Capital efficiency is the way to go

Dateline: Palo Alto, California

It may be apparent to most Canadian entrepreneurs, but if you are starting a business and have VC capital in your sights, make sure that whatever it is that you are going to launch is capital efficient. It might be the greatest idea ever, but if it’s not capital efficient, it won’t likely get funded on either side of the border.

After a couple of days meeting VCs in Silicon Valley, it became crystal clear that they are very much looking for stories that will not require $100 million of capital to find out if it is going to be a winner of an idea or not.

This dynamic is, in part, a reaction to several factors. Exits are taking longer, IPOs are still a surprise, so VCs are raising successive funds much less frequently than earlier this decade. Limited partners aren’t going to be as generous with allocations next time, so even top tier VCs are planning on raising a smaller fund next time; whatever smaller might mean to the team in question.

What’s this all mean by vertical?

Clean tech is still in vogue, but the competition among entrepreneurs for funds is fierce.

Telecom hardware, for example, is tough to get over the finish line unless you are already well down the path with real customers and meaningful revenue.

Software stories that don’t have a SaaS model are almost an afterthought, as so many large customers have been weaned off the perpetual licence model in recent years. Lifescience and drug discovery opportunities are still stuck with the reality that the Series A and B rounds won’t be the last (unless things are going very poorly ;-)).

But, if you have any dreams of VC capital in the IT space, make sure that the business is scalable and the capital treadmill has a definite end in sight.

MRM