Unlocking Value with Contributed Capital Return
Contributed Capital Return (CCR) is a financial metric that estimates the potential value created by new contributions or reinvested earnings into a company.
I’ve found it to be a helpful frame to evaluate the efficiency of capital allocation and deployment when comparing alternatives, with a focus on value creation over time. It is particularly helpful if the company is working towards a first-class exit.
How to Calculate CCR
Determine the inputs:
Dollars Invested ($X)
Units Created ($Y), being revenue, EBITDA, or another financial metric
The Multiple (Z)
Years to Liquidity (T)
Perform the calculations:
Potential Value Created ($V) = $Y x Z.
Determine CCR = $V / $X.
Calculate CCR over time = CCR / T.
Notes
If CCR ≥ 1, the investment is potentially accretive (based on the assumptions).
It is important to consider the timing of when the investment is made, when the Units Created are realised, and to confirm the measurement period aligns appropriately.
It often makes sense to have a margin of safety in the input assumptions.
When to Consider Using It
Exit Planning: Aligning investment decisions with an exit strategy, considering the expected exit multiples and timelines.
Comparing Alternatives: Weighing different growth strategies, investment, or reinvestment alternatives to make data-driven decisions.
Assessing New Investments: When contemplating new investment opportunities or additional funding rounds.
Examples
Software Company Example
Inputs
Dollars invested (X) = $1m
Units Created (Y) = $2m (recurring revenue)
Multiple (Z) = 6x (revenue multiple)
Years to liquidity (T) = 2
Calculations
Potential value created = V = $2m x 6 = $12m
CCR = $12m / $1m = 12x
CCR over time = 12 / 2 = 6x (simple return on investment of 600% per year)
Conclusion
For this software company, investing $1m to generate $2m of recurring revenue at a 6x revenue multiple with 2 years to liquidity would result in a CCR of 12x or 6x per year.
Ecommerce Company Example
Inputs
Dollars invested (X) = $1m
Units Created (Y) = $1m (EBITDA)
Multiple (Z) = 8x (EBITDA multiple)
Years to liquidity (T) = 1.5
Calculations
Potential value created = V = $1m x 8 = $8m
CCR = $8m / $1m = 8x
CCR over time = 8 / 1.5 ≈ 5.33x (simple return on investment of approximately 533% per year)
Conclusion
For this ecommerce company, investing $1m to generate $1m of profit at an 8x EBITDA multiple with 1.5 years to liquidity would result in a CCR of 8x, or approximately 5.33x per year.
Benefits and Limitations
Benefits
Alignment with Exit Strategy: By considering exit multiples, CCR integrates investment decisions with long-term exit planning.
Ease of Use: The straightforward formula makes it accessible to help make informed decisions around investment, raising funds and exit.
Versatility: CCR applies to various industries and investment scenarios, offering insights into potential value created through investments.
Limitations
Limited Scope: CCR may not be suitable for businesses without a clear exit strategy (e.g. startups or those working on a long time horizon) or those focused on immediate ROI and the metric may not capture all financial complexities (e.g. how much revenue is actually recurring, what will churn be, what will the relevant unit be at exit), operational efficiency or nuances specific to certain businesses.
Dependence on Accurate Assumptions: The validity of the results depends heavily on accurate assumptions and inputs, such as multiples and time to liquidity.
Internally focussed: CCR is most useful as an internal frame of reference. Different parties (e.g. shareholders, new investors or acquirers) will likely have different ways of measuring and expressing value
Alternative metrics to consider
ROC (Return on Capital) - Measures return on total capital invested, encompassing both debt and equity. A broad gauge of capital efficiency.
ROE (Return on Equity) - Focuses on shareholder profitability, assessing how much profit is generated with shareholder funds.
ROIC (Return on Invested Capital) - Includes capital from shareholders and debt holders, evaluating efficiency in allocating capital to profitable investments.
ROIIC (Return on Incremental Invested Capital) - A more specific measure, analysing the return on incremental capital invested during a particular period.
NPV (Net Present Value) - Accounts for the present value of both cash inflows and outflows over time, offering a comprehensive view of an investment's value.
The above metrics can be distinguished from CCR, which is a simplified approach that provides a tailored way to evaluate new contributions and reinvestments in the context of an exit strategy and time to liquidity.
Final thoughts
I’ve used Contributed Capital Return (CCR) in various forms for more than 20 years when considering working towards exit or liquidity. It is broadly applicable and I’ve used it with software, ecommerce and digital services companies that have a reasonable level of scale and are working towards a strategic exit or financial acquisition.
See also: a first-class exit and exit equation.
