Startups, Mind Your Unit Economics
Unit economics are the financials associated with cost and earn of a unit of something in your business. Cost to make a unit of your product, cost to attain a customer, what you earn per customer, etc. Quotes from Y Combinator’s Sam Altman to remind you why good unit economics is golden.
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Startups and entrepreneurs, mind your unit economics. If you’re making a profit per customer you have, great. If you’re at least closer to making a profit per customer this year than you were last year, that’s great too. What’s not so good is if your expenses and VC funding are rising and you’re moving further and further away from making a profit for every customer you have.
“There are now more businesses than I ever remember before that struggle to explain how their unit economics are ever going to make sense. It usually requires an explanation on the order of infinite retention (“yes, our sales and marketing costs are really high and our annual profit margins per user are thin, but we’re going to keep the customer forever”), a massive reduction in costs (“we’re going to replace all our human labor with robots”), a claim that eventually the company can stop buying users (“we acquire users for more than they’re worth for now just to get the flywheel spinning”), or something even less plausible.”
“[Cash] burn rates by themselves are not scary. Burn rates are scary when you scale the business up and the model doesn’t look any better. Burn rates are also scary when runway is short (i.e., burning $2M a month with $100M in the bank is fine; burning $1M a month with $3M in the bank is really bad) even if the unit economics look great.
The good news is that if you’re aware of this you can avoid the trap. If there’s no other way to operate in your space, maybe it’s a bad business. The low-margin, hyper-competitive world is not the only place to be. Companies always have an explanation about how they’re going to fix unit economics, so you really have to go out of your way not to delude yourself.”
If you hold yourself to the standard of making a product that is so good people spontaneously recommend it to their friends, and you have an easy-to-understand business model where you make more than you spend on each user, and it gets better not worse as you get bigger…”
We are going to stop quoting here. If you have managed to do this, you have won, my friend.
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