In PayPal’s Early Days, We Lost Money on Every Transaction

The dot-com crash forced PayPal to charge a fee
In the early days of PayPal, we lost money on every transaction. The product was free, and we lost about 2.5% of the transaction to fraud and credit card fees. We liked to say, “When you’re losing money on every transaction, you can’t make it up in volume.” We realized that we needed to introduce fees. More

Get the Operation Working at a Small Scale

Know your unit costs, focus on pricing and prioritize zero-to-one problems
If you’re running a tech-enabled startup—a business that combines software and meaningful physical world components—I recommend a few things. You need to develop proficiency in cost attribution from a much earlier stage than a purely software business; you need a much more detailed understanding of your unit costs than a typical SaaS startup. More

‘Tech-Enabled’ Often Means Thin Margins

The economics of tech-enabled businesses look like the businesses they're replacing
The problem with this new generation of tech-enabled businesses is that their economics and business models look similar to the companies they’re replacing. Uber’s business model looks much more like the taxicab industry than a purely software business. Subsidizing rides and guaranteeing the drivers a minimum fare makes them take on the economics of the taxicab industry. More

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

Pure software businesses never had to be cost-conscious
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. More

You Can’t Optimize Profits If There Are No Profits to Optimize

Scaling with negative unit economics leaves no profit to optimize
Every startup needs to develop the muscle of attributing costs and calculating unit economics. It’s often under-developed because most founders believe profitability is something they can optimize down the road. After all, finding product-market fit is the most important thing. Then, they have to beat the competition. They believe they can optimize profitability later. More

Negative Unit Economics Create the Illusion of Success

This leads to a brutal restructuring at massive scale
People are already familiar with core metrics like unit economics. The question is: Why does negative unit economics catch startups by surprise? The answer is that, in a lot of cases, unit economics are hard to measure. It’s easy to understand that negative unit economics are bad—you’re selling your product for less than its variable cost. More

Startups Are Susceptible to ‘Happy Talk’

The burden of proof should be the same for good and bad news
A lot of founders are susceptible to “happy talk.”  They only want to hear good news; they want to believe. If I’m in a board meeting, trying to explain that things aren’t going that well, the founder will often demand an extraordinary amount of proof. But if I’m saying something positive, the burden of proof is very low. More

Mature Your Culture as You Grow

What works at the early stage won’t work at scale
Just as founders should balance their own psychology, they should also balance the psychology of the “hive mind,” the corporate mind. There are a few ways to do this. The first step is choosing the right cofounders. A strong founder will have a blind spot for their own worst traits—we all do—so the best cultures usually come from a yin-yang relationship. More

Nobody Wants to Give a Founder Tough Love

Smart founders ask people what they really think
VCs now compete to see who can be the most pro-founder. They don’t want to tell founders they’re doing something wrong or give them any tough love.  Founders of fast-growing companies get to pick their board members. The whole ecosystem is pro-founder—and that’s as it should be. But smart founders go out of their way to ask board members and advisors what they really think, especially if they’re reluctant to speak up. More