The discussion topic you and I have been going back and forth on is capital efficiency, which I think is a really critical topic as we confront some of the underlying sins, if you want to call them that, of the growth-at-all-costs mentality. It feels like a lot of companies are trying to be much more thoughtful about how they build their models. Before we dive into the details, for folks who may not be as familiar, I would love a brief introduction to Volition as a firm and to your background.

I've been in the venture and growth equity business for over 25 years. We founded Volition 15 years ago as a pure-play growth equity firm, meaning that we focused on more bootstrapped and very capital-efficient founders: businesses that are not trying to raise a series of venture capital rounds, but have funded their businesses off of customer revenue, which is the old-fashioned way. Sometimes those companies are running their balance sheet to zero every single month, that becomes a challenge, and so they want to raise an institutional round.

We often partner with those types of companies, and it's very common for our companies to take that round from us and go the distance. I would say 70% or 80% stay within that round, and with 20% or 30% we really press on the gas and raise lots of money. So we know both paths, but we definitely started with an orientation as a firm that values capital efficiency in high-growth tech companies.

One of the things I want to drill into immediately is a misnomer folks have, that capital efficiency and high growth are diametrically opposed. Those are very different things. It doesn't mean that you have to grow super slowly and put up a few percentage points each year. Give us a primer on how you think about capital efficiency and how the best businesses have leveraged it.

Our typical company at the time of our investment has probably $10 million of revenue, is growing about 100%, and has raised less than $5 million, if not zero. That's our prototype. It can swing a little bit in either direction. That means you're getting real customers and real growth.

The way you do that without capital is you're just efficient with it. You're not spending dollars on sales and marketing to experiment. You're spending dollars on sales and marketing that drive a high ROI. You're not chasing projects or ideas with technical resources that don't tie to customer needs. It just enforces discipline. A lot of these businesses start with the founder, because they're bootstrapped. Every dollar is their own. When you don't have outside capital to work with, that creates a level of discipline that can also still achieve high growth. And that's where we live.

Chewy, I think, only raised about $50 million ($236 million) before being acquired for over $3 billion. So as far as inputs and outputs, that output is huge. Looking at the last couple of years, at companies that struggled because they thought there would always be an unending faucet of venture dollars, how do you help companies think about building their businesses more efficiently?

It's really interesting. In the last maybe three months, six months, I have seen more companies, and this is due to AI, reach greater than $10 million ARR in less than 10 months with less than 10 employees. And in my entire career, this is the last six months alone. So I think AI has enabled a level of capital efficiency that we haven't seen in the past.

When capital was free, interest rates were zero, and money was readily available, the idea of being capital efficient almost didn't make sense to people. Now you've seen the fallout of it. You've seen companies that were reliant on capital to grow, and when capital became harder to access, those companies imploded on themselves. The sad part is that oftentimes these companies can be worth less than the capital they've raised, which means the investors, the founders, and all the employees don't get anything. That has played out time and time again. So capital efficiency is now more in vogue, and I think it's more possible with AI tools and AI capabilities. That's what we're seeing in the market.

From a technological perspective, being able to leverage AI allows you to build a product more quickly and more efficiently with fewer developers. So you can be efficient on the "we built something" side of the equation. But there's still the question of how to efficiently acquire customers for whatever you're building. How can folks apply the same capital efficiency mindset in a world where, as it gets easier to build software, there's more and more competition for every incremental customer dollar?

If there's one area I'd focus on, it's how you manage working capital. You brought up Chewy as an example. When we invested, Chewy had $75 million in revenue, and it grew to north of $1 billion in revenue in about three years. The way they were able to do that capital efficiently, and they were operating cash flow positive for the last year and a half of that three-year period, was working capital management. They negotiated very aggressively with the manufacturers they carried as a pet food e-commerce business, so they were able to pay their manufacturers after they sold the product. It's negative working capital.

So if you want to be capital efficient, one area to start is to manage your working capital really tightly and view it as a strategic issue. A software company that gets paid up front on an annual contract is very different from a software company that gets paid monthly over the course of the year on that annual contract. Those are essentially financing events that occur through the operations of the business, and they limit your need to take outside capital to fund growth.

Working capital is obviously a critical metric for understanding your own capital efficiency. Are there any other metrics or ratios that you see best-in-class businesses laser-focused on as North Star metrics?

One of them is just ARR relative to capital consumed in the business. That's a very common magic number for SaaS: if you have $10 million of ARR and you've only consumed $10 million of capital or less, then you're north of one, and that would be a good capital efficiency metric. Oftentimes people think about net new ARR relative to dollars consumed in sales and marketing in a similar vein. Sometimes we think about the gross margin dollars of the business relative to capital consumed, and so forth.

