Solid Unit Economics, but Why Though?

As a startup growth advisor, it's essential to understand the changing landscape of investor preferences and market conditions. Currently, venture capitalists (VCs) are emphasizing the importance of unit economics, cash reserves, and maintaining a conservative approach to hiring. The objective is to achieve cash flow neutrality or positivity and prepare for potential challenges ahead.

Just a few months ago, however, VCs had a different mindset.

They encouraged companies to invest in growth, talent acquisition, and overall spending, as long as it drove revenue growth at an accelerated pace. The key difference between these two approaches lies in investor confidence and their willingness to invest capital without a clear path to profitability.

Now, let's explore the advantages of building your company around solid unit economics, unlike certain examples such as Fast, which achieved a high valuation ($1B) but had minimal annual revenue ($600K). By prioritizing unit economics and reserving cash, you position your business to weather economic storms effectively.

During the initial stages of the pandemic in 2020, while many businesses were pulling back, our ecommerce company adopted a different strategy. Leveraging our strong unit economics and focus on profitability, we made the bold decision to double down on ad spend. This move resulted in a 90% reduction in customer acquisition costs (CAC) due to reduced competition and significantly boosted our revenue by fourfold.

In a similar vein, back in 2009 during the recession, the customer intelligence firm I joined, Vision Critical, experienced an overflow of work, necessitating the need for additional hires. While other companies struggled to keep up with customer sentiment and needs, we utilized communities and active market research to maintain strong customer relationships and reduce churn.

Reflecting on the 2008 financial crisis, when long lines formed outside banks, my cybersecurity firm experienced overwhelming demand. Despite the challenging economic conditions, we focused on executing our sales strategies, preserving cash, and investing only in areas that delivered the highest returns. By staying cash flow positive and remaining attuned to our customers' needs, we not only survived but thrived.

During the dot-com bubble from 1999 to 2002, the online learning management platform WebCT faced tough times, resulting in layoffs. While fortunate enough to keep my job, I witnessed firsthand the austerity measures necessary to preserve cash and focus on sales, all while innovating to meet market demands. Our emphasis on delivering results, maintaining a scrappy mindset, and prioritizing the needs of our customers enabled us to weather the storm and remain cash flow positive.

Regardless of market conditions, there will always be winners and losers.

The winning companies are those that innovate in response to market changes, start with strong fundamentals, possess ample financial reserves to withstand challenges, or preferably, a combination of all three. Furthermore, there will always be consumer demand for essential products and services, presenting opportunities for businesses in these sectors.

We have demonstrated our resilience by successfully navigating the worst-case scenario—the pandemic-induced economic shutdown.

Similarly, we will overcome the challenges of this downturn. To position your company for success, it is crucial to focus on your captivated audience—those who have ongoing spending needs regardless of economic fluctuations. By ensuring that the economics of your target audience align favorably with your business objectives, you can drive profitability even in uncertain times.