Capital Efficiency

C

Most early-stage and growth-stage startup investors focus on valuation, and the question of whether the investee’s valuation can grow by an order of magnitude or more in the next decade.

At Africa Eats, we do look at that, but we focus even more on how efficient our investees are with the money we provide them. How efficient is their use of capital?

Specifically, we compute a simple ratio. Take the most recent 12 months of revenues and divide by the total amount of investment capital provided to the business.

Most startups have a ratio less than 1. This is especially true of the so-called “venture scale” companies. They tend to burn through tens of millions of dollars of investment capital before they begin earning tens of millions of dollars of annual revenues.

What is different, and not visible, about the Africa Eats companies is that nearly all of our 27 companies have a ratio greater than 1. Quite a few with a ratio great than 2. A few with ratios above 8.

For example, a few of our companies earned $150,000 in annual revenues using just $10,000 of investment capital when we first found them. That is a capital efficient ratio of 15.

One of our companies had earned $250,000 the year we found them, using just $40,000 of friends and family capital. That ratio is only 6. But with the first $20,000 of external investment, the company then grew its revenues to $1.1 million, growing that ratio to 18.

How are these companies able to grow so quickly on so little? Understanding and replicating their processes is part of our mission at Africa Eats. In 2021 we are expanding our efforts to share these and other secrets that lurk within the success stories of our investees, spreading that knowledge to others, so that all of them can be as efficient as possible with the capital we are providing.

Happy 2021.

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