Capital Intensity

The amount of capital a business needs to invest, in equipment, inventory or projects, to generate revenue and grow.

Example

A hardware company tying up 3,000,000 in inventory before sales.

Important

Capital-intensive businesses can consume cash as they grow, so fast growth does not necessarily fund itself.

Related terms

• Working capital — The money tied up in ordinary trading. The operating version - receivables plus inventory minus payables - excludes cash and borrowings, and is the one that behaves like a use of money.
• Bill of Materials — The list and total cost of parts, components and assembly needed to produce one unit of a physical product.

Lessons that explain it

• AI companies can have software growth with hardware-like costs; deep tech trades time for defensibility — AI businesses must be judged on the cost of running models and on what protects them from competitors using the same models. Deep tech companies face technical risk and long timelines before revenue, in exchange for harder-to-copy advantages. (12 min)
• Biotech outcomes are often binary; healthtech outcomes depend on who pays — Biotech value is driven by clinical trials with low overall success rates and long timelines. Healthtech depends on proving clinical or economic value and securing payment from hospitals, insurers or health systems. (13 min)
• Climate and hardware companies need capital before revenue and margins before scale — Physical-product businesses face manufacturing risk, inventory, lower gross margins and large capital needs. Many climate companies also depend on policy and on project finance to deploy their technology. (11 min)
• Consumer businesses live or die on acquisition cost and repeat purchase - and some questions apply everywhere — Consumer companies depend on the relationship between customer lifetime value and acquisition cost, brand and channel. Across all sectors, unit economics, retention, capital needs and time to revenue are the questions that travel. (12 min)
• Ask what breaks, and what it costs, at ten times the customers — Technical diligence tests whether a product can serve far more customers without collapsing or destroying margins, by looking at architecture, infrastructure costs and past incidents. (11 min)
• How a company makes money determines what good numbers look like — Subscription software, marketplaces, transactional businesses, advertising, hardware and services each have different margins, growth patterns and risks. The same metric means different things across them. (11 min)

All 578 terms in the Investing glossary