90% of all startups never become profitable.
The recession that’s bursting the over-valuation startup bubble has reset the game.
As a startup, your end goal should be profitability.
As simple as that.
Instead of future market size value calculations…
Everyone is more (& more) attracted to the profits.
But, in most cases, reaching it is more complex than it looks.
That’s why understanding the economics of startups matters.
Rules of the economy will give you a stronger base.
For both reaching & maintaining profitability.
We’ve all heard of old-school Economy rules.
Supply vs demand, assets vs liabilities, and so on.
But how this applies to new-age startups?
And the economy that’s rapidly changing?
In this article, I’m showcasing the first out of 5 must-know Economy rules.
Deeply focused on startups & their profitability.
I’m not a big fan of the theory myself (either).
So all rules are backed with real-life business examples and thoughts of industry experts.
Before jumping to the rules, let me introduce myself.
💡 My name is Matija, & I’m the CEO of Omnius, a B2B marketing & management agency.
We help some of Europe’s most innovative companies aggregate compound organic growth. (Not a sales line, we really roll up our sleeves to make things happen).
Before this, I’ve been a part of C-level teams in several startups. Both bootstrapped and VC-funded, which gave me a pretty good understanding of how unfamiliar startups are with the way Economics work.
That’s the reason I decided to write this.
Hope it brings you applicable value.
Internal Investments: Assets vs Liabilities Concept
Startup founders nowadays must be cost-effective.
The margin for error in financial investments is nano-small.
In most cases.
There are exceptions, of course.
Some as big as private jets.
Most of the time, in the early days, we’re talking about internal investments
Such as user acquisition, product development, design, hiring, and so on.
Making a single wrong choice can put you in the 70% group of startups (that don’t survive the first 6 months).
So “frameworking” the investment assessments process early enough could save your business in the long run.
The concept of assets versus liabilities is a fundamental law of economics.
Not only applicable to personal finance…
But also to the categorization of internal business investments.
When it comes to it, it's essential to understand the differences between assets and liabilities to ensure that your investments are justified.
To begin, let's define:
- Assets, and
Assets are items that your company owns, and that compound value through time.
Liabilities, on the other hand, are what your company owes to other parties.
Alright, alright, alright…
Let’s break it down.
For instance, suppose you're considering investing in an Apartment in London.
In that case, real estate on a stable market is an asset because it will bring profits over time through value increase, renting fees, and reduction of other costs.
Conversely, a Range Rover is a liability because it will take money out of your pocket through value decreases, interest rates of loans, maintenance costs, and other expenses.
The distinction between these two terms is crucial…
When you’re making up your mind about whether an investment is worthwhile or not.
*And here comes the beauty of Economics.
All rules are logic-based.
Therefore, they’re universal.
Assets vs Liabilities: SaaS marketing examples
Now, let's apply the concept to the world of startups.
Specifically, let's talk about user-acquisition channels:
- Paid Ads
…and determine whether they are assets or liabilities.
1. Paid Ads (Facebook)
Facebook’s PPC has a stable increasing trend in cost per click (CPC).
At one point in the near past, the CPC has increased by as much as 47% in just 2 years, with decreasing ROAS (return on ad spend).
For example, suppose the current Facebook CPC price is $0.94. (April 2023)
In that case, 60,000 visitors to your website would cost an average of $58,000 per month.
This means that as time goes on, the cost of using PPC as a marketing channel will continue to increase, and the value it generates will decrease.
💡 *Therefore, PPC is a liability because its cost increases over time, while its value decreases.
Additionally, Google recently announced an additional blow to the performance of paid advertising.
They’re starting their “The Privacy Sandbox” journey by disabling cookies for 1% of Chrome users in Q1 2024 to give developers and advertisers a chance to test a cookieless web.
Later in 2024, they're rolling out the change to all users.
This is a continued trend of transparency decrease in the performance & tracking accuracy of paid ads, making it once again, and even further - a liability.
On the other hand, SEO compounds result over time.
When done right, it comes with a stably increasing MoM rate of growth.
Without scaling costs.
Meaning that the amount you pay for every organic click is decreasing over time.
Once you've reached a particular number of monthly visitors, you won't have to pay the CPC again the next month.
Here’s a case study on how we @ Omnius achieved the benchmark number of 60.000 visitors in 7 months in the AI SaaS space.
💡 In deference to PPC, SEO is actually an asset, because its value increases and cost decreases over time. Second, SEO is an “owned media” channel, so you're also investing in the channel that you actually own and control - your website.
Let’s put this into a real-life perspective.
We’ll take Airbnb as an example.
How Airbnb started investing in marketing assets?
At the end of 2022, Airbnb has reported its most profitable Q4 ever.
Two years after the radical shift.
Two years ago, Airbnb decided to deprioritize performance marketing.
And start educating users.
600,000 articles were written about the business in 2022.
Nearly 90% of the platform’s traffic remains direct, Airbnb's CEO confirmed on a call with investors. According to Chesky, this will imply marketing investment to drive awareness and educate travelers about Airbnb’s new services and offerings.
Adjusted EBITDA reached $506m (£417m) in the final three months of the financial year.Up from $333m (£274m) a year prior.
24% rise in revenues to $1.9bn (£1.6bn) over the period.
Airbnb’s highest fourth quarter revenues to date.
The move away from ‘buying customers’ to ‘education’ boost direct bookings and retention, and helps grow profit, as claimed by the company.
Sounds like a rock-solid investment into assets, right?
I’m a big believer that user education, which comes through different formats of content in the vast majority of cases, is one of the anchor KPIs companies should be starting to implement.
Think it through.
The user won’t sign up on the website if he/she isn’t educated.
Trial to paid conversion? Retention? Referral? - All of these come from this simple factor.
The reality check
If you come to the meeting in a Range, and close the $500K deal because of it, it’s not really a bad investment, right?
The above-mentioned illustrative examples are not swords in a stone.
It’s a concept to be personalized per business type and its phase.
It’s day one.
What can you do today that will compound value through time?
That’s an asset.
The same principle can be applied to both monetary and non-monetary investments.
💡 Albert Einstein referred to compounding interest as the world's eighth wonder. "Those who understand it, earn it and those who don't, will pay it."