Invest in Pure Tech Companies

What portion of every dollar goes to technology development?
There’s a class of startups that look like tech companies on the surface, but then you scratch them with a fingernail and find there’s little technology underneath. These are difficult companies to invest in. As an investor you need to ask: How much of every dollar invested is going into technology development and how much is going to things like scaling, customer acquisition, subsidizing rides or deliveries, or some physical product. More

Raising Money Without Any Product Is a Red Flag

If a team hasn’t built anything, what makes you think money will help?
One of the biggest red flags for an investor is when a team raises money before building any kind of product.  Business founders or sellers will say, “Hey, if you give me money, I will go and recruit the builders.” But if the team hasn’t built anything, what makes you think raising capital will allow them to do it? This is why having a product as the team’s resume is so important. More

The Product Is the Resume of the Team

At the seed stage the product tells you what the team is capable of
As an investor you want to apply judgment to pick good founders who are attacking large markets with credible products. We’ve talked about applying judgment to evaluate founders. Now let’s talk about applying judgment to evaluate products and markets.  Especially in an early stage investment, the product is really just a resume of the team. More

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