Written with Craig Shapiro
Two years ago, Aileen Lee introduced the unicorn, a private company worth more than $1 billion. Last year, Caterina Fake coined the cockroach: An adaptive company who refuses to die, even in the toughest of circumstances.
We’d like to introduce a new label into the startup lexicon: the Cricket.
Farmers track what’s called the “feed conversion ratio” of animals. It measures how efficiently an animal converts food into body mass.
A cow general requires 10 kilograms of feed to generate one kilogram of mass. Pigs have a ratio of about 5-to-1. Salmon are about the same. A pound of chicken generally requires 2.5 pounds of feed.
But few animals grow as efficiently as the cricket.
One kilogram of cricket mass can be produced with 1.7 kilograms of feed. That’s six times more efficient than beef.
To bring this metaphor home: instead of feed, think of capital; and instead of mass, think value.
The cricket business requires very little capital investment to produce value. They’re usually not big. Few pay much attention to them. They sometimes even look like a nuisance. But if you’re after efficiency and value, they are the winners.
Years ago, Warren Buffett wrote in Outstanding Investor Digest:
You can certainly have a situation where there’s absolutely no growth in a business and it’s a much better investment than some company that’s going to grow at very substantial rates — particularly if they’re going to need capital in order to grow. There’s a huge difference between the business that grows and requires lots of capital to do so and the business that grows and doesn’t require capital. And, generally, financial analysts don’t apply adequate weight to the difference between those. In fact, it’s amazing how little attention is paid to that.
It really is amazing. When was the last time you saw, next to the headline of how how much a company is currently valued at, any indication of how much investment it required to get there?
The real value in business and economics isn’t size, but efficiency. The Soviet Union was larger than Japan in 1980, but among the efficiencies we should cheer — the ones that propel the world forward — Japan was in a different league. A power weightlifter will struggle to do a pull-up while a 90-pound gymnast can crank out a dozen without breaking a sweat. The former impresses us with size, but the latter is who should impress us with pound-for-pound efficiency.
Investing is the same. We celebrate the cows, because they’re huge. But we should pay more attention to the crickets. They are the symbols of efficiency we should be proud of.
WhatsApp is one of the biggest cricket of all time, selling for $20 billion after raising $60 million of capital. Tellapart raised roughly $17 million and sold to Twitter for ~$500 million. Gnip sold to Twitter for ~$130 million after raising only $6 million. Nest went to Google for $3 billion after raising $100 million.
These are Crickets, and we should be proud of them. They’re not the largest deals. But they are, in many ways, the best. They created a lot out of a little, which is the recipe capitalism relies on to not only grow, but grow in a meaningful and productive way over time.
In our last piece we argued that startups shouldn’t raise as much money as possible, because scarcity and need is a better motivator than luxury and want. Cricket investing follows the same philosophy. It’s counterintuitive that less can be more, but it so often is.