Gross margins–which are essentially a company’s revenue from products and services minus the costs to deliver those products and services to customers–are one of the most important financial metrics for any startup and growing business.
And yet, figuring out what goes into the “cost” for delivering products and services is not as simple as it may sound, particularly for high-growth software businesses that might use emerging business models or be leveraging new technology. Why do gross margins matter? When do they matter during a company’s growth? And how do you use them to plan for the future?
In this episode, a16z general partner Martin Casado, who invests in early stage enterprise and AI/ML companies; David George, who leads a16z’s Growth Fund and was previously at General Atlantic and led numerous consumer internet and enterprise software growth deals; and Sarah Wang, on the Growth investment team and was previously at TA Associates, a global growth equity firm, share their perspectives on how to think about gross margins in both earlier and later stages of a startup. The conversation ranges from the nuances of and strategy for calculating margins with things like cloud costs, freemium users, or implementation costs, to the impact margins can have on valuations.