About This Episode

In this episode, Patric and Shub dive deep into negative gross margins as a predictive indicator of market froth in venture capital. They explore why businesses that lose money on every transaction they complete represent a fundamental misunderstanding of value creation, particularly in the AEC and B2B technology sectors.

In This Episode

How gross margin reflects whether customers truly find value in what you're delivering and serves as a measure of pricing power in competitive markets

Why negative gross margin businesses fundamentally contradict the purpose of capital allocation and represent value destruction rather than creation

Historical examples of negative gross margin bubbles including scooter companies like Lime and Bird, quick commerce platforms, and their inevitable market corrections

The current AI and LLM industry's troubling trend toward negative gross margins, with detailed analysis of companies like Cursor paying more to AI providers than they generate in revenue

Common window dressing techniques founders use to disguise poor unit economics and why clean financial reporting starts with honest gross margin calculations

Timestamps

(00:00 ) - Introduction and discussion about their break

(02:17 ) - Introduction of negative gross margins as market froth indicator

(02:55 ) - Definition and explanation of gross margin across different business models

(09:54 ) - The fundamental question: does your customer find value?

(18:49 ) - Historical examples: scooter businesses and quick commerce failures

(25:23 ) - Why negative gross margin businesses still attract funding

(31:28 ) - AI and LLM industry analysis: Anthropic, Cursor, and GitHub Copilot case study

(39:46 ) - Window dressing techniques and financial reporting tricks

(42:23 ) - Conclusion and final thoughts on B2B vs B2C differences

Resources or Companies Mentioned

Anthropic: https://www.anthropic.com

Cursor: https://www.cursor.so

GitHub Copilot: https://github.com/features/copilot

Lime: https://www.li.me

Bird: https://www.bird.co

Perplexity: https://www.perplexity.ai

OpenAI: https://openai.com

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Foundamental: https://www.foundamental.com/

Patric Hellermann: https://www.linkedin.com/in/aecvc/

Shub Bhattacharya: https://www.linkedin.com/in/shubhankar-bhattacharya-a1063a3/

Youtube: https://www.youtube.com/@foundamentalvc

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