Expanding Fast vs. Dialing in the Model

David Sacks: Do you expand fast to beat the competition or take the time to dial in your business model? If you move fast, you risk negative unit economics or some other blitzfail. But if you wait, the competition may take the market.

There is no clear-cut answer to this problem. It depends on the market and its competitive dynamics. The fundraising criteria of late-stage investors is what determines the balance.

If there’s a massive $100B fund that only looks at the top line—they just want to see hyper-growth and aren’t focused on unit economics—then startups are forced to play that game. 

If some kingmaker fund says, “We’re going to give $1B to the fastest growing company to crush their competitors,” and they don’t care about the economics of it, then you’re forced to be that company.

Growth investors now seek positive unit economics

Growth investors recently have reevaluated their criteria. They’re suddenly much more conscious of unsustainable growth, such as growth at the expense of positive unit economics. If growth investors are requiring positive unit economics—as I think they are—it changes the game that’s on the field.

Founders should adjust their thinking accordingly. Just because they’re the fastest growing company doesn’t mean they will win the fundraising game anymore.

If I were a founder today, I would much rather have a positive unit economic model that’s working in a few cities than be the so-called “market leader” in 50 cities but operating with negative unit economics. I suspect growth investors would agree.

If you’re lucky enough to have few competitors, you have more breathing room to get the model right before you expand. On the other hand, if you have lots of competitors, you may feel a legitimate need to expand faster.

Finding the balance between these two extremes requires entrepreneurial judgment and a board that can help weigh the risks with you.