The [Lean] Elephant in the Room

Venture Capital's Crisis and the Capital Efficiency Revolution

It's time we addressed the elephant in the room: The VC asset class is in crisis mode. It’s a total disaster in so many ways, in particular, vintages after 2021 are vastly underperforming.

As a small, early-stage fund without LPs, we at Crescent Ridge are witnessing firsthand the specific challenges plaguing our corner of the early-stage investing world and wanted to share our concerns, philosophy and what we can do about it.

The Problem

The seed stage ecosystem has been flooded with capital from unsophisticated investors over the last 5 years - micro funds and angels alike. This influx has led to inflated early stage valuations and a disregard for business fundamentals. Essentially, anyone could raise money.

More recently, in the last couple of years, "capital efficiency" seems to have become the buzzword du jour, and every early stage fund manager is talking about it. We got very excited! People care about capital efficiency! Finally, it was going to be easy to find our crew. We both thought that it was going to be so much easier to find aligned investors to share cap table with, right?

Well, unfortunately it hasn’t been that easy. While we do have an aligned crew of operating partners, portfolio founders and investors. We are a small pack swimming upstream against the massive flow of mainstream VC advice.

There are a lot of people talking about capital efficiency and business fundamentals in Linkedin and other places, but if you peek under the hood, you'll find many of those micro-funds, “Capital Efficiency influencers” are still making questionable decisions: Leading rounds with oversized SAFEs with sky-high caps and misguided advice like pouring money into marketing/growth, lack of focus, and too many features before achieving product-market fit. The result? A landscape littered with dysfunctional, overpriced startups that are stuck in zombie land that unluckily received poor advice and are now untouchable.

At Crescent Ridge, capital efficiency has always been our North Star. We've learned the hard way that relying on later-stage capital often ends in bad for us. That’s why we focus on REAL capital efficiency - prioritizing survival and financial stability very early on. Our philosophy? If a business model makes sense at $2M in revenue, it's very likely to be valuable while they reach $10M, $50M in revenue and beyond.

Here's the rub: true capital efficiency is REALLY HARD. It requires incredible resourcefulness and expertise - a skill that's undervalued in mainstream VC. It's not even aligned with the traditional venture business model. Big funds profit from deploying and pushing more money. We operate differently, we don’t have LPs and we succeed when more of our companies survive and thrive with less. We’ve been forced to make due with what we have which is a maximum of $1.5-2M allocation per company. If our portcos need more capital before reaching profitability or exit; they need to figure out how to make more revenue or we have to find very aligned co-investors.

The VC Hunger Games

For early-stage VCs, mimicking big funds is like bringing a knife to a gunfight. While mega-funds chase billion-dollar AI deals, we've identified a vast, underserved market of promising startups that can't be "AI-ed away" or are "too niche" for mainstream VC. We'll take a 25% chance of a $100M exit over a 1% shot at a unicorn any day. Why? Because being at the bottom of the capital stack even inside a unicorn rarely ends well for early investors. Liquidation preference, massive dilution, punitive provisions... Just look at recent tech IPOs like ServiceTitan - beneath the hype, many VC investors are likely underwater due to liquidation preferences and other provisions.

David vs. Goliath: We’ll take the “underdog” any day

Consider this comparison between some of our exits with our capital-efficient approach and a typical unicorn deal:

This approach isn't just better for early-stage investors - it's also more likely to be superior for founders too. Selling a company for $60-$150M is very achievable; reaching and exiting at unicorn status is a Herculean task that even if you achieve has another set of challenges before reaching liquidity: from limited buyers to post-IPO lockdown periods and complexities.

Beyond Financial Metrics: The Human Advantage of Capital Efficiency

Beyond the financial advantages, the human benefits of our approach are even more profound. We're not on this planet to grind like robots, sacrificing our well-being in pursuit of unsustainable growth. Choosing a smaller, pragmatic, capital-efficient route offers something far more valuable: quality of life. By rejecting the "growth-at-all-costs" mentality and avoiding the high-stress ecosystem of mainstream unicorn-chasing VCs, we create a more balanced, sustainable approach to building businesses.

Other advantages include:

• Less burnout for founders

• More meaningful work-life integration

• Lower anxiety and psychological pressure

• Greater ability to make strategic, thoughtful decisions

• More authentic relationships with team members, customers and investors

• Space for creativity and innovation beyond pure financial metrics

Our philosophy isn't just about making money—it's about creating businesses that allow founders and investors to thrive personally, not just financially. In a world obsessed with unicorns and endless scaling, we believe there's immense value in building companies that respect human potential and well-being. And at the end, as we show in the graph above, you are more likely to create financial wealth with a capital efficient approach.

The Solution: Finding a TRULY aligned CAPITAL EFFICIENT crew of investors, founders and operators

We’ve been doing well thanks to our capital efficient approach over the last decade+ but why are we writing this? Because it’s hard to swim upstream! We have ended up several times stuck in cap tables with co-investors providing totally different advice and going forward we are on a mission to find co-investors that are TRULY aligned.

Finding investors that are truly aligned is very hard. And finding operators, advisors and founders with the discipline and skills to pursue this path is even harder. Fortunately, we're building a network of pragmatic, under-the-radar, and incredibly smart entrepreneurs who've succeeded with this model. Some examples from our San Diego ecosystem include Jenna from Uqora, Claire Weston from Reveal Biosciences, Colin from Chatmeter, Jason Young from Brixton, Craig Lee, Nina Saberi, among others. These are the type of founders and mentors that we need to galvanize to create a new ecosystem that celebraters capital efficiency and human flourishing.

Are you a fund manager or founder who shares this mindset? Reach out. Let's collaborate and build a more sustainable, efficient startup ecosystem. It's time to stop swimming upstream in a broken VC model that doesn't serve us or our founders. Join us in the capital efficiency revolution. Let's rewrite the rules of early stage business building together!