I See Negative Gross Margin Businesses

I recently met with a startup that’s dead broke. They’re convinced that if only they could raise another round, everything will work.

It won’t. Here’s why…

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Some startups are negative gross margin businesses. Think of this as the old cliche, “We lose money on every one, but we make it up in volume.”

Let’s say I’m going to start an Airbnb killer – Frankbnb. If Frankbnb charges $100 a night to stay in the average room, that’d be a great deal!

But how do I get hosts to accept that low price? What if I paid hosts $200 a night and ate the difference?

Everyone would be so happy! Guests and hosts would flock to my platform, and I’m off to the races.

Sounds great, but actually it winds up more like this:

Why doesn’t this work?

Because with a negative gross margin model, you can’t stop losing money. Ever.

Every guest costs you $100 a night. The more guests you sign up, the better you think you’re doing.

But in reality, each one digs you deeper into the hole.

Obviously, the real Airbnb doesn’t do this. It charges guests, then gives a percentage of that to hosts, keeping the rest.

We investors complain about negative gross margin businesses all the time. But we created them.

Easy VC funding meant startups could always raise another round. Growth was all that mattered.

In 2023, reality is hitting unsustainable startups like a ton of bricks. VC’s are laser focused on margins and burn.

Negative gross margin businesses will either adapt rapidly or die.

Look closely at your startup. Do you make money on each new customer?

If not, take a hard look at your business model before it’s too late.

Are you seeing lots of unsustainable growth? Leave a comment and let me know.

There will be no blog on Monday in honor of President’s Day. See you Tuesday.

Have a great weekend everyone!

More on tech:

Dawn of the Dead VC’s

Top VC Firms Have Great Returns…Right?

From Design to Code in Seconds with AI

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