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Why we picked it When you bolt a services layer onto a product business, the number investors actually stare at is your blended gross margin, and this is the canonical piece on why. Sacks (a serial founder and VC) walks through how low-margin, labor-heavy revenue drags down the whole business and why investors gross-margin-adjust their valuation multiples. It reframes the services question as a margin-discipline question, which is exactly the lens you need before you add the layer.
The Gross Margin Problem: Lessons for Tech-Enabled Startups
From Bottom Up by David Sacks (Substack) by David Sacks about 12 min read
- Investors read software and services as different-margin businesses, so mixing them lowers your blended gross margin even when each part is fine on its own.
- Track product and services margins separately from day one, because a healthy blended number can hide a services drag underneath.
- A lower gross margin is acceptable to investors only if there is a credible path to it improving as the mix shifts back toward the product.