Why you need solid growth economics to secure investment
If you can demonstrate solid growth economics to investors, you can prove that investing in your venture will lead to accelerated growth and deliver a return.
4 elements contribute to demonstrating solid growth economics:
- Ability to target a big market
- Product to market fit
- Evidence of a growth engine, or a plan to build one
- Favourable unit economics
How to demonstrate solid growth economics
This video was recorded at a We Work labs event for startup founders.
Targeting a big market
The market you target must have a large enough potential for growth, with the ability to sustain delivery on the investment multiples. According to Alejandro Cremades, author of The Art of Startup Fundraising, the market must be in the billions to make the investment opportunity attractive enough.
But you also need to be realistic, no new startup will ever gain a 100% market share. Tx Zhuo of Karlin Ventures says “If it's 1 - 5% of the pie, you have a realistic plan.”
Getting the right product to market fit
The easiest way to understand if there is a product to market fit is to ask the question “Can I sell this to someone I don’t have a relationship with?” If the answer is yes, you likely have product to market fit. Your friends and investors don’t count.
Product designer Josh Porter takes this a step further, saying that you have achieved product to market fit when your customers begin to share their positive experience with others, and you can replicate the experience with every new user who your existing users tell.
Evidence of a growth engine
Don't think of marketing, think of a growth engine instead.
Just like the components of an engine work together to efficiently convert fuel into motion, the components of a growth engine work together to convert prospects (the fuel) effectively into sustainable growth (forward motion)
Read this post on why investing in a growth engine is an essential criterion for success.
Favourable unit economics
Investors want to see that you have a grip on your numbers and understand the business. This is the purpose of unit economics. In a nutshell, they help you understand if you are getting enough value from a customer to warrant the acquisition, retention and product costs.
A unit economics analysis helps to forecast how profitable your company may (or may not) be, identify when it can expect to reach profitability and distinguish which strategies will work best to influence that. Here’s an easy to use unit economics template that we created.
