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I cannot urge early stage startups enough to make a model of their unit economics. It is so telling what will likely cause great, early pain in your startup in the first 5 years. It’ll keep you honest & let you test the accuracy of your intuition. Buffer for the unknown.
For some it may be depressing but for others it’ll make you feel a stronger sense of conviction about clever ways you can improve things. That will help you focus more clearly on what’s important.
When constructing your unit economics model I highly recommend being conservative: assume churn is higher, estimated costs will be greater, improvements will have a reduced impact, average sales prices will be lower. Use similar companies as a benchmark.
When you make your spreadsheet use granular units (hours, GB, users) when calculating costs/revenue. Then adjust those knobs & play around. It helps build your intuition quickly to see what’s most impactful & what has diminishing returns. And, yet again, greatly clarifies focus.
You can spend many months living in this spreadsheet while in the midst of operating a company. It can feel like the only way to control something you don’t directly contribute to as CEO. So, don’t! Pick an area to improve & help fix it with the team. Get out of the spreadsheet!
When you’re done, find someone who will lend a critical eye & understands a business like yours to help you diagnose if you’re either missing something or a number is way off. This will help you build conviction that you’re not ignorant about something or extremely biased.
Don’t forget that even after you make this model you still to turn enough of a profit to pay many employees not factored in, facilities, food, etc. If you raised money, you may need to consider how fast you’re allowed to grow if you’re losing money due to runway constraints.
Death by poor unit economics is common. Often the founders will have wished they had that extra 6-9 mo of runway to run the experiments that could’ve turned it around. You may as well know now & start immediately once you’ve proved there’s demand.
