Metrics & Performance
Gross Margin
Last updated
Quick Answer
Revenue minus cost of goods sold (COGS), expressed as a percentage — a fundamental measure of how much value a business retains from each dollar of revenue after direct costs.
Gross margin measures the profitability of a company's core business before accounting for operating expenses like sales, marketing, R&D, and G&A. It's calculated as: (Revenue − Cost of Goods Sold) / Revenue × 100.
For SaaS companies, COGS typically includes hosting/infrastructure costs, customer support, and third-party software licenses — not R&D or sales costs. SaaS companies generally have high gross margins (70–85%+) because software has near-zero marginal cost to deliver to an additional customer.
For hardware, marketplace, or services businesses, gross margins are typically much lower because COGS includes physical goods, third-party payments, or human labor. Gross margin is a primary signal of the fundamental economics of a business model — it sets the ceiling on how much profit the business can ever generate.
In Practice
A SaaS company generates $10M in revenue. Its COGS (hosting, support, third-party APIs) total $1.5M. Gross margin = ($10M - $1.5M) / $10M = 85%. This means for every dollar of revenue, the company retains 85 cents before operating expenses — leaving significant room for profitability as it scales.
Why It Matters
Gross margin is one of the first metrics investors look at because it determines the fundamental attractiveness of a business model. A company with 30% gross margin needs dramatically more revenue to achieve the same profit as a 75% gross margin business. Low gross margins constrain everything downstream: operating leverage, R&D investment capacity, and ultimate profitability.
Related Concepts
Further Reading
LTV: What Lifetime Value Means in Venture Capital
LTV (Lifetime Value) measures the total revenue a business expects to earn from a single customer over the entire relationship. Here's what it means, how to calculate it correctly, and why the LTV:CAC ratio is the most important unit economics benchmark in SaaS.
CAC: What Customer Acquisition Cost Means in Venture Capital
CAC (Customer Acquisition Cost) is the metric VCs use to assess go-to-market efficiency. Here's what it means, how to calculate it correctly, what good benchmarks look like, and how it interacts with LTV to determine business viability.
How to Calculate LTV: Customer Lifetime Value Formula Explained
LTV tells you how much revenue a customer generates over their entire relationship with your company. Here's the formula, a worked example, and what benchmarks VCs use.
ARR: What Annual Recurring Revenue Means in Venture Capital
ARR (Annual Recurring Revenue) is the single most-watched metric in SaaS venture capital. Here's exactly what it means, how it's calculated, what benchmarks matter, and why VCs obsess over it.
How to Write an Investment Memo: The VC Template That Actually Works
A practical, partner-ready guide to writing VC investment memos that actually drive decisions: structure, examples, common mistakes, and how top firms like Sequoia, a16z, and Benchmark do it.
What Founders Get Wrong About Valuation
A high valuation feels like winning. It's often a trap. Learn why the "right" valuation matters more than the highest one, and how vanity metrics can set you up for a painful down round.
Frequently Asked Questions
What is Gross Margin in venture capital?
Gross margin measures the profitability of a company's core business before accounting for operating expenses like sales, marketing, R&D, and G&A. It's calculated as: (Revenue − Cost of Goods Sold) / Revenue × 100.
Why is Gross Margin important for startups?
Understanding Gross Margin is critical for founders navigating the fundraising process. It directly impacts deal terms, valuation, and the relationship between founders and investors.
What category does Gross Margin fall under in VC?
Gross Margin falls under the metrics category in venture capital. This area covers concepts related to the quantitative measures used to evaluate fund and company performance.
Newsletter
The VC Beast Brief
Join thousands of founders and investors. Every Tuesday.
The VC Beast Brief
Master VC terminology
Get smarter about venture capital every week. Our newsletter breaks down the terms, concepts, and strategies that matter.
VentureKit
Ready to launch your fund?