Nothing gets an investor’s heart racing like the phrase “software margins.” It’s shorthand for the concept than businesses which are primarily bits (not atoms) have some very attractive characteristics: fixed development costs, economies of scale in deployment & servicing, and “winner take most” markets with pricing power. The resulting impact is very profitable, fast-growing success stories with high gross and net margins. Dismissing a company as “nice but doesn’t have software margins’ is the “yeah, nice personality I guess” of venture investing.
So if you believe that in order to access growth capital and consistently trade at a high multiple as a public stock a company needs to maintain the margin-profile of a best-of-class software company, what might be the tradeoffs?
Well, maybe you focus engineering efforts disproportionately on growth and revenue-generating projects. And perhaps you see Sales & Marketing as necessary but every other non-product function – Policy, Customer Support, HR – as margin sucking cost centers.
Could Facebook, Twitter and YouTube spend more money on faster responses to abuse reports, more accurate content review tools, better ethics training for engineers, more manual investigations of identity theft and fraud? Sure. Would these lead to better products despite being fundamentally non-scalable? We can debate whether the answer is between “partially” and “substantially” but the impact would certainly positive.
Will we find that there were types of technology businesses which we thought had “software margins” but were understaffing customer support, content moderation, and policy enforcement because managing a global social network is just fundamentally different than selling expense software into the Fortune 500? These are questions not proposals, but when I look at some of the struggles my favorite consumer tech companies are facing, I do wonder if the requirements to fit a certain margin profile are one of the structural constraints to solving their issues faster.