What is the most important metric for startups in 2016?

2015 is the end of the growth era of startups. In 2016, following the question “What is your growth rate?”, The question “What is your unit economy?” Will be asked. This change in investor mentality is triggered by an increase in startup capital.

Starting in 2014 (and perhaps a little earlier), start-ups could achieve funding on better terms than ever. Due to the big competition among investors, you can get more money with less blurring of the share.

A low-cost investment dollar allows capital-intensive companies to accumulate the capital necessary for a successful struggle with competitors. To maintain this growth rate, startups like Uber and AirBnB require huge amounts of money. According to Crunchbase, Uber scored 10.1 billion dollars, and AirBnB - 2.4 billion. In just eight years from its inception to leadership in the industry, using a completely new model, and we also see a strange situation: the largest company -the carrier does not have a single taxi, and the largest company in the hotel sector does not have a single hotel. It is also important to note that real estate and transportation are two areas that startups have not yet replaced.
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In order to maintain this level of growth, such startups need to have large capital due to the payback period of the customer acquisition process, and more unstable startups need adequate capital to prove that their business model really works. Consider a theoretical example: there is a business with an income of $ 100 million, which wants to grow by 100% per year, while attracting each customer takes $ 400, and the payback period lasts 9 months, and the average annual income from each customer is $ 600. Thus, he has to spend 67 million dollars a year, while we ignore the turnover of customers. This is a huge amount, even if after a year, all customers will generate income.

And what happens if the company does not spend all this capital? Fragmentation of the market. Imagine regional taxi services, of which there are four in the US, each with its own application, different personnel sources, different working conditions. The total cost of these four services will be only a tiny part of the Uber estimate. Centralization creates a large-scale economy, especially in the framework of market activity, which justifies mass expansion, the purpose of which is dynamics like “the winner takes all”.

Capital markets have given impetus to the emergence of this type of start-ups, helping them recruit large capital at an attractive cost and destroy large markets. However, in the next 5-10 years, the cost of capital for startups will increase for three reasons. First, federal funds will continue to raise interest rates, which are now very low. In 2008, the federal funds rate was 5%. Today this figure reaches only 0.25-0.5%. Secondly, the stock market and higher prices in private investment markets for start-ups will compete with hedge funds, mutual funds and other private markets.

Collectively, these unconventional venture capital accounts for about 25% of the venture dollars invested over the past year, dragging off the resources of the bull market for startups. Third, venture capital will no longer earn a record amount of money. Considering the fact that last year more than 50 billion dollars were earned compared to 17 billion in 2001, it becomes obvious that such a redistribution of capital at some point will turn against companies. All this suggests that startups will have less money. Along with a decrease in demand prices will also go down.

When seed investors and “Series A” investors think about what investment to make in 2016, the main questions they will ask themselves will be “What capital will this company need to raise?” And “How difficult will it be?” Over time, getting money will become more difficult than today, and this will increase the risk for early stage investors - the risk that a startup does not earn the capital it needs.

Therefore, the next question will be: “How quickly can a business show that its unit-economy is working?” Indeed, at this stage, the business needs only money to grow. The faster this economy turns out to be a reliable enterprise, the greater will be the chances of receiving investments, even if stock markets are choking due to the circumstances described above.

Translation and revision of the article provided by the online education service foxcourse.com