There’s a lot of recent whispering out there about sustainability and profitability. The world got alerted when in the second half of 2019 Japanese conglomerate SoftBank, a major investor in Uber, Slack and other stellar startups, got shaken by the weak performance of some of its major investments. Not to mention the dramatic failure of WeWork.

Uber, just like Amazon, is a global tech monopoly in its respective field (that’s why they call it “Amazon of transportation”), but do you know what else makes these two similar?

They wouldn’t have been the companies they are today without their growth tactic: blitzscaling. It is a shortcut to immense growth via cash burning, resulting in massive edge in technology and customer base. You’re simply pouring in the money even if the numbers don’t make sense. Sustainability may seem trivial and profitability got a red light. What if the traffic signs don’t work and the business will never see its profits? The argument is that the growth would eventually compensate for the financial losses sometime in the future. Note: eventually does not mean definitely and, at one point, each business has to take certain measures to ensure sound financial standing in the long-run.

It took Amazon over a decade to touch the profits. Uber is yet to be profitable and its CEO recently said it would finally happen by the end of 2020. The main question is: when Uber decides to take measures toward profitability, to what extent would their customers stop using the Uber app? We @ArzanVC don’t feel it’s going to be anything major! Uber improved our daily logistical life and most people would be willing to pay more. (Let’s hope that’s the case—we have invested in a number of mobility players.)

Ultimately, we all want our businesses to be sustainable and profitable. Blitzscaling is a valid growth approach, but it doesn’t fit all business models. Many investors are recently eyeing businesses that opted for a bootstrapping tactic. Those who deliberately focus on the most profitable areas and slow, paced growth. If Uber got bootstrapped, it wouldn’t have grown so fast and it would have most probably been already profitable for some time. Or maybe it would no longer exist, since other players would have grasped the opportunity and burnt cash to grow their market share at the expense of Uber!

We shouldn’t need to remind you that each starting business must know the right ingredients of success and you must take into account different factors when considering a certain growth strategy. Is there a way to find out and predict the feasibility of your business model? Call in unit economics. It is a tool that tells you how much money one unit of any solution or service will generate. Essential from day 1. How much does it cost you to generate $1 value? Unit economics basically measures how much the business gains (or loses) from each customer (or transaction). You can then know if you are on the right path to profits and what to focus on in order to make that hit.

 Many startups are losing with each new customer. Why? Because it costs them a certain amount to attract a customer who is not going to stay with them for long. If you spend $2 for $1 value and your customer base is expanding way too fast, you will only be able to go on at this pace until all your money runs out… 💸

In simple terms, you need to balance well your customer acquisition cost (CAC) and customer lifetime value (CLV). That balance can be either positive or negative. Positive unit economics brings cash in, negative robs you of it. If your CAC is bigger than your CLV, you’re basically paying your customers to use your service. You may gain a mighty market share in the early stages, but that alone would not make your business sustainable. In the early days of Uber, Lyft and WeWork, no one looked at profitability—they actually used to make fun of anyone who would do that! After all, VCs are not in the business of early profitability yet the value proposition of any business should always be sticky and impactful. Are your customers willing to spend more or can they “live without you” once you start playing with the pricing? If they feel like your services/solutions are “nice to have but not must-haves,” this means they will be sensitive to price changes, lowered quality etc.

The lesson for 2020 is simple—hold on to your fundamentals and focus on real value creation.

Being over-ambitious on your growth strategy may often turn out to be risky. Do your unit economics, set realistic targets and spend responsibly so that you are able to create and sustain your value. Do you want to have recurring revenues? Then persuade your customers to stay with you for a while. Get under their skin.

TL;DR (too long; didn’t read) 
Following the falls and losses of many flagship startups in 2019, businesses (and investors!) shift their attention towards unit economics. Measuring costs/gains per transaction can reveal a lot about the future sustainability of any business. Growth-at-any-cost is becoming a strategy of yesterday. Today cares about the value proposition, so that tomorrow could be about long-term sustainability.