Elevate your enterprise data technology and strategy at Transform 2021.
Y Combinator president Sam Altman recently published a post arguing that much of what is plaguing startups these days, and causing some to raise eyebrows at valuations, is poor unit economics due to low margins.
What’s a low-margin business? Historically, you could argue that most tech-enabled businesses fall into this category — e-commerce, food delivery, vertical services, etc. To simplify, we can go as far as saying that a low-margin business is any business for which you’re banking on high frequency of use or purchases to pay back your customer acquisition cost and eventually create profitable unit economics.
The tone of Altman’s post carried an inherent prejudice against low-margin businesses. Being a software wunderkind himself, that isn’t surprising. Most investors in the Valley love pure software businesses for the attractiveness of their fundamentals: virtually zero variable costs, model leverage, pricing leverage, etc.
But all that glitters is not gold.
The truth is, such attractive fundamentals tend to attract brutal competition. For every Slack or Salesforce, there are countless others fighting for a piece of their pie.
If you’re qualified to build the next SaaS darling, all the more power to you. For everyone else who has an entrepreneurial streak, don’t be so quick to disqualify a low-margin business as one not worth pursuing. If you’re not technical, before you convince yourself you need to learn programming, design, or the host of other skills required to stand out from the software pack, consider these low-margin businesses that have managed to capture valuations ranging from several hundred million to over 2 billion dollars.
One Kings Lane / Zulily — flash sales sites focusing on the home and family categories, respectively. Both businesses have succeeded in creating a new direct-to-consumer channel for fragmented supplier bases. OKL’s most recent valuation was +$900 million. Zulily was acquired by QVC earlier this year for a whopping $2.4 billion.
Birch Box — a subscription e-commerce service focused on consumables. It has succeeded thus far in relieving cognitive overhead for consumers to discover and try new products. Its most recent valuation was $500 million.
Dollar Shave Club — a fresh approach to the holy grail of captive pricing: razors and razor blades. Dollar Shave Club is a vertically integrated, direct-to-consumer channel for shaving products, most recently valued at $615 million.
TrunkClub — a new channel for men’s clothing, part personal shopper and part Amazon. The problem it has solved is helping guys dress for everything in between suits and sweats. Nordstrom acquired it for $350 million.
Blue Apron — has succeeded thus far in relieving the cognitive overhead of cooking and eating healthy. Its most recent valuation was +$2 billion.
There are dozens of others worth mentioning — if you would like to see the full list, send me a message!
It’s imperative to remember that unit economics are a moving goal post. Advances in technology including but not limited to big data, machine learning, and social channels allow tech-enabled companies to experiment with the following levers to expand unit economics:
Personalization — Personalizing touch points such as email, push notifications, websites, mobile apps, etc. Personalization has the ability to increase frequency of purchases and average transaction size.
Community engagement — Twitter, Instagram, Pinterest, and YouTube afford companies the ability to continuously engage their communities and create sticky content with high referral value, driving down customer acquisition cost.
Supply chain enhancement — Data science, fueled by machine learning, creates opportunities to optimize your supply chain, expanding gross profit.
Certainly, there are numerous pure software darlings that have leapfrogged to unicorn status, but that shouldn’t detract from all of the impressive “low-margin” businesses passionate founders have built, with valuation step-ups outpacing other asset classes. What each of these teams has done is extraordinary.
Every category has its unique challenges, and progress is ultimately determined by the passion of the founding team and its ability to fight through the inevitable chasms and build a business with longevity. This is what is referred to as problem/founder fit.
What do each of the companies mentioned above have in common? Talented and passionate business cofounders!
Salmaun Ahmad is a startup consultant and commentator. He previously founded Black Box, a subscription e-commerce service that was acquired by Menscience Androceuticals. Prior to Black Box, he was a member of the corporate development and strategy team at The Walt Disney Co. He writes at salmaun.me and can be followed on Twitter at @Salmaun.
VentureBeatVentureBeat's mission is to be a digital town square for technical decision-makers to gain knowledge about transformative technology and transact. Our site delivers essential information on data technologies and strategies to guide you as you lead your organizations. We invite you to become a member of our community, to access:
- up-to-date information on the subjects of interest to you
- our newsletters
- gated thought-leader content and discounted access to our prized events, such as Transform 2021: Learn More
- networking features, and more