The era of capital-efficient growth is upon us

This post was originally published on January 16, 2023 for the Angular Ventures newsletter. Subscribe here to receive all new Angular blog posts, data reports, and newsletters directly to your inbox.

As I’m wont to do, I spent a lot of the holiday thinking about growth. Specifically, I was reflecting on the fact that, for most of 2022, investors have been advising founders to cut burn on the one hand, and grow, grow, grow, on the other.

That’s harder said than done, of course. As a former bootstrapped founder, I intimately know how challenging it is to grow financed by revenue alone. And it’s especially challenging when there are so few examples of companies executing on capital-efficient growth strategies in the startup world to learn from.

That’s why I was so excited to listen to this conversation with Zoom CEO Eric Yuan and Veeva CEO Peter Gassner about capital efficient growth. Veeva and Zoom have nearly opposite business models (Veeva sells multi-million dollar contracts, Zoom sells small contracts bottoms-up). And yet, they both went public after raising vanishingly small amounts of external capital.

So, are there any secrets we can glean from Veeva and Zoom’s stories?

Perhaps not secrets, but…modes of operating? Absolutely. In the conversation, Peter and Eric identified a few attributes that enabled them to be so capital efficient:

1) Mindset. It wasn’t easy for either Veeva or Zoom to raise external capital. Investors told Peter that vertical markets were too small, and Eric that video conferencing was too crowded. This forced them to execute as if they’d never see another dollar, which was more challenging, but also much safer. As Peter said in the interview: “A cash-generating business is always valuable to somebody. At some point, a business that’s not cash generating is going to be valuable to nobody.”

2) Product excellence. Both Peter and Eric kept coming back to this point, and I think if they were editing this newsletter, they’d ask me to bold it, highlight it and underline it. Whether selling top-down or acquiring customers bottoms-up, providing an excellent product that customers love is a prerequisite to pulling off capital-efficient growth. This is somewhat obvious for bottoms-up companies which rely on the product to grow, but an excellent product is more efficient to sell top-down as well, because fewer sales people are needed per dollar of revenue. So, product excellence must be an obsession. Ensure you have a team that can build a superior product, and empower that team to do so.

3) Focus. Don’t do anything, or hire anyone, that’s not moving the ball forward on building an excellent product or acquiring customers. Those are the only things that matter. On customers, be utterly and completely focused on building the right product to make customers successful. (Peter mentioned that Veeva never did customer satisfaction surveys early on because “you can hide behind metrics” and he wanted to hear exactly how every customer spoke about the product.) On hiring, Peter and Eric suggested thinking about each person as a distinct investment that needs to be judged based on its return. Is hiring that person going to be ROI positive? How will you know one way or the other?

There were a few interesting tactical points from Veeva and Zoom’s stories that I wanted to highlight as well:

• The downside of multi-year deals. You might think, especially if you’re trying to grow in a capital efficient manner, that getting as much cash upfront would make sense. Not necessarily, according to Peter: “I was always optimizing for the long term value, which is the annual value per customer. If I had to give the customer terms that would lock them in, I thought that's actually shrinking my market because they'll pay less if they're locked in. That's one thing. The other one, I didn't want us sort of getting lazy. I wanted us to earn the business every year.”
• The benefits of promoting from within. Both Veeva and Zoom recruited some established “external superstars,” but they mostly filled their executive teams with internal “up and comers.” There were a few reasons for this. One is team dynamics. The chemistry of the executive team is much more important than the skills of the individual players, and it can be easier to build that team with known quantities. (And having a mix of experienced external players and internal “house talent” is very valuable.) Another is alignment. There’s something special about giving somebody a chance to do something they haven’t done before. They’re more fulfilled, and they pay you back in loyalty.
• Accelerating your growth by building a product portfolio. Peter and Eric both agreed that building a portfolio of products was integral to changing Veeva and Zoom’s growth trajectories. Veeva’s approach, in particular, is worth learning from. Peter specifically decided to build a new product that was clearly not an add-on to their first product. This may seem counterintuitive, but his argument is as follows: your first product’s footprint will naturally expand. You won’t need to plan for that. By adding a new product to the portfolio, you’re trying to change the growth trajectory of the company . That will only work if your new product is different enough to be truly additive.

I’ve listened to this conversation a handful of times now, and these are the points I keep coming back to. Now, none of these are that surprising. I can’t say that any secrets were revealed. The reality is that growth is hard work, and capital-efficient growth is even harder. But I find solace in their stories and inspiration in their success, and I hope you all do too.