Regarding capital valuation efficiency and income generation efficiency.

As an investment practitioner, you should have noticed a phenomenon. In recent years, the number of unicorns has appeared more and more, and the amount of project financing has also increased. Even some unicorns’ financing amount before listing, It is much larger than the management scale of many well-known funds. The following is the recent financing situation of some projects:

However, in the past, the author discovered some interesting problems. For example, although some companies raised a lot of money, their valuations did not rise, investors did not earn a high percentage of returns; some companies’ financing amount It is much higher than the income it generates, which means that the money was spent but not made back.

As a result, the issue of capital valuation efficiency and capital revenue generation efficiency has become a topic of interest to the author, and the following questions and thoughts have been raised:

  • From the perspective of valuation, how efficient is the capital valuation of these companies? Here we create a new term called P/I, which is valuation/financing. We use this ratio to describe the capital return multiple of a company’s financing, that is, how much the company’s valuation has been driven by 1 dollar. .

  • From a revenue perspective, how efficient is the capital revenue generation of these companies? We also create a new ratio called R/I, which is income/financing amount, that is to say, how much capital investment is needed for every dollar earned?

  • Which companies have excellent P/I and R/I, and which ones are not good?

  • What are the characteristics of P/I and R/I of companies in different life cycle stages?

  • What is the difference between TO C and TO B’s company P/I and R/I?

Capital valuation efficiency

The author believes that the capital valuation efficiency of a startup company is the ratio between the company’s current valuation and the amount of financing, and it measures the capital leverage efficiency, that is, how many times the capital appreciation is brought by investors for each dollar invested .

The company’s capital valuation efficiency can be viewed from two dimensions: one is the cumulative capital valuation efficiency, that is, the ratio between the company’s current valuation and the historical cumulative financing amount, P/I=the company’s current valuation/history Cumulative financing amount;

Cumulative capital valuation efficiency can be used to measureRecurring Income (ARR)

  • Efficiency Score=Net new annual recurring income/net capital consumption

  • Burn Multiple=Net capital consumption/net new annual recurring income

  • The efficiency of capital income generation is evaluated by linking capital consumption to income growth. David prefers to use the formula of consumption multiplier. The higher the multiplier, the more funds the company consumes to achieve growth per unit. The lower the multiple, the more efficient the company’s growth.

    At the same time, David also summarized the pros and cons of early-stage startups’ “burning multiples”:

    David believes that if a startup company spends 2 million U.S. dollars in a quarter and creates 1 million U.S. dollars in ARR, the burn multiple is 2, which is not bad; if a startup company spends 2 million U.S. dollars, Only creating an ARR of 500,000 U.S. dollars is in a very dangerous state.

    The author may be more inclined to the second formula mentioned above, namely, net new annual recurring income/net capital consumption, which is expressed by a formula that is more familiar to everyone in China. The author named it R/I, which is Revenue / Investment , The lower the R/I, the less capital investment is required for a dollar’s income.

    Similarly, regarding R/I, we can also look at it from two perspectives: cumulative R/I and current R/I. Cumulative R/I refers to the ratio of the company’s cumulative income to the capital invested in the past, which measures the company’s historical capital revenue generation efficiency; the current R/I refers to the ratio of the current period’s revenue to the capital invested in the current period, which measures It is the company’s current capital income generation efficiency.

    Even, you can also use this indicator to measure the company’s capital revenue generation efficiency in each financial year, so as to analyze the operating efficiency of different years.

    In financial analysis, we have previously used ROIC as an indicator to measure the return on invested capital. ROIC = pre-interest and after-tax operating profit/capital investment, where pre-interest and after-tax operating profit = (operating profit + financial expenses-non- Current investment gains and losses) × (1- income tax rate), capital investment = interest-bearing liabilities + net assets-excess cash-non-operating assets.

    This indicator is similar to ROE but pays more attention to funds than ROE, so it is frequently used in Pe investment.use.

    Capital valuation efficiency of different companies

    The author has calculated the capital valuation efficiency of some companies based on public information. The reference is as follows:


    (1) The unit of Yunzhisheng is 10,000 yuan, and other related amounts are 10,000 US dollars;

    (2) Mobike and wework are data obtained based on the public information of the media;

    (3) The IPO market value is calculated based on the IPO issue price; the current market value of the listed company is the closing market value of the most recent trading day; the current market value of the unlisted company is the valuation of the latest round of financing;

    As can be seen from the table, the market value of some companies is already below the accumulated financing amount, such as WEWORK, eggshell, etc.; the P/I of some companies is only more than doubled. This means that the value of the company is seriously not recognized by the current capital market, and investors in the past will undoubtedly fall into a situation of not making money.

