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What Does it Mean to Be “Venture Scale”?
The simple framework for defining an oft-overused buzzword.
What does it mean for a business to be venture scale? I’ve heard this phrase thrown around for close to a decade now, and I feel like it means so many different things depending on who you ask. Here’s some things it means to some people (heuristics, if you will…):
$100M in Annual Recurring Revenue
$1B in Sales (for non-recurring revenue businesses)
>100x return potential (from seed stage)
“Capital efficient compounders” (this is one of my favorites)
$1B+ Enterprise Value (Unicorns!)
$10B+ Enterprise Value (Decacorns!)
I define venture scale more fundamentally (curse you, CFA!). Specifically, a venture scale company is one that has the potential to consistently generate high return on invested capital (“ROIC”).
Of course, this easily describes the best SaaS businesses funded by venture investors for close to two decades now. High margin, sticky revenue, with limited upfront capital to get started and most venture dollars going in to scale product and sales. It’s why SaaS is the maybe the greatest business model ever invented (thank you, AWS!), and why US VCs invested close to $90B in SaaS companies in 2021…
So naturally, against that backdrop, we should all just pack it in and exclusively fund SaaS businesses for all eternity, right?
By reframing venture scale as high ROIC potential, we can open our investment aperture to include businesses that require more upfront capital but can still achieve long-term high ROIC via bolt-on high margin subscriptions or services (Amazon Prime!), royalties/license fees (Gingko Bioworks!) or by capex requirements falling as a percent of revenue with scale (NVIDIA pricing power!).
Reframing venture scale as a company that needs to achieve high ROIC at some reasonable point in the future (generally within 10-15 years of founding) opens the aperture of our investable universe at the early stage without changing the frame of reference that’s made SaaS investors so successful for the last two decades. This approach is why we’re able to underwrite non-traditional venture opportunities like satellites, fission reactors, and space manufacturing. But doing so requires a breadth and depth of understanding across technical disciplines, business models, and financing structures (in addition to the most important skill of underwriting founders) to appropriately guide our seed-stage founders towards business models that have the potential to achieve that venture scale which drives 100x+ returns.
It can be challenging to frame companies this way when it’s just a founder and a deck (sometimes even without a deck!) and we try not to be myopically focused on business models, but when we talk about a pragmatic vision at Also Capital, we mean having a realistic view of the ways your business may be able to achieve high ROIC (regardless of high or low margin structure), paired with a unique perspective on where the future is headed.