I enjoyed this. I'd also recommend an interesting book that addresses this idea, but in a different context: Merchants of Grain. It discusses the six large worldwide grain companies: Continental, Cargill and 4 others. What's interesting is most of these businesses started out as trading businesses that were asset light and employed lots of leverage, generating prodigious cash flow. Then, in the great depression, there was an oversupply of grain and price went down, and these companies with their excess cash vertically integrated, buying infrastructure upstream and downstream such as refineries and grain elevators. The returns were lower, but more durable once you owned the immovable infrastructure and provided decades of reinvestment opportunity. They also never had to raise capital so these businesses stayed tight and family controlled.
No problem. I also have my notes, which I am happy to email. I've almost become conditioned to not liking high gross margins as it can signal a lack of reinvestment opportunity and it also makes it harder for someone else to come in. This article was helpful in understanding that better. https://a16z.com/2020/05/28/moats-before-gross-margins/. I also understand that high margins are good and nothing is true all the time, but interesting food for thought.
In software I don't think that necessarily holds true. High gross margins are normally a signal of pricing power and ability to deliver value to the customer so they are willing to pay such a price. In software, reinvesting in the product or act two product can still have equally high gross margins so not necessarily the case that there's a lack of reinvestment opportunity. That being said when a SaaS company moves into a low margin, asset heavy business...that's when the fireworks fly!
I enjoyed this. I'd also recommend an interesting book that addresses this idea, but in a different context: Merchants of Grain. It discusses the six large worldwide grain companies: Continental, Cargill and 4 others. What's interesting is most of these businesses started out as trading businesses that were asset light and employed lots of leverage, generating prodigious cash flow. Then, in the great depression, there was an oversupply of grain and price went down, and these companies with their excess cash vertically integrated, buying infrastructure upstream and downstream such as refineries and grain elevators. The returns were lower, but more durable once you owned the immovable infrastructure and provided decades of reinvestment opportunity. They also never had to raise capital so these businesses stayed tight and family controlled.
Oooh thanks for the rec! Never heard of it before but certainly sounds useful and instructive.
No problem. I also have my notes, which I am happy to email. I've almost become conditioned to not liking high gross margins as it can signal a lack of reinvestment opportunity and it also makes it harder for someone else to come in. This article was helpful in understanding that better. https://a16z.com/2020/05/28/moats-before-gross-margins/. I also understand that high margins are good and nothing is true all the time, but interesting food for thought.
In software I don't think that necessarily holds true. High gross margins are normally a signal of pricing power and ability to deliver value to the customer so they are willing to pay such a price. In software, reinvesting in the product or act two product can still have equally high gross margins so not necessarily the case that there's a lack of reinvestment opportunity. That being said when a SaaS company moves into a low margin, asset heavy business...that's when the fireworks fly!
Point taken!
Hi Anton, would you mind sending me the notes? It's a truly fascinating topic, which I'd love to learn more about. I appreciate the help!
My email is mmindlin814@gmail.com
Just sent.