I was recently on The E-Commerce Business Podcast and was asked for my top advice to E-Commerce startups that plan to raise capital. My answer will always be: tell me the story of your company’s unit economics.
You draw the investor in with your team’s background, data on market opportunity, and the company and product vision. But the investor values predictable execution, and the best way to stoke her confidence in the investment is to clearly outline how you’ll make money, and when the company will increase in value. This allows her to conceptualize return on her investment.
Step 1: The Unit Economics Story
Start with a clear walk through of how money flows through your business. Consider this in two categories:
Your Revenue Model considers how you build a conversion funnel to acquire and monetize customers. It can be broken down as follows:
Top-Funnel: Acquisition Channel performance: how many users do you expect to acquire from each channel and how is are the channels performing against their respective targets (Common terms: CAC, visitors acquired, visitor acquisition %, bounce rates);
Mid-Funnel: metrics relating to click through and user behavior once they’ve landed on your site, app, or platform; what does your user engagement look like once you’ve acquired them, and what are you doing to improve it? (Common vocab: signup acquisition %, page views per session, page bounce rates);
Conversion and Retention: what’s the typical cart mix of your users, how often do they return, and when do they churn out? (Common vocab: cart size, gross merchandise value (GMV), conversion %, retention %, LTV:CAC).
After you’ve acquired and converted your userbase, the Operating Model captures all costs associated with closing the loop on order fulfillment and other costs required to run the company. Key metrics here are:
Per-order direct costs and per-order margin: what costs are directly associated with fulfilling the customer order; these are typically budgeted as a percentage of sales, but they may also decrease as you scale up your number of orders (Common vocab: COGS %, Direct Labor %, merchant fees %);
Other fixed or variable costs related to technology, facilities, management salaries, and others.
Step 2: How does your Unit Economics Story change as you grow?
You’ve shown that you know how to make money, now show the investor that there is a clear path to growth in company valuation, and therefore growth in the share value received her cash investment.
When are you projecting breakeven and what is your userbase, order volume and unit economics at that point?
What are your key milestones in your current market or revenue line, and what is your path for expansion?
What additional capital events are required to achieve those milestones?
Nail steps 1 and 2 above, and prepare for more engaged investors and better results in your funding round.