Some time around 2016, a company that was raising at a lofty valuation pitched to me requesting capital from one of Sputnik ATX’s antecedent funds. The company pitching was WeWork.
The heart of their presentation was a claim that WeWork represented a new model for coworking space that was going to revolutionize coworking from stodgy folks like Regus, a profitable competitor. At the time, WeWork charged less than Regus to use office space and WeWork had significantly higher unit operating costs, customer acquisition costs, higher churn, and a significantly riskier customer base.
I pointed out to their pitchman that they had lower unit revenue and far higher unit cost than their competitors. How could they make money?
They responded with more of the same balderdash. WeWork’s plan to overcome negative unit economics was to make it up on volume, as they grew faster and faster with additional investment.
This reminds me of Paul McElroy in the old SNL skit, First Citywide Bank, who claims the bank makes it up on volume. Thus the old joke, “I lose money on every one I sell, but I make it up on volume.”
If your marginal profit per unit sold is negative, no amount of volume will help you be profitable. Taking investment to accelerate losses makes the situation worse.
Blitzscaling is taking in large amounts of venture capital for massive customer acquisition growth in a short period of time. Growing so fast, you can’t be ignored, and then basking in the glow of a sustainable, massively profitable business.
A Blitzscalable business must have positive unit economics so that scaling increases profits, over and above overhead expenses and marketing costs. In short, the net profit selling each unit accrues faster than your expenses. When this happens, your company becomes profitable and sustainable.
Over the past few years large amounts of venture capital have poured into negative unit economic businesses that tout “volume” as the solution to their woes. Unless those businesses have some monopolistic plan to dominate the industry and then jack up prices to alter the unit economics, they will fail.
Of course, they could be hiding a novel new technology that will disrupt industry cost structure to make the unit economics positive, but if they did, why aren’t they using that technology now?
For example, Uber analysts tout that the company may be profitable when driverless technology becomes broadly available. This begs the question why they’re just figuring that out now, after massive investment on a different thesis, but I digress.
Bottom line: when your unit economics are negative, the business is unsustainable and you are blitzfailing if you raise capital to dig your grave at an accelerated pace.
Instead, resourceful entrepreneurs should create disruptive innovation that dramatically lowers the cost to solve a customer’s problem or provide a new, novel service that generates massive consumer surplus that cannot be ignored.
If you choose the path of the resourceful entrepreneur, unit economics and the market will reward you handsomely.
Author’s Note: yes, I love old words like poppycock. So precise!