How to form a smart capital allocation strategy

Companies with misguided capital strategies can veer off the path they’ve identified for future growth. We may be preaching to the choir, but a good CFO is important for growth because they help take the guesswork out of capital allocation.

Growth is certainly a priority for Dominic Phillips, CFO at Samsara, which provides technologies for improving the safety and efficiency of customers’ physical operations.

Like many CFOs, Phillips contributes to Samsara’s growth goals by setting its capital strategies and the frameworks for how it should invest its dollars.

“Capital allocation and discipline is a big part of my job,” he told CFO Brew.

Phillips joined Samsara in late 2019, when it was still private. The company went public about four years ago, and held its 16th earnings call in December. Samsara, which was founded in 2015, recorded nearly $1.8 billion in annual recurring revenue (ARR) in Q3, according to its earnings report.

He recently walked us through how he sets Samsara’s capital strategy and spots growth opportunities. Our interview took place shortly after Samsara reported nearly 30% YoY growth both in revenue and ARR, plus its first quarter of GAAP profitability.

Careful planning. The finance team works with other functions “to hypothesize where we think the biggest opportunities are going to be,” Phillips said. They form their hypotheses by monitoring competitors, sizing market opportunities, and reviewing customer feedback.

“There are a lot of inputs…we use to say, based on what we’re seeing and what we’re sizing, we think these are the biggest opportunities and where we should deploy capital,” he said.

Samsara is comfortable with “taking a lot of shots on goal,” Phillips said. “We want to spread and take a lot of bets, as opposed to going really deep and taking big, risky, concentrated bets.”

This strategy requires “the discipline to track the performance” of Samsara’s investments, Phillips said. The AI dash camera is Samsara’s “largest and fastest growing product category,” even though it wasn’t the first product the company offered, he explained. These cameras use AI technology to determine if a driver is tired, wearing a seatbelt, or on their phone. It can also detect forward collision warnings, he said. “As we saw that take off and really do well, it was very clear that this is an area where we need to allocate more capital.”

AI technology can detect dangerous driving behavior, anticipate pedestrian behavior, and improve maintenance costs and fuel efficiency, according to a report from the Intelligent Transportation Society of America and Cambridge Consultants. And a recent Samsara report found that customers using its AI products reduced their crash rates by 73% over 30 months.

Other initiatives didn’t pan out. Samsara used to make cameras for factories or warehouses that used “computer vision models to detect deficiencies or anomalies,” such as improper product-label placement on an assembly line, Phillips said.

This product needed a lot of implementation support to work well, whereas Samsara’s most successful products “work out of the box,” Phillips said. “And so we reallocated that capital to other products,” he said.

Samsara’s capital allocation strategy appears to be aligned with recommendations from consulting firm Gartner. Michelle Carlsen, director and analyst in Gartner’s finance practice, wrote last year that CFOs should “adopt a capital allocation framework that prioritizes high-return opportunities” during periods of “economic uncertainty and expensive capital.”

Carlsen noted that “flexible capital allocation is a hallmark of companies that achieve the desired internal rate of return” from their growth investments, yet few companies “consistently reallocate capital from low-value uses to higher-value uses when business conditions change.”

Diving into growth. Samsara had a banner Q3 in customer additions, according to an earnings release. It added 219 customers that pay $100,000 each year for Samsara’s products, and 17 customers that pay $1 million or more annually, both of which are quarterly records.

Phillips believes there’s still plenty of room to grow, and said Samsara can continue on its trajectory by adding products, expanding internationally, growing within specific customer segments, and expanding further in targeted industries.

In many cases, Samsara isn’t replacing legacy technology for customers—it’s installing safety tech for the first time, according to Phillips. He added that most commercial vehicles in the US still don’t have AI cameras. “There’s a massive opportunity, even just with that one product category, to drive a lot of safety improvements, lower insurance premiums, [and] reduce accidents.”