Why Unit Economics Are Important for Startup Companies

An article we liked from Itay Sagie of Crunchbase:

Don’t Raise VC Money Before You Understand Unit Economics

Over the past couple of years, VCs have become more conservative, expecting significant commercial traction and a stellar team to get funding.

The coronavirus has not loosened these criteria. Commercial traction is not a magic phrase that gets you money. The quality of this traction and how that projects into the future matters even more.

Investors will ask questions such as:

How much money are you spending to get each client?
What is each client worth to you?
What percentages of your clients will churn?
When do you expect profitability?

These types of questions help investors create an economic health check, otherwise known as Unit Economics. The outcome will determine if you have potential for sustainable growth and if your company has the potential to be valued at 8 or 10 times your revenues upon exit, meaning Enterprise Value (EV) / Revenue will be 8 or above.

Shift in the investor’s mindset

Unit Economics were not always in the investor’s mindset. Not long ago, investors rewarded high-growth companies, without looking at the costs. These companies survived and thrived for years, at the expense of...