Silicon Valley Startups: A Case Study

Good Essays
You have probably heard that there is a growing problem with Silicon Valley startups. The typical excuses include valuations being too high, companies staying private too long and extraordinary burn rates. But one thing continues to be overlooked and that’s unit economics. Unit economics is a basic concept that looks at the direct revenues and cost associated with a particular business model. This is specifically expressed on a per unit basis and can resonate with businesses of all size, large and small.

Startups, now more than ever, struggle to explain how their unit economics will ever make sense. Essentially these companies are losing money on an ongoing basis with no signs of ever turning a profit. A change in mentality to improve unit
…show more content…
More often than not you find a venture-backed company running double digit sales growth while continually taking a loss. In fact, many of these same companies have well prepared financials showing they will never make a profit. Startups then turn to capital markets to help them raise huge amounts of funding and maintain operations. Companies that have raised exorbitant amounts of money are most at risk. Spending more money instead of addressing the issues just creates more problems.
High burn rates aren’t necessarily a problem, but coupled with a scaling business, they can look scary. This has been a problem for Tesla. The electric car company continues to lose money while making more cars. Recently it issued $2 billion in shares to meet the increasing demand for the Model 3. Assuming the Model 3 is just as unprofitable, Tesla’s financial outlook a year from now might be bleak.

What Does It Mean for
…show more content…
Since 2014, startups have been able to raise capital on the best terms since the turn of the millennium. More funding with less dilution works in favor of entrepreneurs. Inexpensive equity funding enables startups to raise huge amounts of capital and disrupt the incumbent players. If investors were to shift their focus to unit economics new startups would be in for a rude awakening. Raising money will become harder than it is today, increasing the risk for early stage startups to go under. The sooner investors use unit economics to identify a viable business, valuations will come down, capital markets will stabilize, and the budding tech bubble will start to

Related Documents

  • Decent Essays

    Altera Case Study

    • 1833 Words
    • 8 Pages

    The high tech market of semiconductor devices is highly volatile and forecasts are dependable only to a certain extent as technological breakthroughs would shift the demand in entirely new direction. Customers need to have flexibility in terms of owning inventories or writing- off orders during such market changes. The supply chain of Altera before and after implementing the strategy is shown below: Altera could revamp its inventory through little changes in its supply chain strategy. By moving the push-pull boundary upstream, the company could save millions of dollars. But the move was well though off, as the processes which were now part of the pull from the customers’ side involved a short lead time.…

    • 1833 Words
    • 8 Pages
    Decent Essays
  • Decent Essays

    This starts to cause the line separating high and low end vehicles fading. For the lower end consumer this is a huge plus, but now manufactures have to find new features for their higher end cars to attempt to stay ahead of the curve. Doing this increases cost in development. The rescission has hit the manufactures hard, but this won’t stop Toyota. While they are slowing starting to increase sales due to the economy on the turn around, their main focus is to capture more of the market share.…

    • 1407 Words
    • 6 Pages
    Decent Essays
  • Decent Essays

    The top nutritional companies which I have mentioned are formidable competitors and enjoy a sizable scale economy that is not easily accessed by a newcomer. To gain the market share that GPN have by a newcomer would be extremely difficult and would require a huge investment. The marketing and advertising costs to attract new customers and build a significant volume of sales while still maintaining a strong competitive price would be extremely high. As the market for this industry is thriving it may attract newcomers to invest in this industry and challenge competitors for some of their market share. Newcomers may drop the price of their good to attract customers so they can build up their market share.…

    • 1816 Words
    • 8 Pages
    Decent Essays
  • Decent Essays

    Starting A Small Business

    • 890 Words
    • 4 Pages

    Rather than working for another company, entrepreneurs are more interested in becoming their own boss and starting their own business. The rate of entrepreneurship is increasing drastically as the writers of The Future of Working would say. Branching out and starting your own business of course has its’ perks, however along with advantages comes disadvantages. With innovation and great ideas comes failure and not all ideas entrepreneurs come with are the greatest. Although the startup of a new small firm is relatively cheaper than if you were to start a large company, the work for a single person to manage is unbearable.…

