Dear Unit Economics, I Hate You

Photo Cedit — Ariel Verber

Unit economics — the most terrifying term in the entrepreneurial dictionary, is a vicious serial startup killer that is walking amongst us. Passionate entrepreneurs with revolutionary visions of changing the world are spending most of their time worrying about the usual founder struggles — continuously seeking the perfect business model, obsessing over product –market fit and pursuing rapid growth that would later on lead to scale. Somehow, mysteriously enough, dealing with the unit economics usually gets postponed to a later stage while completely ignoring this lethal killer, leading to the tragic yet highly predictable death of many companies.

Figuring out the unit economics is not rocket science, in fact it’s actually extremely simple and makes a lot of sense. In layman’s terms: earn more than you spend. The LTV (lifetime value) of a customer has to be higher than your CAC (customer acquisition cost). To the extent that the LTV exceeds the CAC, you have a business. Being able to acquire new customers, for less money than the amount of revenue that they will generate during the entire duration of their usage of your service, should be pretty obvious. It’s simple math. If you ask any kid in the first grade if he would be willing to sell a dollar for 70 cents he would probably look at you as if you were out of your mind, but this is the exact same phenomena happening in the Silicon Valley these days. Entrepreneurs are selling a lot of dollars for a lot of cents, refusing to recognize that something is wrong.

The main problem is that entrepreneurs are naturally very optimistic creatures, otherwise they wouldn’t be in this business to begin with. Now don’t get me wrong, believing in yourself and in the problem that you’re solving is crucial in order to succeed, nonetheless this blind faith leads many startups to the false belief in the infinite retention of customers, or the famous “everyone will talk about it”, assuming virality is a non-issue. In the B2C world, viral growth is often hoped for - unfortunately, in reality it’s usually not the case. We live in a time with an absurd number of low-margin, highly competitive companies. The funny thing is that some of these money-losing companies still manage to raise considerable amounts of money at unrealistic valuations. Did anyone say bubble?

The On-Demand Economy is a lie

We all want something, and we want it NOW! Consumer behavior has changed drastically in the past few years with the smartphones being heavily integrated into our lives.This revolution generated a sense of convenience and simplicity, which fast enough, resulted in the inescapable birth of what’s called — the on-demand economy.

Other than the enchanted magical Uber which is unquestionably an outlier in this folktale, there is a never-ending list of companies like Postmates, Shyp, Instacart, Seamless, Good Eggs or any other random product or service that is just a click of a button away. These companies are now starting to feel a bit troubled. Or at least they should be. Business models are constantly changing, while prices are steadily going up with strange kinky fees that are discreetly being added blaming what’s now called “changing market conditions”. Then of course there is the “gig economy”, which is the core infrastructure of the on-demand economy, making headlines these days on a daily basis and is about to undergo a legal makeover. Politicians and lawyers are now obligated to figure out a resolution for these technically defined as independents picking up gigs that all of a sudden account for 1 percent of the U.S. working-age population, according to a 2015 McKinsey Global Institute report. With the gig economy changing labor, the rules of workplace need to be changed accordingly, which will make it even harder for these on-demand startups to flourish.

These companies always have justification to how they will make the unit economics work despite the fact that the company is losing money. In my opinion, we’re talking about a much bigger problem. In the past two years or so every “Uber for X” company managed to raise big bulks of cash so that they couldn’t care less if they’re losing money on most of their orders because surely, big volumes will be the magic antidote. Paying more money to get a premium service is not innovative in any kind of way. It’s just another luxury service for people who can afford it, and this concept has been around for quite a while now. Stop fooling yourself folks, the gig is over.

Always be yourself, unless you can be a unicorn

When starting a new startup they tell you to fall in love with the problem and not the solution, but is that really enough? Finding a “pain” or inefficiency that people go through on a daily basis makes only half of the equation. Making a viable business out of that inefficiency is the second half of the equation that entrepreneurs usually tend to leave behind.

Sadly, we can’t all be unicorns. A_wareness_ should be added sooner rather than later to the list of key traits that make a successful entrepreneur because passion and tenacity is just not enough. Even though you might be sure that the planet couldn’t possibly exist without your solution, I would highly recommend thinking it over. Don’t waste your life savings and many years on an idea when you are completely ignorant of its viability. We entrepreneurs take risks against nearly impossible odds to be part of something big and meaningful in hopes of making an impact. Unfortunately, we all must accept the fact that some problems were just not meant to be solved.