    The author believes that the bottom line of a company is that the P/I value is greater than 1, which means that the company’s market value is at least greater than its financing amount; if even P/I>1 cannot be achieved, then the company’s texture is indeed terrible. ; For an excellent company, its P/I value should be at least greater than 5. For example, Perfect Diary’s P/I value has reached 5.4 before it goes public.

    In the past few years, there have been a large number of unicorn companies that have spawned through a large amount of financing. Typical examples are shared bicycles and travel companies. Recently, such as artificial intelligence companies, they burned money through continuous financing and continuous burning of money. , Crazy expansion, extensive operation, but not necessarily increased in valuation. Its capital use efficiency and capital valuation efficiency are relatively low. After the market vent, the capital boom receded, and a large number of companies were caught in the development. Dilemma.

    P/I difference between TO C company and TO B company

    Regarding the capital efficiency of TO C and TO B companies, Xintian Venture Capital partner Jiang Yujie made a detailed comparison of overseas listed companies.

    Data source: Xintian Venture Capital Jiang Yujie, modified by the author

    You can clearly see that the P/I value of TO C company is much lower than that of TO B company. The P/I of TO C companies is mostly 2-4 times, only SPOTIFY exceeds 12, but the P/I of lendingclub and Groupon is lower than 1, and the P/I of lyft and Uber is only about 2;

    In sharp contrast, TO B’s P/I value has reached dozens of times, the highest such as Shopify exceeding 156, the lowest such as Slack also reached 10.

    A simple comparison shows that TO C companies are much more dependent on capital than TO B companies, and their capital efficiency is much lower than TO B companies.

    The reason for this sharp contrast, Jiang Yujie believes that first, TO C is a competitive economy, winner takes all, one family dominates, although different apps, such as Pinterest, Facebook compete for the length of the user; and TO B It is a symbiotic economy, co-existing with each other, even in the same business, there is no single dominant company.

    The second is the difference in customer acquisition models. TO C is a market model for traffic acquisition, while TO B is a sales model for targeted acquisition. ToC’s customer marketing has poor accuracy and low continuity, while a good ToB company theoretically has a long sales cycle and high sales costs, but the customer unit price is very high and the renewal rate is high. For example, the unit price of ServiceNow is as high as one million U.S. dollars, while the unit price of Workday is 850,000 U.S. dollars, and the unit price of Slack’s major customers is 100,000 U.S. dollars.

    The author agrees with Mr. Jiang Yujie’s views.

    However, in recent years, the financing of some TO B projects in China has shown the characteristics of TO C financing, that is, investment institutions spend large sums of money on TO B projects, forcing them to grow rapidly, and there has been a situation of maturation fueled by seedlings, such as the SAAS field. Some companies in the fields of chips, artificial intelligence, autonomous driving, and hard technology have seen their valuations continue to increase and their personnel have expanded rapidly without much progress in R&D and commercialization in the early days. Presenting a state of great leap forward.

    R/I at different life cycle stages

    The company has different efficiency in burning money at different stages.

    • In the requirements verification phase, requirements investigation, product development, and technical framework construction, the investment is far greater than the income. At this time, the R/I may be 0;

    • In the sales verification stage, expand the market, polish the product, and look for PMF. At this time, the R/I may be 0.2-0.6;

    • In the formation stage of sales strategy, with the continuous maturity of products and the maturity of sales skills, its R/I value may increase to 0.5-1.5;

    • In the sales replication stage, the model of each work is basically mature, and its R/I may be much higher than 1

    We simulated the income and burnt situation of a startup company from year 1 to year 7. You can generally see the changes in the following data.

    Finally, to summarize:

    • Capital valuation efficiency (P/I) is an important indicator to measure the financing leverage efficiency of startups. Startups cannot patronize financing, but their valuations are difficult to increase; on the one hand, they release too many equity in startups, On the other hand, it also leaves investors with no book return;

    • The valuation efficiency (P/I) of capital is affected by its own development quality, interval, financing speed, financing frequency and the temperature of the capital market;

    • The bottom line of the capital valuation efficiency (P/I) should be 1. A value lower than 1 means that the company’s valuation has not reached the amount of financing money, and it also reflects that the company’s quality is extremely poor; a good company has a capital valuation. Value efficiency should be as high as possible;

    • The data shows that the capital valuation efficiency of TO B company is much better than that of TO C company, which is affected by its competitive situation, customer acquisition cost, customer unit price and renewal rate, etc.; < /p>

    • The income-generating efficiency (R/I) of capital is an indicator that measures the relationship between the income of a startup company and financing, which means how much capital investment is required for every dollar of income generated;

    • Startup companies at different stages, The efficiency of capital income generation is different. In the early stage of product polishing, R/I may be zero or extremely low; as the product and the market mature, the R/I value should continue to increase. Ideally, for a mature company, it should no longer burn money, and the R/I value should be extremely high.