Cash efficiency, measured as revenue per year / equity + debt invested, is every bit as important as revenue growth. Spending too much to grow at best dilutes away your return and at worst will lead to a company’s death.
We did an analysis looking at the revenue, equity, and debt of publicly traded tech companies at the time they filed to go public. Using the equation above (revenue / [equity invested + debt]), we were able to observe the cash efficiency of each company. As you would expect, cash efficiency varies by industry: for instance, hardware is the most efficient generating $3.64 per $1.00 of revenue and marketplaces are least efficient, generating $0.43 per $1.00 of investment. Below is the data.
A few observations:
Hardware has to be very efficient. While hardware was the most efficient at the time of filing, generating $3.64 per $1.00 of investment, it’s not necessarily the best business: hardware businesses have to generate a lot of revenue because the customer buys very infrequently (how many iphones do you need at once?), whereas other businesses can afford to be less cash efficient because the customer comes back more frequently.
Investment prior to IPO is way up. The amount of cash required to get to IPO has changed dramatically. For instance, Apple in 1980 filed to go public having invested $22mm in equity and debt in the company. On the other hand, Fitbit which filed in 2014 had total investment of $207mm, nearly 10x Apple.
Ecommerce figures are all over the board. Despite being a stock market dog, Blue Apron has managed to generate $2.70 in revenue per $1 of investment, while Alibaba, which is an ecommerce darling had taken in $14bln of cash prior to its IPO but generates only $0.39 of revenue per $1 invested. Some of the most cash efficient ecommerce companies are the ones you don’t hear of as often (BlueNile, 1800Flowers, etc).
Marketplaces are the least efficient, generating only $0.43 of revenue per $1 of investment while Social Media businesses generate a median of $0.62 per $1 of investment, with Snapchat being the worst in the group at only $0.15.
The data should give you a good sense for how efficient your tech co should be based on what industry you’re in. So long as you can get close to your larger peers, you’ll be well on your way to going public.
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