Subscription software, marketplaces, transactional businesses, advertising, hardware and services each have different margins, growth patterns and risks. The same metric means different things across them.
11 min read · Level 1
I think the first question about any startup should be what exactly a customer pays for, because the answer decides which numbers are meaningful and which are marketing. A company that cannot state its business model in one sentence usually has not decided it yet.
Common startup business models:
Model What customers pay for Typical gross margin Key metric Subscription (SaaS) ongoing access to software high recurring revenue and retention Marketplace a transaction between two sides depends on take rate GMV, take rate, liquidity Transactional each purchase or payment varies volume and margin per transaction Advertising attention of users, paid by brands varies users and engagement Hardware physical products lower unit margin and inventory Services / hybrid human work, sometimes plus software lower utilisation and repeat work
The same headline number can mean very different things. 10,000,000 of revenue:
SaaS at 80% gross margin 8,000,000 of gross profit Hardware at 35% gross margin 3,500,000 of gross profit Marketplace reporting 10,000,000 of GMV at a 12% take rate: only 1,200,000 of revenue
Revenue quality also differs: recurring subscription revenue is more predictable than one-off transactions or advertising that depends on user attention.
Because comparing companies without adjusting for business model leads to large errors in valuation and expectations.
It also shapes what can go wrong: SaaS risks churn, marketplaces risk liquidity and disintermediation, hardware risks inventory and capital needs, advertising risks platform and attention shifts.
Educational, not personalised financial advice. Nothing in the Investor Academy is a recommendation to buy, sell or hold anything — what is right for you depends on your own circumstances and the rules where you live.
Three startups each describing '10 million' in their pitch.
Company A: 10,000,000 of ARR, 80% gross margin, 110% net revenue retention Company B: 10,000,000 of GMV, 12% take rate, so 1,200,000 of revenue Company C: 10,000,000 of hardware sales, 35% gross margin, 4,000,000 held in inventory
Company A has 8,000,000 of gross profit and predictable revenue. Company B has 1,200,000 of revenue. Company C has 3,500,000 of gross profit and substantial cash tied up in stock. The shared figure hides three very different businesses.
Comparing companies on headline revenue or volume without converting to the figures that matter for their business model.
Identify what customers actually pay for.
Translate GMV to revenue and revenue to gross profit.
Judge SaaS on retention, marketplaces on take rate and liquidity, hardware on unit margin.
Whenever comparing companies or reading a pitch's headline numbers.
Do not assume a company fits one model cleanly; many combine several, and the mix matters.
Analysts and financial journalists have repeatedly highlighted marketplace and platform companies presenting gross transaction volume prominently alongside or in place of revenue, particularly in early investor materials, where the distinction materially changes how the business should be valued.
Always ask for revenue when a company leads with volume.
Create a free account to read the rest and apply it to your own investing.