The Call for Capital Efficiency
Happy Friday. I spoke to a good friend of mine recently who’s an executive at leading VC portco mentioning something I’ve seen in companies around the ~ 3–10MM funding mark — that he also echoed.
Many companies in the 3–10MM funding range require capital efficiency and strategic planning — ASAP.
They don’t know benchmark operations and have little insight into critical drivers or risk areas; they have rudimentary cash flow planning or expense optimization and are retroactively filling gaps. Not to mention that founders could use ongoing executive coaching to upskill.
While today, some are relatively well-capitalized companies, they will nonetheless fall subject to macroeconomic headwinds and run into issues as capital becomes more expensive and less accessible for the following 12–24+ months — this includes both equity and, in the case of Web3, appetite for digital assets.
The big expectation is that many of these projects will fold or turn into zombie businesses (existing in a state of suspended animation, moving sideways, and not growing).
There are, however, ways to mitigate the eventual failure. First, it’s implementing strategies that trim expenses, maximize the output per dollar spent, and optimize teams to deliver maximum value to customers and come out competitively prepared for the next up-market event.
Secondly, if competitiveness cannot be established in the next 12–24 month period, preparing the business for an acquisition or as part of a roll-up strategy will permit for extraction of maximum value.
To do this, however, businesses need to hire talent that can lead them toward meeting capital efficiency and facilitating strategic planning. The issue, however, is an economic one.
From a cost perspective, a seasoned executive that can execute the above will cost a company ~300k+ base, + equity + benefits + (in Web3 tokens). A comp rate that a seed or small A round company should not be entertaining as it would detrimentally affect their burn, and where anything less wouldn’t fit the risk profile of the executive.
Instead, 3–10MM companies should look to fractional leadership roles and executive coaching to implement the necessary changes to position them for the most post-downturn upside. From those companies I’ve spoken to funded by some of the most prominent VCs in the space, I have not found this to be the case, but I would welcome thoughts from those closer to the companies than me.