Startup stages and growth through unit economics

Startups go through phases just like people—you have to crawl before you walk before you run. Fred Wilson divides the startup lifecycle into three stages:

  • While building product your team is singularly focused on executing vision and ensuring your product meets customers’ needs. You hear this called product-market fit or customer development but the process is basically the same.
  • While building usage you start to lay the foundation for growth: more management and more processes. To graduate from this level you need to prove your business model has both scale and viability.
  • While building the business you start treating the company as a product unto itself, focusing on the senior management team, culture and values.

While building usage you must face two big challenges: demonstrating potential scale and proving viability. For consumer apps, the math is depressing. Start with your goal and work backward—the path to a $100MM business is paved with a huge audience, high revenue per customer, frequent transactions or, ideally, some combination of these factors.

For consumer apps, viability can be an arbitrage game. First you need to measure your unit economics, specifically Customer Lifetime Value (CLV) versus Customer Acquisition Cost (CAC). Cash flow and burn constrain your ability to decrease CAC with scale and force you to accept shorter payback periods. Product and design resources constrain your ability to monetize customers and increase CLV. For more on business model viability and the concepts of CLV/CAC, here are some recommended reads: