Cloud Cost and Gross Margin

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Just because a company early in its life cycle has low gross margins doesn't mean that it will have low gross margins forever. Early on, you just don't know what's going to be fixed and what is going to be variable. Different product just have a different level of ore inde required to sell. And more and more, cloud costs are becoming a significant portion of the cog.

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.

In this episode from June 2020, a16z general partners Martin Casado, David George, and Sarah Wang talk all things gross margins, from early to late stage. 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? 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.