How To Evaluate Your Startup Idea With Simple Calculation
How To Evaluate Your Startup Idea With Simple Calculation
Unit economics provides a framework for measuring the profitability of selling one unit of your solution. Knowing what it will take to profit from every transaction is key to evaluating the potential of the startup idea and the different levers that need to be focused on for the numbers to add up.GETTY
Many ideas sound interesting on paper but are not viable in practice. Some ideas are interesting and viable but not feasible without a large sum of money. Other ideas are interesting, viable and feasible with a little bit of funding and hard work.
Every idea has different viability, validity, feasibility, capital requirement and potential characteristics. Entrepreneurs must evaluate their ideas against those characteristics, vision and goals before taking the first step forward. Failure to account for them in the beginnings will have major consequences later in the venture. More specifically, waste of resources and startup failure.
Take the example of Uber and Amazon. Those are two interesting business model innovations with growth potential but a huge dependence on cash for venture initiation and growth. The two companies and many others operated under the blitzscaling philosophy documented by Reid Hoffman that suggests continuously investing to accelerate growth even if the numbers don’t add up in terms of short-term profitability and self-sustainability.
The idea is that the growth will eventually compensate for the losses through future promising revenue channels and market share. It took Amazon over a decade to hit profitability while Uber is still unprofitable.
Bootstrapping and blitzscaling cannot work together. If Amazon and Uber were bootstrapped, they would have grown slowly by focusing on their most profitable segments and areas, but their founders had a vision to build giant companies with investors’ support, what’s your vision? Not matter what it is, the numbers have to add up even if your target values cannot be reached in the short-term.
While predicting future values is not easy, every entrepreneur should run back-of-the-envelope calculations to identify the conditions that will make their ideas profitable at some point in the future (and when?).