    • 890 Words
    • 4 Pages
    Decent Essays
  • Decent Essays

    According to Business Wire, (2011) “Business scenario in today's context - niche opportunities, limited time periods, ever increasing risk and the need for precise decision making, which if not done correctly would run the costs in million even before brakes are exercised. That is the speed of business in today’s high-octane economies which are constantly metamorphosing into global empires of influence. Even the best decision makers have made mistakes which have wiped out entire reserves built over a period of hard work by the company's stakeholders including the employees. The responsibility imposed on the shoulders of senior management is immense and does not leave much room for mistakes to be absorbed by the interest holders in the company. In this scenario, the management needs a good, strong and logic driven decision-making tool which and can serve as easily referable, is common in language, can be applied globally with standard…

    • 859 Words
    • 4 Pages
    Decent Essays
  • Decent Essays

    The debt to equity ratio measures a company’s financial leverage by dividing its liabilities by its equity. A high ratio indicates a company is using too much financing to grow. Although financing is a great tool for increasing production and capital, it is significant that CanGo shows financial growth so that higher earnings can be distributed to shareholders rather than cash flow going to repaying debts. Barnes & Noble’s most recent debt to equity ratio is 0.33 (Businessweek.com, 2014), CanGo’s is 0.67 which is notably higher than the industry average. Still, other ratios tell us that CanGo is not financing its growth enough, and is being too cautious with its capital.…

    • 716 Words
    • 3 Pages
    Decent Essays
  • Decent Essays

    Without the large load, most of the positives of the SAN are useless till the company expands, costing more than it is returning till the company makes the necessary growth. Another disadvantage of SAN is that it is expensive. Steve Brown, CIO of Carlson, had this to say about the expenses of the upgrade: “The hardware wasn't cheap. Carlson CIO Steve Brown said the 12 IP switches, two routers and 10TB array cost a total of about $2 million. The company paid $40,000 each for Nishan's switches, $80,000 apiece for the Cisco routers and $1.2 million for the XP512” (Looking at… n.d.; Mearian,2002; Stallings, 2009, p. 314).…

    • 1084 Words
    • 5 Pages
    Decent Essays
  • Decent Essays

    During this phase, the Boom stage, the asset gains popularity. People fear of missing out, which furthers how fast the prices escalate. Later, in the Euphoria stage, caution about buying the asset is gone, and the price of it skyrockets. The theory that the price of an object isn't determined by its value, but the beliefs and expectations of the people buying them (a.k.a. the 'greater fool' theory) plays out everywhere.…

    • 1409 Words
    • 6 Pages
    Decent Essays
  • Decent Essays

    Without these means a business wouldn’t survive the economy in today society. Especially with the recession and unemployment at an all-time high. Jobs are scarce and proper communication is needed for a business to continue to grow. The most important part of appropriate interaction in business is finding a way to grow. As the world continues to change its seemingly harder for a business to grow, and as the recession prolongs, it will only get more difficult before it gets better.…

    • 789 Words
    • 4 Pages
    Decent Essays
  • Decent Essays

    Objectives Of Tesla Motors

    • 1360 Words
    • 6 Pages

    Founded in 2003, Tesla is a relatively new company that has had a variety of problems with their solvency. Although they were able to survive due to their continuous investment from investors, (Brooke Crothers 2015, para 4) states that Tesla loses more than $4000, per Model S sold, which shows the difficulties of creating a cost efficient product in niche market. Additionally, Tesla’s survivability is explained by (Boris Marjanovic, 2016, para 4), that Tesla can only sustain itself for another six to eight months if they sustain their ‘cash position of $1.2 billion and an estimated monthly cash burn rate of $150 million’. Although these figures show, Tesla 's short term insolvency, due to big investments into their operations, it shows that it is difficult for businesses to simultaneously achieve their economic and environmental responsibilities. In conclusion, for all, for-profit businesses their early stages of operations are geared towards achieving their economic line before taking in considerations of their social and environmental…

    • 1360 Words
    • 6 Pages
    Decent Essays

Related Topics