From my own experiences, I see the gross majority of new founders conclude at the outset of launching a new venture that they need to raise money. In the mad rush of launching a new venture and raising capital, the focus often falls on generating sales (rightly so) and showcasing growth as a primary lure for investors. However, while sales are critical in any venture, understanding the underlying unit economics of your business can play an even more critical role, particularly when raising funds. It’s this deeper dive into the numbers that reveals sustainable potential of your startup, beyond the initial trickling in of revenue.

What and why unit economics?

Once a venture leaves the friends and family zone where one’s own personal network became the first users/clients, a venture must begin to market and sell to an unknown universe. It is in this phase where unit economics start to build. Unit economics break down your revenue and costs on a per-unit basis, offering a clear view of profitability. This granular insight is essential because it shows not just whether your venture can make money, but precisely how much and from where. While sales volumes are impressive, knowing the profit per sale is what keeps the business viable and informs strategic decisions.

Investors want to make money

Investors aren’t just looking for a venture that makes sales; they’re looking for one that can scale profitably. This is more true in today’s post COVID market where venture funds took a beating on investing in the boom of ideas that came from lockdown. Metrics such as customer acquisition cost (CAC), lifetime value (LTV), and retention rates aren't just numbers—they're the indicators of your business' health and potential for long-term success. These figures help investors see a clear path to a return on their investment, a crucial persuasion factor in fundraising.

Not knowing the details of your business hurts

Understanding the cost of acquiring a customer and the return on that investment influences how you allocate resources. For example, if your CAC is unexpectedly high, it may prompt a strategic pivot in marketing strategies or product offerings. Likewise, knowing the LTV helps in tailoring customer service and retention strategies to maximize profit. Presenting to investors without showing you understand the details is shooting yourself in the foot.

Investors love a good hockey stick

With solid data on unit economics, you can model future scenarios with greater accuracy. This isn’t just advantageous for internal planning; it’s a critical component of the financial forecasts and presentations that will be evaluated by potential funders. Being able to present a believable future state is crucial in building trust and confidence.

Sales and beyond

While sales are the lifeblood of any business, unit economics are the lifeblood of business viability and probability of survival. Unit economics provide a comprehensive picture not just of what is happening now, but what is likely to happen in the future. In a startup environment, where cash flow is king, having a handle on each dollar's journey through your business—from acquisition to revenue—ensures you’re not just running, but running towards profitability.

As a previous founder, and as an experienced executive operator I understand the focus on sales. I really do. But, fundraising is about convincing someone to give you their money and in today’s market, investors want more than just sales to believe that they will see their money again. So please, get to the part where you test marketing, understand cost basis, understand retention, understand whether you’re going PLG versus direct and get a financial model in place as quickly as you can. It’s crucial to balance the drive for immediate sales with an understanding of the underlying economics of your business model. The most successful entrepreneurs are those who can leverage their initial sales into insights about their business’s deeper financial narratives, crafting stories that not only captivate customers but also align closely with the analytical needs of savvy investors. Understanding and articulating the unit economics of your venture is not just about knowing your business—it’s about demonstrating its potential for sustainable success.