Understanding Gross Margins in Software Companies

Gross margins are essentially a company's revenue from products and services minus the costs to deliver those products and services to customers, and it's one of the most important financial metrics a startup can track.

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 partners Martin Casado, who invests in early stage enterprise startups and  David George, who leads our growth fund, and Sarah Wang  on the growth investing team share their perspectives on how to think about gross margins in both earlier and later stages at 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.