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Finance: What Does "Capital Intensive" Mean? 27 Views


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What Does "Capital Intensive" Mean? “Capital Intensive” refers to those industries that require a high level of capital investment before business can commence, basically making the barrier of entry for entrepreneurs high. The capital investment is usually for fixed assets, such as machinery and other supplies, without which it would be impossible to enter the business in any capacity.

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Transcript

00:00

Finance a la shmoop what does capital-intensive mean? lots and lots and

00:08

lots and lots of capital yeah that's what it means starting a website, two [Two young kids setting up a website in a garage]

00:13

kids a garage and a nice home computer not capital intensive, drilling for oil

00:18

in the North Sea highly capital intensive...

00:22

well capital needed for the two kids in a garage building a search engine about

00:25

two million bucks capital needed for the oil rig well like ten billion bucks and

00:31

why does the capital intensity matter well if you can create Google that

00:36

generates a few billion dollars of free cash flow a quarter for a total capital

00:40

input of maybe a hundred million dollars ie a few rounds after the garage round [Equity investment agreement documents appear]

00:45

then investors in it make an absolute killing like if you don't dilute

00:49

yourselves and the stock goes up a lot life's good yeah hundreds or thousands

00:53

of times their original investment if you create BP British Petroleum or Royal

00:58

Dutch Shell or Chevron which also have a few billion dollars of free cash flow a [Cash flowing into fuel tanks]

01:02

quarter but it takes you ten billion dollars in capital to generate those

01:07

returns then yes you get a nice investment return but it's nothing that

01:11

you know Vikings sing songs about and it's the allure of the capital [Man typing on laptop]

01:16

unintensive businesses like building a website in Yahoo or a search engine in Google or a video streaming

01:22

site in Netflix that takes relatively small amounts of capital to start and

01:27

then produces mounds of free cash profits that has made venture

01:31

capitalists fall all over themselves hoping to find that one little garage [Person looking through binoculars at garages]

01:35

with the next great white whale yeah that's intensive...

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