Overused and Misunderstood - Capital Efficiency

"Capital efficiency" is such an over used term these days I don't even know what it means anymore.

Some startups think that burning $100k per month is too high while others think $100k/mo is close enough to zero that it's "near break-even."

Vinod Khosla has proclaimed that a company which burns less than $100 million is "capital light" (he was referring to clean tech). At $100k/mo, it would take almost 3 generations to burn that much money (each generation is about 30 years).

The problem is that the monthly burn rate or total funding doesn't say much about efficiency. The return on capital is the key metric needed to determine capital efficiency and most startups have no clue because they don't even know if they have a business (yet). 

Another problem is that startups are not efficient. In fact, they are so inefficient that their trajectories are often referred to as "drunken walks." 

Big companies are built for executional efficiency. Startups are built for innovation. It requires a certain mindset. A willingness to experiment, endure mistakes, allow for some slop and forgo efficiency. 

Steve Blank likes to describe startups as organizations formed "to search for a repeatable and scalable business model" (others might add a step - find product/market fit, then look for a business model).

While I like Steve's definition, it's important to emphasize that the goal of a startup is NOT to stay in a limbo state of experimenting, learning, pivoting, and searching for product market fit or business model.

The goal is to find something that works and scale it.

For some entrepreneurs, this is when the fun ends. For others, this is when the fun begins. It's funny how some entrepreneurs feel like they are just getting going long after they've built billion dollar companies (examples include the founders of companies such as HP, Intel, Microsoft, Apple, Oracle, Amazon, Google, Facebook).

As a startup grows, more and more parts of the company will make the shift from exploration/learning to execution mode. At first, it might be just the founders and engineers, then the sales team, then the marketing team and eventually the entire company. 

So, rather than capital efficiency, perhaps we should think about constraining the capital in startups...until they are ready to scale? For example, at Y-Combinator, founders are initially paid roughly the equivalent of a grad student stipend - barely enough to pay for meals and a shared apartment.

At the right right time, there is no question that a startup should raise the capital needed to take advantage of the opportunity at hand. In fact, I'd recommend raising a bit extra, to allow for ample cushion and a margin for error.

But until then, "capital constraint" or "capital restraint" might be better terms to think about than capital efficiency.