Capital Efficiency is the Name of Our Game
My first investment at Crescent Ridge was a $25k check into a company called Saambaa in 2012. Matt Voigt, the founder, had been patient with me as I had done an inordinate amount of diligence on the company compared to the check size. The weight of the decision driven by my desire to not lose the investment prolonged my decision. I hadn’t experienced this depth of loss aversion before - even in my 5 years of experience at both a venture fund and startup prior to starting Crescent Ridge, the risk of losing it all this time seemed too real for comfort.
Years later, I realized this weight was crucial in shaping my focus on funding capital efficient companies. I realized that the founders who were able to use cash wisely and stretch their dollar - particularly in the early stages - usually built strong foundations for their business. Not only that, these founders treated my capital like their own: thoughtfully and carefully but not stingily. I sought out these founders, first because I trusted them, and also because their demonstration of financial discipline usually translated to a similar discipline in building and growing their companies.
Now at Crescent Ridge, we only fund founders who are capital efficient. While our check size has gone up, we are still highly averse to losing our money for each company we invest in. Our model, contrary to most VC firms, is based on the majority of portfolio companies succeeding. For this reason, when looking for founders to partner with, these are some characteristics we seek:
- Financial discipline: We value when founders are good at using cash responsibly and are creative to stretch their dollars. They are skilled at discerning what expenses are absolutely critical from the ones that are a distraction at each stage.
- Profit prioritization: We look for founders who prioritize revenue that will generate profit. This is different from other revenue strategies (such as loss leader).
- Strong signs of product-market fit: We love when founders put “the horse before the cart” and know their solution is truly needed before they raise outside capital. These founders have a deep understanding of the problem they are solving and an unparalleled empathy to the early adopters they serve, which they have gained from years of experience with their customer base even before starting their company.
- Reasonable exit expectations: We are wary when founders don’t recognize the downsides that come with high valuations. The best antidote to avoid dilution is to “right-size” the amount of VC raised. Because we strive for the majority of our portfolio companies to either exit or be profitable, our hope is that they get acquired before they decide to "go big or go home".
Generally, we define capital efficiency as raising between $0-$5M and exiting for $20M-$100M and we've found being capital efficient is relative to each industry and founder. The capital requirements are different when building a CPG company versus a tech company versus a medical device company. Yet the results of being a capital efficient founder are the same. Capital efficient founders create value that align with their valuations and have metrics that establish a strong business from the start.
We'd love to hear from you - are you a capital efficient founder or do you invest in them? What other characteristics do capital efficient founders possess?
Allison and Maria
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