Silicon Valley Startups: A Case Study

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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
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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
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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

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