Asset Class
Unit Economics
Unit economics measure the profitability and scalability of a business at the level of a single customer or transaction (e.g., LTV vs CAC). Allocators evaluate unit economics because durable venture outcomes require scalable growth that doesn’t collapse when capital becomes expensive.
In venture, unit economics separate durable growth from growth that depends on subsidized acquisition. In tighter markets, companies without sound unit economics face down rounds, stalled growth, or forced restructures. For allocators, unit economics are not “finance metrics”—they are survivability indicators.
How allocators define unit economics quality
They assess:
- LTV realism: retention-based and not inflated by assumptions
- CAC quality: channel mix and saturation behavior
- Payback period: how quickly acquisition cost is recovered
- Gross margin trajectory: ability to scale profitably
- Contribution margin: true profitability after variable costs
- Cohort stability: whether economics hold across time and segments
Allocator framing:
“Can this business scale profitably when growth capital tightens?”
What slows allocator decision-making
- metrics presented without cohort detail
- LTV based on optimistic churn assumptions
- CAC payback that deteriorates as channels saturate
- lack of clarity on margin expansion path
Common misconceptions
- “Unit economics only matter later” → they matter as soon as you scale.
- “LTV is always high in SaaS” → only if retention and expansion are real.
- “Growth fixes economics” → growth can make bad economics worse.
Key allocator questions
- What are LTV/CAC by cohort and segment?
- How stable is CAC as spend increases?
- What is the margin trajectory as the company scales?
- What happens to payback if retention weakens?
- How do you underwrite unit economics in down markets?
Key Takeaways
- Unit economics determine survivability and exit quality
- Cohort-based analysis is required; averages hide fragility
- Strong managers underwrite profitability pathways, not just growth