Understanding the Underlying Economics Problem of your Startup

As an entrepreneur, it’s easy to overcomplicate things. You are deep in trying to change the world and turns out that big vision in your brain requires a complicated story. We’ve all been there – pitching the hockey stick story that has some reference to billions while balancing feedback from everyone you’ve spoken with.

But the reality is, startups are about a simple economics problem: figuring out how to optimize the supply and demand lines. Markets want to be efficient (or so I learned in my Econ 201 class), but sometimes it takes technology to solve the inefficiency… and hopefully that is your technology.

Seems almost too simple, right? But there is truth in that very statement:

  1. eBay. Nationalize the supply and demand (take collectibles and list them online), and suddenly supply has higher demand (better prices) and demand has more choice (better selection). More efficient market is created. Everyone wins and eBay is a household name.
  2. Groupon. Huge excess of supply in local markets fighting for limited demand. Excess supply can be discounted for access to that demand. Restaurants are full; consumers get deals; and Groupon is a noun.
  3. Google. Advertisers pay for customers. Google has hyper targeted customers looking to buy. Advertisers pay Google for access to hyper targeted customers. Profit.
  4. Airbnb. Hotels are expensive. People who need money have extra rooms they’d happily rent out. Match people looking to save money with people who want money and have an extra room. Voila: the biggest non-hotel hotel chain in the world.

The list goes on and on for every company – summarizing the economics problem being solved. It seems oversimplified, but turns out your business is really quite simple (if it is going to work). Turns out you might wish you hadn’t slept through those econ classes, huh?

So figure out the economics problem your company solves – what sort of efficiency do you bring to the economics; the supply and demand. It seems simple, but when you are neck deep in .json files and SEO research, you might miss the forest from the trees. If you can’t figure it out or it doesn’t seem obvious, then that might well be the problem.

What’s the economics problem you solve?

Special thanks to one of my favorite investors, Sundeep Peechu from Felicis Ventures who inspired this blog post after a conversation at his office where he said, “Let’s simplify this – Economics 101 here, Eric.”

You see, the second order benefit of investors is their brain-power – getting some smart people to weigh in who see more of the playing field and are out of the muck of day-to-day operations of your company. Sure, the money is necessary, but once you have the money the smarts are pretty crucial. Dudes like Sundeep are great to have around!


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