Startups Didn’t Need Great Accounting Until Software Ate the World

David Sacks: The unit economics problem has grown in recent years precisely because startups are eating the world.

Many startups today are an interesting mix of software and hardware, or software plus service. Uber is the paradigmatic example of this type of new company providing a physical service that’s enabled by software.

All of a sudden startups have had to get good at unit economics in a way they never had to when they were pure software companies.

A pure software business has perfect gross margins and unit economics because all of the cost is in creating the first copy of the software—the variable cost of producing additional copies is zero.

This is the realization that made Bill Gates the richest man in the world. Software was quite expensive at the time. He realized Microsoft could make cheap mass-market software and make it up in volume.

Startups never had to be good at accounting

Startups never had to be particularly good at accounting or being cost-conscious. Look at the benefits and Disneyland-style campuses of Google and Facebook: These are extraordinarily profitable businesses because the gross margins are fantastic. There are no cost of goods sold. The cost is only in creating the first copy of the software.

It wasn’t until software started eating the world that these hybrid software-physical world businesses emerged and unit economics became a factor.

This took the startup ecosystem by surprise. We were all trained to think that gross margins and unit economics didn’t matter because all the successful companies never paid any attention to these things.