Check yourself before you wreck yourself
“We will lose a little money on every customer, but we will make it up in volume.”
Eh…no.
It is becoming increasingly clear that user growth without a corresponding increase in (unit-profitable) revenue growth is not a luxury founders in developing markets have.
There are many reasons why this is true, but the most important for today’s nugget is this: the nature of the companies built here — their DNA — means that they often don’t have a scalable advantage in customer acquisition costs. That is: the bigger they grow, the more likely they are to encounter customers who care less, spend less and churn more. Don’t believe the flywheel illustrations.
Too often, this isn’t well considered and companies find themselves coasting on the coattails of “user growth” or “Facebook likes” or “press mentions” until isht hits the fan and the music stops and the smoke clears. Party over. The entrepreneur’s job is to quickly understand the levers that impact their revenue growth and unit economics and work out ways to shift them in their favor.
Paul Graham frames this nicely:
“When I talk to a startup that’s been operating for more than 8 or 9 months, the first thing I want to know is almost always the same. Assuming their expenses remain constant and their revenue growth is what it’s been over the last several months, do they make it to profitability on the money they have left? Or to put it more dramatically, by default do they live or die?”
To succeed in markets that are superficially wide (but not very deep), founders must have a manic focus on discipline, capital efficiency, and unit profitability; every dollar spent, returning a dollar in its place and a dollar more.
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