The gross margin game

VCs are interested in a startup’s gross margins because it can show the attractiveness of the unit economics of the business.  One thing I’ve seen a couple of times is companies who have strong gross margins but those margins are a weighted average across multiple revenue streams or products.

For example, a product company may derive most of its revenue from selling product, but might also sell advertising or sponsorships on their website.  Here we have two separate revenue streams with two very different gross margin %’s.  The product business is going to have very slim margins while the ad/sponsorship margins will be quite high.  If you blend them together (weighted for amount of revenue each product contributes) you may get a gross margin that looks attractive in aggregate.

However, I’m not sure that playing the blended margin game is a good one, particularly in an early stage venture.  After all, most entrepreneurs and investors recommend that startups focus ruthlessly on one specific product.  Spreading a startup’s limited resources across multiple products will dilute the focus on either individual product and my guess is that the aggregate gross margin would suffer due to that lack of focus.

Are any startups (present or past) playing the gross margin game successfully?

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