With the debacles of 2019, it doesn’t take a genius to figure out that investors are feeling burned. To top it all the ongoing pandemic and the following expected slowdown has led investors to re-evaluate the investing strategies. A path to profitability is becoming increasingly more desirable than achieving a sky-high valuation.
What we now observe is more founders pledging to be focused on profitability and less on achieving high valuations with a “growth at all costs” mentality. In fact, with the number of layoffs from high-flying start-ups, the lean start up mentality may be making a comeback.
At Auxano, elementary matrices are deployed while considering investment to evaluate the prospects of profitable growth, namely
- Cost of Additional Sales
- Unit economics
To understanding the metrics let us take 3 examples
- Startups with SaaS (software as a service) offerings – Once a platform is built, the same software can be sold to infinite number of customers without any direct cost of additional sale.
- Startups with SaaS offerings with customisation – Herein, the man hours deployed to customise the platform, will add up to the cost of additional sales, which can be controlled as the bulk of the work has already been done.
- Startups with product offerings – Every new sales, will require the new product and the cost of the same with inbound and outbound logistics will be the cost of additional sales, which can run very high in certain cases revenue lesser than cost.
In case 1 & 2 identifying unit economics is next to impossible. The concept of amortising technology asset is gaining more relevance than ever before.
To estimate unit economics, valuable life of technology has to be considered and equated with expected traction over the valuable life to reach to unit level basic cost. Post that other direct expenses need to be considered at unit level to reach to a breakeven price. The breakeven price would reveal the Total Addressable Market (TAM) & Serviceable Addressable Market (SAM) more precisely. With the above matrix of market share, cost and unit pricing, the contribution of the transactions can be identified and the road map to profitable growth be prepared. Achieving profitability is a function of execution
Projections without the supporting calculations are just beautiful numbers.
For case 3 start up the maths is same but much simpler and free from judgement biases.
At Auxano, we believe investor capital is to support growth, but businesses where cost of sales is greater than sales revenue, even scale cannot yield profitability. Thus primary filter applies, revenue per sale should be greater than cost of sale under ordinary business practice.
Of the start-ups having positive revenue to cost of sales ratio, if the cost of additional revenue decreases, that is where the Golden ring lies.
Auxano is not only keen in making the next unicorn or top-line growth at any cost, but focuses on businesses and entrepreneurs which exhibit scope & mind-set of profitable growth.
