Investor appetite for growth at all costs, fuelled by the heady days of cheap borrowing pre- and immediately post-pandemic, is fading fast. During boom times, many investors overlook business efficiency in favour of rapid growth potential. Companies that scale quickly, even at a loss, are seen as a good investment, especially in the technology sector.
In the post ‘gold rush’ era, however, things have changed. Tougher economic conditions and political uncertainty have created a more cautious investment climate. The focus now is on operational efficiency and profitability as well as growth.
But that may not be the full picture. While economic ‘boom and bust’ cycles will inevitably persist, there does appear to be a more general shift towards the appreciation of long-term value creation, both among founders and investors.
What it means in practice is that, rather than chasing the next unicorn, savvy investors are betting on companies with strong fundamentals and a longer-term outlook. In other words, those with clear pathways to profitability and steady growth.
The new reality
Business fundamentals have always been important, and any VC or other investor worth their salt will perform thorough due diligence before committing funds. However, the rush to find the ‘next big thing’ can create significant FoMo in the good times. Certain sectors, most recently AI, for example, can quickly become overheated. It results in all parties in danger of temporarily forgetting the basics, with a path to value generation for customers and investors alike often unclear.
As the AI sector matures in 2025, it is worth a refresher on some key indicators of an efficient business. For scale-ups especially, investors will be looking for more than just a strong leadership team and solid financials. They will also be looking for evidence that the business has the potential for long-term value creation:
Balancing cash burn
One of the key fundamentals investors are likely to look at in this climate is cash burn. High growth alone will no longer cut it, but a high growth rate alongside slow cash burn will make all the difference.
Net Dollar Retention (NDR)
NDR helps determine the revenue retained from existing customers after considering churn and expansion. It can also act as an indicator for changes in the market which may affect demand for products or solutions. In turn, this allows decision-makers to know when it is time to pivot or reposition.
Cost of Customer Acquisition (CAC)
investors are placing greater emphasis on operational efficiency metrics. This means, not only looking at how and where new customers are acquired but also the cost of acquiring those customers in relation to business efficiency and profitability.
Gross/Net Margin
These metrics show the profitability of an organisation. Gross Margin shows how much money the company keeps after factoring in the cost of revenue/cost of goods sold (COGS). Net Margin is slightly different as it takes all a business’s expenses into account. It’s the percentage of net income earned from revenues received, in other words, its overall profitability.
Revenue per Employee
Key to maintaining productivity and efficiency as the company grows and scales. Controlling headcount is key to profitable growth. Gone are the days when a CRO would hire as many reps as they could with the vast percentage failing. Today you should only hire when the pipeline and current efficiency (rep attainment) is at an agreed trigger. And that’s not limited to sales, it needs to be across all departments.
Return on invested capital (ROIC)
This is a way to assess a company’s efficiency in allocating capital to profitable investments. It is calculated by dividing net operating profit after tax (NOPAT) by invested capital.
While these metrics are a useful guide to overall business efficiency, they must be considered in the context of what makes a successful company. The most successful companies are almost certainly efficient, but the most efficient companies are not necessarily the most successful.
Focussing on efficiency alone is a fallacy
Just as growth shouldn’t be pursued at all costs, efficiency can become a cul-de-sac if considered in isolation.
In his book, The Effective Executive, Peter Drucker stated that “efficiency is doing things right, effectiveness is doing the right thing.” This makes them close cousins, but crucially, effectiveness will drive business value through effective prioritization and strategy. By focusing on things that drive business value and hit targets, teams will inevitably become more effective due to being connected around a common goal.
For example, consider companies that can leverage technology such as AI and automation to scale efficiently without the need for increases in headcount or capital expenditure. While this ability to reduce costs and improve efficiency will be attractive to investors, without a strong focus on wider business effectiveness, these technological integrations could prove disastrous.
To integrate technology effectively, businesses need to build a model that layers over the top of AI – powered by it rather than replaced by it. The technology is not at a point where it can lead and implement purposefully. However, it will increasingly power applications overlaid by strategic, human-led frameworks.
Improvements in efficiency must be weighed against increased margin for error. That risk increases when those making decisions to implement don’t fully understand the strengths and limits of the technology.
Ultimately of course, the aim is to build a company that is both efficient and effective. Whether this leads to profitability, steady growth or even rapid growth the very act of maintaining the right balance is the key to long-term value creation.
Founded by Adil Mohammed, Hugo Farinha, and Andrew Doughty in 2017, Virtuoso QA was developed by a team passionate about improving the quality of low-code/no-code test automation software without slowing down the development process. By 2019, Virtuoso had reimagined test automation software by pioneering the next generation of low-code/no-code testing in the cloud. Virtuoso believes anyone can test, and uses AI, ML, NLP, and Robotic Process Automation to run a test automation tool offering speed paired with the power of scripted test steps.
