📰 Today's topic: Why "decent" unit economics should make you nervous

A founder pitches you their startup. They're acquiring customers for $50 and making $100 back. 

That's a 2x return on customer acquisition. Sounds solid, right?

Well, it should actually make you nervous.

I’ve seen this movie play out hundreds of times. When I see a company spending $1 to make $2, I get worried. 

At a small scale, sure, the math works. But there's virtually no room for error.

Why CAC almost always goes up

The reality is: customer acquisition costs tend to increase over time. 

Elizabeth Yin (GP at Hustle Fund) previously backed a company whose CAC was $4 when she invested. Today…it's $35. That's nearly a 9x increase.

Now, this company is doing fine because their lifetime value is super high - but imagine if their LTV had been $10. They'd be underwater and drowning fast.

This is why you need the spread between LTV and CAC to be as big as possible from the start. You're not investing in today's numbers; you're betting on whether those numbers can survive the inevitable pressure that comes with growth.

The late-stage flameout problem

You've probably heard about those crazy VC-backed companies that raised hundreds of millions and then imploded. (The ones that make headlines for all the wrong reasons.)

When you dig into these failures - not naming any names - it's often because the unit economics didn't work out. And more often than not, the unit economics never made sense to begin with.

These companies weren't “figuring it out as they scaled”. They were just delaying the inevitable.

What this means for your $5k check

Let's say you're looking at a startup and doing some back-of-napkin math. The founder tells you they're spending $50 to acquire a customer who pays $100 upfront.

Ask yourself: what happens when CAC hits $80? Or $120? 

Because if this company grows, they'll exhaust their cheapest acquisition channels.

They'll hire salespeople. They'll compete for ad inventory with bigger players. And the $50 CAC won't last.

If the business can't survive CAC doubling or tripling, you might be investing in a temporary arbitrage that's running out of time.

The Day 1 test

Elizabeth has a take on this that I love:

“If I were starting a product company today and my unit economics weren't great from the jump, I would scrap the idea entirely and try something else.”

That might sound harsh, but business fundamentals start from Day 1. Too many entrepreneurs (and investors) overlook this - which is baffling when you think about it.

Business isn't really about product or design. It's about making your sales and costs work out.

Bottom line

The ideal scenario? A company that covers both their marketing spend and their cost of goods in that first transaction. 

Quick payback, strong unit economics, and room to breathe when things get harder.

That's the kind of startup worth your $5k.

– Brian from Angel Squad

Overheard in SF…probably

“We're not a 'zombie startup.' We prefer 'undead unicorn.' Sam Bankman-Fried taught us that branding matters.”