on hand. It’s achieving strong performance without substantial ongoing capital injection.
Again, give that last line a pause and think about what this means for you. A company that is adequately resourced at the right times will have a much better chance of success than one that has been “scaping by” for years.
This has huge implications for founders who might jump on the seedstrapping bus. (Seedstrapping: a funding strategy where founders raise some money but then rely on revenue to fuel further growth, rather than just pursuing subsequent funding rounds. It sits between traditional bootstrapping and the typical venture capital path of multiple funding rounds. )
I like capital efficiency as a strategy…when used as strategy, not as a cover for being under-resourced. When you are broke it is hard to invest into critical growth drivers, things often necessary for long-term growth. It can be hard, if not impossible, to dig your way out of a growth deficit. I’m not kidding when I caution founders about the perils of bootstrapping yourself to death.
This misuse of a word may seem too small a thing to blather on about. But these small shifts have a huge impact on how we train entrepreneurs and how our collective expectations about adequate resourcing impacts investor behavior. It certainly has changed mine,
And as someone who invests into companies that have the potential to be capital efficient over time, I see first hand what happens when “growth” and “financial discipline” get out of balance. Things get messy fast.
Clearly I am ready to pop off on this topic, which I am excited to do with my friend, colleague, and fellow investor Rebecca Moore on September 22. We’ll be debuting a new presentation on the Pros and Perils of Capital Efficiency at the Women’s Venture Summit 2025 in San Diego.
Building on this diatribe, we’ll explore what it really means to “do more with less” and how this expectation can empower founders or hold them back. And, we will take a deep dive on the unintended consequences founders face when ultra-efficiency becomes the only path.
But for now let’s just check ourselves when we herald the virtues of capital efficiency…are we balancing growth with financial discipline or just glossing over what happens when a company runs out of gas too soon?
Melissa Withers is Managing Partner of RevUp Capital .
More About RevUp Capital
RevUp Capital invests in B2B and B2C companies that are revenue-driven and ready to double down on growth. We deploy cash and capacity to help companies grow from $1-3M to $10-30M, quickly and efficiently, using a revenue-based model. Companies enter our portfolio with $500K-$3M in revenue, a strong growth rate, and a team that’s ready to scale. Our typical investment range is $300K-$500K.
More at www.revupfund.com