Categories
Tech Venture Capital

Unit economics: why they matter

Interesting times

Something seems off in the tech landscape lately. Nobody seems to be able to really pinpoint what’s going on but there is a general consensus that a bubble is forming and that the collapse might be imminent. In a world of continuous supply of cheap money facilitated by central banks (a trend that even accelerated post-Covid), we can’t help but notice that money has become a commodity. With increasingly more money chasing fewer opportunities in venture capital, we see venture capitalists pushing for growth at all costs. This growth at all costs is disrupting the basic economics that have basically been the driving mechanism behind several industries. Not only is this destruction harmful, it benefits absolutely nobody in the long run. Think about this pizzeria restaurant owner that ended up buying their $24 pizza’s themselves for $16 using DoorDash.

These stories might seem funny but what it actually signals is how VC and tech is completely disregarding unit economics and are destroying incentives and balances that have driven the local economic ecosystems for decades. What’s even crazier than the tactics that are being used to aggressively acquire customers, are the justifications of these actions. Like Sam Altman pointed out these practices are justified by claiming infinite retention, complete robotization of their labour costs or the claim that the acquisition costs will ultimately drop to zero.

undefined

How do you measure success?

It’s as if VC’s nowadays are willingly ignoring unit economics in plenty of cases. Companies like BlueApron and WeWork are companies that will probably always keep losing money. Yet they managed to secure funding rounds that enabled them to grow to giant corporations. How can companies with weak fundamentals make it this far? Are VC’s 10 steps ahead of everyone and indeed betting big on technological innovations that would decimate the costs? It wouldn’t be the first time that visionary’s in Silicon Valley are way ahead of the curve and are indeed anticipating certain game changers. Autonomous vehicles in the case of Uber or drone deliveries in the case of food delivery services would indeed change the game instantly and in that moment the first mover advantage would be so powerful that the big players that are now losing money on every delivery would come out as monopolists. Yet, ignoring unit economics is a dangerous practise and the question remains how long you stay operational when you lose money on every order. It makes your company fragile and completely dependent on radical innovations that might take longer than you expect.

“Nothing can give a startup the illusion of success like negative unit economics. This occurs when a startup is selling a product for less than its variable cost. Hypergrowth is easy when you’re selling dollar bills for 90 cents.” — David Sacks, Craft Ventures

The quote above by David Sacks underlines that fast top-line growth at the expense of poor unit economics is unsustainable. Stay tuned for an article on unit economics and how you should apply some basic management accounting to make sure your unit economics are healthy and growth is sustainable.

One reply on “Unit economics: why they matter”