Growth and capital efficiency “metric combo”
“Small rooms or dwellings discipline the mind; large ones weaken it.” According to ChatGPT, Leonardo da Vinci said this about constraints.
We launched CreativeCo in 2020 with a focus on investing in capital efficient, early-stage B2B software companies, and wrote a post on the topic explaining why. From 2020 through 2023, our small team invested in 40 B2B SaaS companies that expressed some degree of capital efficiency. The phrase “your cap table determines your path” is very true, as many of these businesses have been over-capitalized in our opinion, driven by large seed rounds and VC directors pushing to spend.
In 2024, we launched our third fund with a very specific spec. All companies in Fund III must have >2X year-over-year ARR growth PLUS ARR > capital spent since inception. For example, a $1M ARR business that has grown 3x over last year and has spent $500k of investor money to get to this point checks the “metric combo” box for us. Fund III will be a major test for us to prove this thesis works, but we believe it will.
There are many interesting businesses that don’t fit this spec, as it has become normal course to raise $2-$5M in funding while still sub-$500k ARR. Sourcing against this spec is challenging, but as Leonardo says — operating in this very small “metric combo” dwelling disciplines the mind and keeps our thesis on point.
We have conviction that this simple metric combo is an early indication of long-term success and a mitigant for early stage risk. Here are the characteristics you typically find with software companies that meet this criteria:
- Founding team with prior entrepreneurial experience.
- Ability to develop the initial product in-house.
- Obvious value prop and solid product-market fit.
- Efficient go-to-market.
- Cash flow break-even culture.
- Our new investment pays for growth, not the past.
Reaching $1M ARR with less than $1M spent is not easy. Let’s explore how our portfolio companies achieved this result.
Churnkey (revenue retention automation for subscription businesses)
Churnkey’s four founders exited their prior business and launched the newco to solve a problem that they (and every recurring revenue business) experienced. They developed the initial product themselves, skipped their own salaries, and self-funded GTM to launch an initial solution. They raised a total of $500k from angels and an accelerator to speed things up, but only spent $350k of that amount. We closed our $1.5M investment right as they were reaching $1M ARR. The case study demonstrates: 1) experience, 2) build their own software; 3) super obvious ROI, 4) inbound GTM, 5) focus on bootstrapping, and 6) our financing is paying only for new hires (no prior burn to cover).
Churnkey’s co-founder / CEO Nick Fogle says: “Our commitment to being “default alive” is central to our business philosophy. We’ve consistently focused on profitability and capital efficiency. We engage in fundraising only when it can significantly accelerate our growth, when we have clear, effective plans for deploying the capital, and when we ensure we do not raise more than necessary.” The result of this approach is that the founding team at Churnkey owns far more of the business than many founders at this stage.
swivl (AI automation for self-storage operators)
swivl also had four co-founders that worked together in a prior startup. After a small exit, they teamed up to work together again, generally targeting the conversational AI space. They developed their own software and then determined that the self storage market was a good first place to focus, where they could deliver a clear value prop, go-to-market efficiently, and avoid the competition of horizontal “chat-bot” solutions. swivl raised $640k from angels and the Techstars Atlanta program early in their journey. When we invested $2M in swivl, they were approaching $2M ARR and had spent ~$500k of this funding to reach this point. Remarkably, swivl was profitable in 2022 and 2023. Again, just like Churnkey, swivl had all of the characteristics on the list above.
Mason Levy, swivl co-founder and CEO says: “It was clear our alignment to build a capital-efficient business made CreativeCo the ideal choice. To find investors who want to align with an entrepreneurs’ definition of success and understand that startups aren’t a zero-sum game is beyond refreshing.”
CreativeCo is arguably one of the earliest-stage growth equity style investors.
We are seeking out the same mission critical, high growth, highly capital efficient software companies that later stage growth equity funds target, except that we are investing 1–2 years earlier. We believe our metric combo mitigates this earlier stage risk. But it does not come without any risk.
There are two consistent risks that come with this spec. First, the exceptionally low spend implies that there is a very small product team, and the historical output of this team is limited in scope and depth. It’s great to have a small focused solution, but generally when we invest, there is meaningful roadmap opportunity ahead and we are investing in expansion of the engineering team.
The second consistent risk is that sales at this stage is typically the result of solid founder sellers. Continued growth requires hiring for the GTM team and transitioning from founder selling to team selling. Fortunately, by applying experience to this transition, we can invest smartly in hires, process and approaches to mitigate this risk.
That said, we believe the benefits of our stage (less competition for deals, lower valuations, great returns at reasonable outcomes) far outweigh the risks, particularly if product and GTM execution is something we know, and both of these functions increasingly benefit from AI efficiency gains.
But most of the benefit of this metric combo accrues to the founding team. We expect all of our Fund III founders to be highly dilution-sensitive, where ownership percentage is a critical measure. By bootstrapping and then minimizing dilution with a small financing like ours, our founders can target exits in the $50-$150M range that are both life-changing for their teams and solid wins for our fund. There are many early stage software companies out there that do not have this founder/investor alignment. We view founder alignment (blog post) to be fundamental to our strategy — and our spec, financing approach, and alignment all fit together.
