It is Never Too Early to Pay Attention to Unit Economics

India's start-up ecosystem, comprising founders, investors and experienced start-up professionals, has lived through multiple phases in its journey. It has seen the euphoria of high growth and rising valuations. It has also battled the challenges of high cash burn and funding squeeze.

- Kunal Bahl

Kunal Bahl

The author is the co-founder of Titan Capital and Snapdeal

Through all this, a fundamental question has shaped up-should start-ups focus on rapid growth through increasing scale, or should they pursue profitability through a steady focus on unit economics? While there cannot be a universal answer to this, it is apparent that growth and profitability are not necessarily an either-or choice.

In the early days of a start-up, the unit economics is sub-optimal, with inefficiencies in sourcing, marketing and supply chain. But it is in these early days that the founding team needs to set the guardrails of unit economics. The founders must have the intent and a plan to get to the correct unit economics in the first year itself, even if the progress is incomplete. It becomes exponentially more challenging to fix it later on-it requires reorienting strategy, cutting scale and, to a significant extent, changing the company's business model.

A business conceived at launch with negative economics accepted as fait accompli will struggle to reach profitability. A start-up may hope that, with scale, the unit economics will improve. While it does, it does not improve dramatically. It is rare to see a 10% gross margin business become a 50% gross margin business without structural changes.