But there's an old-fashioned capital efficiency metric, which is that you're profitable. That is happening more and more. As the market normalized, there wasn't time when people would suspend belief on profitability way into the future. And that's changing. Companies are going to have to demonstrate that they can be proper companies and generate cash flow. Maybe not immediately, maybe not in your hypergrowth phase, but inside the whole period of an investment, inside some normalized timetable. So operating cash flow positive and EBITDA positive are metrics that no one cared about three years ago, but they care about today.

You also see another category of business where CapEx is becoming attractive again. Some folks are interested in building out factories and manufacturing hardware as a component of the broader product they're building, even if they're building software. Others are taking the roll-up approach: rather than building software and selling it into accounting firms or wealth managers, their thought is, "I can just go acquire accounting firms and weave AI into the practice." Is that just another playbook for running a business, or a recipe for fairly inefficient businesses? Do you have a framework for what capital efficiency means for companies that may be raising debt or leveraging more capital to do what they're trying to do?

A few thoughts on that. We have multiple roll-up companies, and I'd point to one, Rounds, which is rolling up mobile applications, acquiring them, and then operating them more efficiently. And we have a number of hardware-enabled SaaS businesses where hardware is a component of the offering, like ButterflyMX, which is an intercom interface system in buildings.

In both cases, think about it in a common-sense way. It's almost the same as customer acquisition, so let's not make it too complicated. You're deploying capital. What is your return? If it were sales and marketing, you'd ask when your payback on that capital is, and how much LTV you get off of that capital expenditure. You'd say that if you get payback in a year and have an LTV of four or five times, that's pretty good. The same goes for a roll-up. In this case you're deploying capital not to acquire a customer, but to acquire companies. And the question is, what is your payback, and what is your LTV on that capital? The same goes for CapEx and hardware investments.

So actually, the metrics are not that different. It's the same thing: you're putting out money, and when are you getting it back? This is where I think it's quite interesting. Sometimes companies are so fixated on organic customer acquisition that they tolerate poor economics in that use case, when they might actually have better economics acquiring companies rather than customers, but their mind never shifts into that world. So I think it's imperative for companies to think expansively about capital allocation. What are your options, and where is the most efficient use of capital across the ones we've just talked about?

You brought up hardware-enabled SaaS. Being able to layer software over physical systems can create a really compelling model. Why are we seeing more of that, and why does it set folks up to potentially have a pretty solid business?

It's quite an amazing set of companies that have emerged. I'll give one example of ours, which is called HALOS. It's a security camera that's worn by individuals in public transport or public security and those types of things, but there's a software back end to manage all the footage, to query the footage, and to isolate issues. As you know, software is pretty high margin, and this is an example where you can recoup the cost of the hardware in six months or a year through the software subscription and then compound from there in terms of LTV. It's the notion that you can rent out hardware with a thinner software management layer for multiples of the cost of the hardware. It makes sense. There's definitely a value property to the customer there. I think it's a great business model.

So you're seeing the pairing of those these days. It used to be that software investors didn't want to attach hardware. It's low gross margin. It's a different ballgame. But now you're seeing the marriage of those two in some really innovative businesses.

If you're chasing a massive ambition, you want to have a really powerful war chest. If you're an OpenAI that wants to do hardware, maybe a social network, and maybe be the backbone of every AI interaction happening on the internet, maybe you want a war chest to do that. Do you buy into the argument that if you're chasing one of these few massive ambitions, raising a ton can be a way to do it? Going back to companies like Chewy, you can have pretty sizable outcomes without raising a ton of capital. Would you push back on that framework?

I think both are true. There is a set of AI companies that are foundational infrastructure, OpenAI-like companies trying to be trillion-dollar businesses, and I understand why they're raising hundreds of millions and billions of dollars. But don't let that headline skew you from the fact that there are thousands of AI businesses emerging that are hyper capital efficient, like nothing we've ever seen in tech. They're profitable, growing, and have scale, super fast, with like an employee. It's rather remarkable. So there's that element of capital efficiency.

I also think that from a customer perspective, without a doubt, there is experimentation happening across the whole tech landscape on AI today. I think you will see the impact on financials, in margin, next year, because it's all being deployed this year. From that point, I think you will see margin compression in legacy companies. I don't think they're going to be worth as much if you're viewing the non-AI world. And you'll start to see a transformative impact of AI in 2026 and beyond. So that's coming. I guess we can think about AI as catalyzing a lot of capital efficiency across different dimensions.