Growth versus capital efficiency

By boris, December 11, 2013

I often see two entrepreneurs executing on similar opportunities, but with two very different capital efficiencies. First, there’s the aggressive one who spends money very quickly, building a large team, buying early growth through aggressive marketing and sales, and hoping for a large upround in the next financing round. Then, there’s the bootstrapping entrepreneur who hires carefully (sometimes too little, too late), trying to get as much runway with the current money as possible and build a “real” business.

Finding the right balance between investing in growth and focusing on capital efficiency is one of the toughest challenges for entrepreneurs and early-stage start-ups. It can be particularly tricky as investors are usually looking for growth and evaluating start-ups as defined by growth.

Here are a few observations and pieces of advice to help you navigate which spending model is best for your start-up:

1. Don’t invest in marketing and sales until you have found product-market fit:

Marc Andreesen once categorized start-ups as before product-market fit (BPMF) and after product-market fit (APMF). When you are BPMF, you should be doing everything you can to get to product-market fit…whether that’s changing out your people, tweaking the product, moving to a different market. However, there’s no point in spending on marketing and sales at this point; until you’ve found the right product for your market, you’d simply be wasting your money.

2. Revisit product-market fit from time to time:

Don’t assume that what worked in the early days will continue to work for years to come. External changes in the market can impact your product-market fit, as may your own growth path. For example, as a SaaS company scales and targets larger enterprise customers, its initial product-market fit may no longer be as strong.

3. Evaluate your market: is it winner-takes-it-all?

If you’re targeting a winner-takes-it-all (or almost all) market, then focusing on saving money makes no sense. You’d be sacrificing market leadership. Think about it. Nobody remembers Ryze, or Spoke as early LinkedIn competitors. But if you’re operating in e-commerce or other non winner-takes-it-all markets, then you don’t have to be overly aggressive in the early stages. In this case, you can take your time to fine-tune your model before aggressively scaling up.

4. Get your metrics under control:

Putting the “pedal to the metal” makes the most sense if you understand your LTV (lifetime value) per customer and CAC (customer acquisition costs). As you scale, you should also have early warning systems in place to see if your new customers and acquisition channels are performing at least as well as the previous ones (weekly LTV/CAC cohorts are the best measure for this).

Final thoughts

As an investor, nothing is more impressive than meeting an entrepreneur that has built a great business in a short amount of time and with very little money. Being frugal and knowing how to spend money is one of the most important entrepreneurial traits – as long as it doesn’t come at the expense of growth. Jeff Bezos/Amazon is probably the best example where the right balance of frugality and growth is engrained in their DNA.


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  • Mark Organ

    I think the problem with this post is that product-market fit is a process, not a discrete point, in my view. To not invest in any marketing or sales until meeting a weakly defined goal of product-market fit doesn’t make a lot of sense to me. I see fit as an asymptote that companies approach and most do not touch, even at scale. I think that the right posture is more about scaling up sales and marketing investment as the company gets closer to fit. As the CEO and team figure out more components of fit, then sales and marketing resources should be applied to those components to help scale them and the CEO then moves on to figuring out more components of fit.

    I agree that right now investors are looking for growth – and more than that, a low growth decay rate, which means growing long into the future … so entrepreneurs looking to raise money need to be a little more aggressive in my opinion.

  • bwertz

    it is a good point that product-market-fit is more of a process than a discrete point (and hence focus on marketing & sales is similarly a continuous process).

  • macewen

    Glad you pointed out the difference in a winner takes all market. It definitely makes finding the balance a little trickier.

  • bwertz

    Especially since a lot of markets have moved towards a “winner takes it all” or “almost all” dynamic

  • Great post, Boris.

  • bwertz

    Thanks, Jordan

  • Aaron Bird

    What are the characteristics of a market that is not “winner takes all”? I thought they all were winner takes all? Certainly all SaaS markets are, right?

  • bwertz

    Markets driven by network effects are clearly winner takes it all markets. In Saas, you usually see winner takes almost all markets (still allowing for solid #2, #3 players). But other markets like e-commerce are usually much more fragmented.

  • Great post with great reminders. Agree re: point 1 being a large source of premature burn often but agree with other comments that it is not an “A-ha” moment where you wake up and have PM fit as much as a slow (or fast) burn that you have to carefully match spend to. Point 3 is an interesting thought but IMO nearly impossible to judge. There are so many examples of where being first REALLy matters and so many others where not being first but being best has been extremely successful…pre-judging which market you are building in seems near impossible to me. If you DID have some insight I completely agree with the point. Thanks for this Boris.

  • bwertz

    As much an art as a science but see my reply to Aaron’s comment as for pointers

  • Emilio Bernabei

    I also see startups that attack the same opportunities with completely different “innovation efficiencies”. Startup “A” takes a million bucks from a VC and builds on Amazon or Azure …dutifully creating features like application failover, secure log in, mobile frameworks, reporting engines, role based security models etc… etc… the list is endless
    Startup “B” takes the same million and builds 100 valuable business features on a PaaS back end (i.e. they start way farther up the stack and don’t reinvent the wheel).
    Which startup will yield the most value to a B2B market sector over 3-5 years? Which adds value faster? Which can modify and zig-zag to achieve product-market fit more efficiently? Which can scale faster and with more predictability and reliability? Which can quickly funnel a greater percentage of VC investment to sales & marketing during expansion?

  • bwertz

    Got concrete examples for this observation?

  • Manuel Medina

    Loved this and the Andreesen post! Another corollary (from personal experience) is that you can be in a great market with the wrong product. This is not a terrible situation to be in, per Andreesen “In a great market — a market with lots of real potential customers — the market pulls product out of the startup”
    If your market is rich, big and under-served, then you are in luck. The trick is to find the product market fit as soon as you can!

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