What is Capital Efficiency and How To Harness it in Crypto

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By Gerelyn
Estimated reading: 6mins
Capital efficiency

Money doesn’t grow on trees. 

The more efficient you can be with it, the longer it will stretch. 

Capital efficiency is one way to keep you and your money together in good times and bad. 

Sometimes it involves taking risks, but the alternative is to leave your money sitting idle in an inflationary economy that is only weakening your buying power.   

It’s the reason why you see a major corporation put its balance sheet to work instead of leaving it on the sidelines. 

But capital efficiency isn’t limited to businesses only and is also a concept you can apply to your personal finances, including cryptocurrency investing. 

In this article, we’ll explore what capital efficiency is exactly and how you can put it to practice.  

What is Capital Efficiency?  

Capital efficiency represents how well a company or individual manages their money. It’s a behavior that requires characteristics like discipline and patience, and it usually pays off over the long term.  

Capital efficiency shows how much a company is spending relative to how much it is growing its revenues and is often associated with early-stage businesses. The more capital efficient a startup company is, the more likely it is to attract venture backers to its business. Capital efficiency It’s a 30,000-foot view into that company’s financial health.  

There are numerous ways to measure capital efficiency, some of which are deemed more effective than others. But the desired outcome is similar, and that’s to maintain greater control of one’s money whether times are good or bad.   

For companies, capital efficiency shows how good of a job it is doing allocating its capital to expand. Basically, it weighs the amount of money being poured into a business relative to its revenue growth and ultimately profits.  

To understand capital efficiency, it also helps to consider what it isn’t. The opposite of being capital efficient would be to keep money in cash when it could be doing more by finding some other use case, such as investing in an asset class like crypto. By staying in cash, you could actually be losing money as inflation weakens the buying power of fiat money.  

Capital efficiency is something that can be measured so you can gauge how efficiently capital is being deployed, something we’ll discuss in more detail below. 

Ways to Become More Capital Efficient

  • Spending - One sure-fire way to demonstrate capital inefficiency is to pour too much into sales and marketing before even demonstrating a sound business model. Research suggests that early-stage companies spend 11% more on marketing than they generate in revenue on average. That is an unsustainable method. Scrutinize where your funds are going and determine if they can be better spent in another area, say product development, that will make your business more attractive over the long term. 
  • Hiring Talent - Even though you’re going to need to hire talent, one mistake that many startups make is overspending in this area. Being picky is no crime. Prefer individuals who are chomping at the bit to get started over those with a long resume. You need producers who will get things done. Consider equity or bonus structures to get the most bang for your buck so that your employees will have skin in the game. 
  • Cash Flow - The way you handle cash flow has the potential to demonstrate capital efficiency. Set a goal and give yourself a period of time to accomplish it. Your cash flow should illustrate that you’ve been disciplined and methodical about spending to get the best return on your capital. 

Capital Efficiency Metrics 

As alluded to above, there’s more than one way to measure the capital efficiency of a business or an investor for that matter. Below is a list of some of the primary ways.  

  • Cash Conversion Score: This metric gauges the return on investment (ROI) of cash invested into a business, particularly for software as a service (SaaS) companies. By looking at other items on the balance sheet through the lens of the cash conversion score, you gain more insight into your revenue as a stand-in for ROI. 
  • Burn Multiple: This is a way to measure your capital efficiency during a market downdraft. It is based on an equation developed by Craft Ventures David Sacks: Burn Multiple = Net Burn divided by Net New ARR (accounting rate of return) 
  • Return on Capital Efficiency (ROCE): This barometer is very similar to capital efficiency, and it’s most relevant to companies with years of operating history. It uses an equation: earnings before interest and taxes (EBIT) divided by capital employed (this can be known by subtracting total assets from liabilities.) ROCE is a tool to measure a company’s net profit, which reflects the overall health of the balance sheet. Once you know your ROCE, see how it stacks up against your peers operating in the same sector to understand your competitive position. 
  • Bessemmer’s efficiency score: For early-stage companies, a Bessemmer’s efficiency score might be more realistic to come by. The way to get it is through another equation: net new ARR divided by a company’s net burn. The results reflect efficiency based on cash burn and are useful to determine how a business might be able to weather a market downturn. 

Capital Efficiency in Crypto

Liquid Loans DApp

Capital efficiency in crypto would mean getting the most out of your digital assets. 

This could mean using a faster and cheaper blockchain such as PulseChain, or putting your digital assets to work.

Liquid Loans is an extremely capital efficient protocol. 

In addition to operating on a fast and cheap blockchain, the protocols:

  • Allow holders of PLS the ability to extract value without selling. This maintains their price exposure to the upside while minimizing the downside risk. It also eliminates the instance of a taxable event
  • Allows users to earn yield on their USDL dry powder

When operating in the crypto industry, it is wise to consider all options available to you to be more capital efficient. 

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Disclaimer:Please note that nothing on this website constitutes financial advice. Whilst every effort has been made to ensure that the information provided on this website is accurate, individuals must not rely on this information to make a financial or investment decision. Before making any decision, we strongly recommend you consult a qualified professional who should take into account your specific investment objectives, financial situation and individual needs.

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Gerelyn is a financial journalist who has been covering Wall Street for more than 20 years. After reporting for some of the top trade publications on investment banking, infrastructure and retirement, she was drawn to decentralization and shifted her coverage to the blockchain and cryptocurrency space in mid-2017. Since then, she has contributed to several major Bitcoin, Blockchain, and DeFi news sites, and has also written a children’s book.

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