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In the ever-evolving world of venture capital (VC), change is the only constant. Over recent months, VC markets have taken an interesting turn, and founders are finding themselves facing two key implications:
To chart a course through this capital-scarce landscape, we propose a new guiding star: growth efficiency. It's time to explore why growth efficiency matters, especially for diverse and underrepresented founders.
Diverse and underrepresented founders often face an uphill battle when seeking access to capital. Shockingly, a mere 1% of venture capital finds its way to Black-founded companies1 and less than 3% goes to female founders.2 This underscores the imperative for diverse and historically overlooked founders to showcase robust growth efficiency metrics.
Enhancing growth efficiency serves a dual purpose. It not only broadens your access to capital but also reins in your burn rate, reducing your reliance on venture assets and bolstering your readiness for the future.
But what metrics should you focus on to turbocharge your growth efficiency? Amid a sea of options, we highlight two key metrics: growth efficiency and the Magic Number.
This metric is the heartbeat of your business's growth efficiency. Ideally, your company should aim for a growth efficiency of 1.0 or higher, signifying that for every dollar invested, you're generating a dollar in revenue. However, this is a target to work toward; your business doesn't need to hit 1.0 overnight.
What matters is demonstrating a positive trend toward higher growth efficiency and explaining the steps you're taking to enhance this metric. VC firms often look closely at this trend line to understand if your improvements stem from cost reductions or more efficient customer acquisition. Mastering this growth efficiency metric helps you communicate that your company is on the right trajectory.
The Magic Number peels back the layers of your go-to-market strategy, highlighting your sales efficiency. A figure above 1.0 signifies a highly efficient sales effort, while anything below 0.5 signals room for improvement. A full grasp of this metric empowers you to pinpoint both strengths and inefficiencies in your sales process and to identify where investments or changes may be warranted.
For instance, a low Magic Number might prompt you to streamline or redirect aspects of your sales strategy, whereas a high Magic Number could justify increased investments in marketing and sales to leverage your sales efficiency.
For those who embarked on entrepreneurial journeys in recent years, growth efficiency might not have been a top priority in the prior regime of unbridled expansion. However, for early-stage diverse and underrepresented founders today, these metrics can be transformative. They not only can distinguish your company but also remain indispensable throughout its life cycle.
Investors in private equity and public markets closely scrutinize how a company's growth efficiency measures up against peers. Context is key; these metrics gain significance when aligned with your company's specific circumstances and growth prospects. You are the foremost authority on your business, so understanding the factors driving any inefficiencies and profiling how your team is steering toward more efficient growth is paramount.
We stand alongside our portfolio companies on this journey. As you navigate the constantly shifting landscape of venture capital, we are here to collaborate and facilitate your effort to unlock your full potential in this new VC era. The rules of the game are rapidly evolving — let's embrace the change.
1Source: TechCrunch, ‘The old guard in venture reigns supreme’. 2 August 2023. | 2Source: Deloitte, “Diversity in Venture Capital – VC Human Capital Survey.” Fourth edition conducted in 2022.
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