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Capital Efficiency: A Core Value of Social Enterprise

In the social enterprise space, we hear of a number of businesses whose missions are to do good, primarily by using less and wasting less.  New companies are sprouting up every day with products and technologies that are more energy efficient, save water, preserve the integrity of the soil, or use less petroleum.  These tenants of conservation and stewardship have become central values of social enterprise, as well they should!

In today’s troubled economy, it’s even harder than usual for a start-up company to make it.  However, those that can build a business and see it through to the other side of the storm will be positioned for great success when markets recover and the playing field is markedly less crowded.  It is crucial that these winners be social entrepreneurs. We need the movement to build steam through this recession rather than fizzle out.

As Inc. magazine assures us, there is money out there for early stage ventures.  In the second quarter of 2008, $12.4 billion was invested in early stage deals.  But even angels who are risk-takers by nature are taking caution…either by investing in syndicated (and therefore pre-screened) deals or by looking for deals that are more conservative.

This month, our member led selection committees have been diligently evaluating the hundreds of deals submitted for consideration for our April Venture Fair.  In their discussions, I’ve observed a strong preference toward companies that are seeking modest raises that make sense compared to the money they’ve raised to date and their current yearly revenues.  Companies like Federspiel Corporation, New Leaf Paper, Cardinal Resources, and Cowgirl Creamery are rising to the front of the competition, given their proven records and continued promises of capital efficiency.  Meanwhile, companies seeking rounds that are several magnitudes larger than their revenues to build on a low margin model are being discarded rather quickly from consideration.

For the social enterprise movement to prosper in the long run, we need it to survive (and even prosper) today.  We need start-up companies in the space to refocus and re-strategize to reduce their burn rates and do more on less.  Just as we’ve proven the potential success of a business model built on the values of improved energy efficiency and reduced material waste, it’s time we put forth examples of companies built upon capital efficiency.  While the financing pool is crunched and weary, social enterprises should be careful to also conserve capital—for the movement and for their own benefits.

Molly Deringer

Entrepreneur Services

Investors’ Circle

molly@investorscircle.net

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One Response

  1. Molly,

    Thank you for your on-going work at the Investors’ Circle and your encouragement around capital efficiency. Social Enterprise needs to address the entire holistic financial costs currently ignored in most mainstream balance sheets (e.g., pollution, waste, etc.), and, undoubtedly, capital efficiency represents a core value for such enterprises.

    A definition of terms will further clarify your post and, perhaps, better articulate the criteria employed by the selection committees for the April Venture Fair. Capital efficiency generally refers to the ratio of output divided by capital expenditures over a fixed period of time. Capital Efficiency can help refine business models and improve profitability over time, and, importantly in this economic climate, encourage us to do more with less.

    However, capital efficiency will, by definition, bias the committees against companies seeking seed funding or requiring an initial capital expenditure to build their proposition and secure competitive advantage. Beginning ventures inherently require higher capital expenditures, and the key for the committees is to understand the non-recurring expenses and on-going margins relative to scale and industry averages.

    In addition, the committees need to recognize the requirement of start-ups to find funding resources outside of the frozen commercial bank credit lines to fund working capital. The issue of frozen credit to small business is a well-documented, new issue deriving from the current economic crisis. Exacerbating the issue, most tangible product start-ups will spend the majority of their funding on working capital, as they grow at accelerated rates.

    As you suggest, we must keep capital efficiency front and center, and those of us working with tangible product production need to explore co-packing arrangements, strategic sourcing agreements and operational partnerships to ensure efficient deployment of capital. However, singular focus on capital efficiency will lead the committee’s away from compelling start-ups requesting pre-revenue capital and/or those in capital-intensive industries. I suggest a DCF/EVA model needs to play a key role in the decision matrix.

    Sincerely,
    Joel Henry
    President, Fig Food Company
    http://www.figfood.com

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