Capex heavy Vs. capital efficient businesses: Differences discussed

Capex heavy Vs. capital efficient businesses: Differences discussed

In a discussion with Ravikumar, Proptech Buzz, Angie Mahtaney, Business Mentor, BRIGADE REAP, brings out the distinction between Capex heavy and capital efficient businesses.

Here is the gist of the conversation.

Ravi: You made a really interesting point that I liked. So, Is there a distinction between Capex heavy and capital efficiency?

Usually, there are founders who have a business that needs capital. They are usually embarrassed to send the decks because most of the decks, if not SaaS, are looked down upon. Because SaaS, as you said, is where you get organic growth.

And, there are so many challenges in the world to be solved, not everything can be solved with SaaS, isn’t it? So, would you say that investors should not be averse to Capex heavy as long as it is capital-efficient? And, this is the strong business model you may know in your experience, I suppose.

Angie: I absolutely agree. Again, it goes back to the point I made earlier on the kind of ethos and investment thesis, and the sort of culture a VC firm has, right?

There are companies, especially in the B2C space, who won’t invest in capital-heavy businesses, right? But, anybody looking at infrastructure, those are sustainability for that matter, can be a capital-heavy business. There is nothing wrong with that, right?

But, what needs to be clear is, when we look at these companies from an investment lens, we know that it’s going to be a longer cycle. The exit may come from a P play vs. a VC play, right?

And, we have the appetite for that. So, I think, as long as VCs are open to a different sort of cycle, and are accepting it, they should not run away from Capex heavy.

Ravi: You know, I’m loving this conversation. I don’t have such conversations with founders. You mentioned something about the exit, P play vs. VC play. Could you explain, I usually like to grab onto anything I can learn from. What is the difference in the play?

Angie: You know, P plays are larger ticket sizes, sort of larger businesses, right? So, let’s say you have a SaaS company where the founder needs to raise every two years.

Initially, there is low sales. Every time the founder raises, the ticket sizes are small, and the valuation is relatively smaller. They will be under the million-dollar range valuation.

Then, if you go to three and then five, the P play tends to focus on funding large businesses, right? More stable businesses do not play in the early stages. I think it’s totally two different kinds of investment or channels.

So, we have companies that are building, let’s say, alternate sorts of table blocks using recycled plastic. The manufacturing businesses may need money very early on, but as they scale, the kind of money they need to put up in plants across the country will be in tens of 15 hundred million dollars.

But these aren’t necessarily VC play, right? Because they are giving you 12-15% every year. Or, every year, they are not going to give you bullet returns of, like, 100X in three or four years

Whereas, it gives you consistent returns year after year and is sort of PE-type business. I mean manufacturing requires that, those aren’t VC businesses typically, right?

So, we are open to both kinds of paths because we recognize that, as you said, not every problem in the world can be solved by SaaS.

There is a reason Make in India is becoming such an important trend in our economy, right? So, we personally look at either option and go with eyes wide open to saying, “We may not get a VC exit in 3 to 5 years”. It may be PE exit in 7 to 8, possibly, right? Possibly in the future, either way.

But, we aren’t sort of open to that path as we understand that those businesses have to see a very clear path of profitability in 12 to 18 months. Because they are PE businesses that are long-term and can’t rely on funding quickly. The minute they are a risk, if they don’t get VC funding, the whole business sort of collapses, right? So, you look at it from a different lens.

Ravi: Very good.