Whenever a boom comes around, I read articles about how it’s dangerous to be too cheap and too cautious. One saying I learned during the last boom was “You can’t save your way to prosperity.”
Maybe. But as you start to hear the siren song of profligacy (last time, we called it “Get Big Fast”), remember that history teaches us that capital efficiency is one of the most important traits of successful companies.
I had breakfast with a VC from a top-tier firm this morning. He told me that his firm had commissioned a research project to investigate how much capital VC firms deployed in their best investments versus the rest of their portfolio.
The answer stunned them: $2.7 million.
The investing principle of cutting your losses and letting your winners run would seem to predict that top investments would receive more capital. Instead, their research showed that the most successful VC investments typically consume far less capital than the average investment.
I’m not surprised.
One of the lessons I’ve drawn from studying the great military strategists of history (Hannibal, Alexander the Great, Napoleon) is that successful generals are economical in their use of manpower. They don’t commit all their forces to every battle.
What sets them apart is their uncanny ability to sense the critical moment during the battle when it pays to take decisive action. It is then that they commit their reserves, turning a close fight into a stunning victory.
As an entrepreneur, think of yourself as one of these great generals. Be a cheapskate, and conserve your capital until you have eliminated enough risks and uncertainties to allow you to sense the turning point. Then step on the gas.