A lot of startups have a business model which roughly equates to: put a dollar in, get two dollars out. This “magic vending machine” is obviously unsustainable but easy to fool oneself into thinking you have excellent product market fit.
Building a magic vending machine happens in straightforward ways—using venture capital money to subsidize the prices of a commodity to gain market share (Uber, Lyft, DoorDash).
Building a magic vending machine happens in accidental ways—building a product that shifts cost from customers to operations of the business and not charging enough for the service.
See also:
- The easiest person to fool is yourself
- We saw many of these businesses during the zero interest rate policy (ZIRP) period
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How to Measure the Health of a Startup
Here are the most useful metrics I’ve found for running a startup. These should be measured and reviewed regularly. The metrics that matter most the ones that raise questions and drive useful discussions. Try to avoid difficult to calculate metrics that are hard to build an intuition about (people don’t expect much from simple ideas).