In our earlier blog (Achieving Profitability) we saw the golden ring of profitability.
Unit Economics being an elementary matrix for evaluation, it is empirical to deep dive to understand unit economics and decode it right.
Not long ago,
Investors rewarded high-growth companies with less consideration to the unit economics.
These companies survived and thrived for years, at the expense of their investors, and
Normally hit a wall when attempting an IPO and or raising funds from more conservative larger investors.
Recently, VC industry has witnessed a pivot and the onset of the coronavirus and its impact, has further strengthened the result-based mindset. Those times are now passe when commercial traction could do the magic and get money . Unit economics is now in the investor’s mindset.
Investors are looking for entrepreneurs who understand Unit Economics. Even if the economic indicators will straighten out in a few years, they want to know that the entrepreneurs, knows where they are headed, and that they are measuring the right unit economic indicators to steer the ship in the right direction.
Significant commercial traction
Strong team,to get funding ,
Quality of the traction ,and how that projects into the future revenues , also matter at this stage.
Investors ask questions to determine -
Entrepreneurs understanding of the unit economics
Company’s potential for sustainable growth
To decode unit economics, investors ask question such as:
How much money is spent to get each client? – Customer Acquisition Cost (CAC)
What is each client worth to the company? – Life-Time Value (LTV) of the Client
What percentages of the clients churn? – Churn
When do you expect profitability? – Break Even Point (Value, Volume, Timeline)
CAC - Calculated by dividing all the costs spent on acquiring customers (marketing expenses) by the number of customers acquired in the period the money was spent.
LTV - Calculated as the gross profit per user in each period (Refer earlier blog), multiplied by the lifetime. Lifetime is calculated as one divided by churn over the same period.
Churn - Churn is the percentage of people who leave in a period.
Decoding the Matrices
The parameters above yield no relevant insights until put in proper metrices which enable analysis. The metrics include:
While building the forecast and business plan, entrepreneurs should note the basic unit economic indicators and present them using relevant metrices.
Adhering to the Unit Economic mentality could help companies’ commercially as well as with the fundraising.