David Sacks: 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.
You can’t optimize for profitability if there are no profits
That’s generally true—as long as there are profits to optimize. Some companies discover very late that there aren’t any profits because of negative unit economics. Suddenly, they’re looking for a scalable model when they’re already at scale, which is a contradiction in terms. This leads to a brutal restructuring.
WeWork is an extreme case. They filed an S-1 before they discovered there might be a giant unit economics problem and that 15,000 employees was way too many for their business. Public investors had to send the message that the unit economics weren’t working.
Raise the financial bar with each round
Public investors scrutinize unit economics more closely than early-stage investors do. Venture investors have access to fewer data points. They just try to find ideas that seem to be working and can grow very broadly.
Growth investors are somewhat in between. They look at more data and they look more closely, but they’re also looking for fast-growth startups.
Startups need to raise the financial bar with each round. When they raise their seed round, they’re not going to have any financial information. When they raise their Series A, they’ll have some.
By the time they get to their Series B, they should know their unit economics. A good growth investor won’t want to invest unless they have positive unit economics.