Get the Operation Working at a Small Scale

David Sacks: If you’re running a tech-enabled startup—a business that combines software and meaningful physical world components—I recommend a few things.

1. Know your unit costs early

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.

For early-stage startups, this is harder than it sounds because the finance function is still immature. Cost of goods sold aren’t typically purchased in units. They’re purchased in larger chunks and then unitized based on assumptions. Those assumptions must constantly be checked to figure out which costs are one-time, ongoing, temporarily inflated or can be brought down with scale.

2. Don’t sell dollar bills for 90 cents

You also have to pay a lot more attention to pricing. In a typical SaaS startup, the goal is to get over the penny gap to prove that a customer will pay anything for the product. This works because Saas companies have perfect gross margins. But if you operate a tech-enabled startup, you have to make sure you’re pricing the product so you’re not selling dollar bills for 90 cents. This will not create a viable long-term business.

It’s easy to create the illusion of product-market fit by giving away a physical world product or service for less than it costs, because legacy competitors can’t compete with negative unit economics.

3. Prioritize zero-to-one problems

You need to prioritize your zero-to-one problems—like establishing positive unit economics in a culture valuing operational excellence—before addressing one-to-n problems.

Tech-enabled startups are much better off when they get the operation to work at a small scale in one market, with the right teamwork and culture, before expanding to other markets.

However, the competitive pressure to go wide and beat competitors often forces companies into premature scaling into multiple markets. I recommend holding back from that, to the extent you can.