Investing in a Premium Line of Business

2min Snip

00:00

Play full episode

Summary

Transcript

Episode notes

Investors can see predictability, and then they can make better decisions. We would like to see that cost of service go down into the sales of marketing line, and omposedi in the cog line. So you no, slack obviously has this dynamic, and in they keep it in their sales an marketing line. And so they have very high gross margins. In contrast, when drop bocks went public, they actually an their cost of good sold, and it kind of confused investors.

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.