The Unsaid Reason VCs May Not Back You: Resource Efficiency
When VCs are asked what their investment criteria are they will list off a number of common considerations: big market size, competitive advantage, a specific geography, a target stage, etc. There is, however, another important consideration which is not often mentioned: the resource efficiency of the company.
The Framework
Resource efficiency refers to how much value can be created through the company with a given amount of resources.
Note that this definition refers to “value”, not revenue. While revenue is often a driver of value, there are other types of value: technology assets, customers, etc. YouTube is a prime example of a company that created substantial value without generating revenue.
Also note, that the definition refers to “resources”, not capital. While the most measurable resource on the market is capital – time, knowledge and other resources are also important considerations. Many of the tech-lite companies on the market today are less capital intensive, but that doesn’t mean that the companies don’t consume substantial resources. The most typical resource consumed is time on the part of management and investors.
Resource Efficiency Framework
Using this framework, there are broadly two types of categories that companies fall into: linear or exponential growers. Linear growers increase the value of the company in proportion to the amount of resources invested in the company. Exponential growers realize increased efficiencies over time – for every additional unit of resource invested in the company the value increases more than it did for the prior unit of resource. Simply put, in an exponential growth company the next million dollars of investment or unit of time creates more value than the prior million dollars or unit of time.
In general linear growth companies sell a physical good or a labor dependent service where one more employee generates a proportional increase in revenue. Consumer product, consulting, investment banking, customer service, recruiting and others are some of the obvious types of linear growth companies. It is worth noting, however, that while these linear growth businesses do realize increased efficiency over time, especially as back-office functions are scaled, the effects of their scale is less robust than in other companies.
Exponential growth companies often have a single asset that can be leveraged across an increasing number of customers. The most obvious example is a web-based service. In general the site only has to be built once, but can service an increasing number of customers.
