Ankit is Cofounder and CEO of A2D Ventures, whose mission is to build Southeast Asia's largest angel investing platform where visionary investors get access to co-invest and back tomorrow's game-changing startup founders.
Ankit has also held a leadership role in Shopee and is ex-McKinsey.
Guest Author: Ankit Upadhyay
In today’s venture capital arena, where every penny counts more than ever, VCs are zeroing in on how well startups use their cash. This spotlight on capital efficiency isn’t just jargon—it’s the lifeline for companies as they move from early stages to the more demanding Series A and beyond.
So what is this thing… “Capital Efficiency”?
At its core, capital efficiency boils down to how much cash a startup burns through to hit key milestones. Given the long road to profitability for most ventures, VCs often turn to a startup’s annual revenue or Annual Recurring Revenue (ARR) to get the real scoop on capital efficiency.
Here’s the formula that’s become our bread and butter: Capital Efficiency = Current ARR / Cash Burned.
For example if your ARR = $1m and your cash burned is $500k than your ‘Capital Efficiency’ is 2.
But if you decreased your cash burned to $100k, than it would be 10.
Simply put, the higher this number, the smoother you’re sailing in terms of operating efficiently. If you’re stacked up against a competitor with the same venture cash but a better ARR, you’re leading the race.
Cash Conversion Score (CCS)
Bessemer Venture Partners introduced the Cash Conversion Score (CCS) specifically for the SaaS game.
It’s calculated as CCS = Current ARR / (Total Capital Raised – Cash Still in the Bank).
For example say you have ARR of $1m, capital raised is $5m and cash still in the bank is $3m.
Then your CCS = $1m / ($5m – $3m) = 0.5
But if you doubled your ARR to $2m, then your CCS is 1.
CCS = $2m / ($5m – $3m) = 1
A CCS over 1? You’re killing it.
Anything between 0.5 and 1.0 is solid, and a score of 0.25 to 0.5 is still not bad in the SaaS world.
But remember, the CCS isn’t one-size-fits-all. It varies by VC and industry, especially outside the subscription realm where future revenue isn’t a sure bet.
A word of caution
If you’re an early stage founder than don’t get caught up in the CCS hustle too early.
It’s a metric that shines once you’ve got some substantial capital ($5M+) under your belt and are beyond the initial scramble of perfecting your product and pinpointing your market fit.
And in SE Asia there aren’t that many SAAS’s that are in this league.
So that is why I typically talk about ‘Capital Efficiency’ with startups that we’re looking at for funding. It’s simpler and more appropriate for their sophistication level.
Ok, now let me ask you
Are you an investor in startups? Would you like to join a platform where you get pre-vetted SaaS deals?
At A2D Ventures we spend significant time evaluating and bringing the right opportunities to our investors.
Or are you a SaaS founder who is building a capital efficient venture?
Then connect with us: https://www.a2dventures.com/
