Darwin's Digest is Back: The ￡1.6B Downfall of "123 Milhas" as a Cautionary Tale for Startups

Hello folks! After a much-needed vacation, Darwin’s Digest is back. I’m thrilled to share that we're under revision for the forthcoming book. We want to get it just right, so it's going to take a bit more time. On another positive note, a big thank you to our astonishing (and unexpected) community of 674 subscribers! Unf*ckn believable!!!!! #cheersforhat

Now, onto the matter at hand.

This week, we've witnessed an unsettling trend among startups: the prioritisation of illusionary KPIs and growth metrics over solid financial fundamentals. The regrettable case of 123 Milhas serves as a timely example, and it ties in perfectly with the concept of Entrepreneurial Darwinism.

This company made several missteps: a false assumption about stable airfare prices post-2020, failing to anticipate increased mileage requirements by airlines, and seeing their cost of financing spike. These errors culminated in a devastating loss of ￡1.6 billion in just the first seven months of 2023.

The 123 Milhas saga serves as a cautionary tale, reinforcing several pillars of Entrepreneurial Darwinism:

1. Profit Margins: Focus on profitability, not just revenue. Growing sales without margins is akin to accelerating towards a cliff.

2. Cash Flow: Maintain a positive operational cash flow. Financing inefficiencies with loans will only dig a deeper hole.

3. Debt Management: Monitor your debt ratios. Over-leverage is a ticking time bomb.

4. Data-Driven Decisions: Never bet on market sentiments. Base your strategies on data and factual evidence.

5. Scalability vs Sustainability: Scaling should bring about synergistic value; otherwise, it's a futile exercise.

These lessons apply to startups and investors alike. While it's tempting to employ market-making tricks such as wash trading, fake invoices, or pay-per-use models to impress stakeholders, this approach is fundamentally flawed. In the long run, a business offering an unsellable service, based on a malfunctioning product aimed at a minuscule market, is doomed.

Investors and entrepreneurs should heed the tenets of Entrepreneurial Darwinism. The market has matured; long-term stability trumps quick wins. Don't become another 123 Milhas. Make wise choices for a sustainable future.