Why Margins Don't Matter for Early-Stage Startups | Gili Raanan

TL;DR

Early-stage startups should ignore gross margins entirely and focus on growth velocity, as margins only become relevant once product-market fit is proven.

Key Points

• 1.Margins are irrelevant at the early stage. Gili Raanan says he never discusses gross margins with early-stage portfolio companies — he tells founders to revisit that conversation in 2029, focusing instead on finding product-market fit and growth.
• 2.Venture as a whole doesn't work for most players. Returns are concentrated among a tiny number of firms like Sequoia, Andreessen, and Benchmark; Raanan warns LPs who spread allocations evenly across funds will be badly disappointed.
• 3.Cyber security seed pricing is dangerously elevated. In 2012 Raanan wrote his first check at a $15M post-money valuation; today deals are done at multiples of that, while only 1–2 out of 150 Israeli cyber startups ever become unicorns — odds that haven't improved.
• 4.Growth velocity is the single most important business indicator. Raanan's benchmark for a great company is 4x, 4x, 3x, 3x growth on new ARR over five years — producing 144x the year-one figure by year five — and he argues fast-growing companies embed that speed into their DNA.
• 5.Wiz and Sierra illustrate contrasting growth paths. Wiz went $1M, $2M, $8M, $24M in new ARR in its first year of selling; Sierra stalled at zero for two quarters before rebounding to $12M in the next 12 months, showing that temporary plateaus don't kill great companies.
• 6.Market size determines whether growth compounds or plateaus. No Name Security hit $3M then $15M in ARR but stalled because API security was a niche; Island, selling enterprise browsers in a market that didn't exist in 2019, became a $5B company by defining and expanding its own market.
• 7.IPOs are marketing events, not liquidity events. Raanan argues going public imposes lock-ups and restrictions that are the opposite of liquidity — its real value is signaling permanence to customers, partners, and future employees.
• 8.Cyberstarts created an annual employee liquidity fund to solve the talent-retention problem. As private companies stay private longer, fully vested employees are structurally forced to leave; Cyberstarts underwrites a recurring tender offer — piloted with Sierra — so employees get public-market-style liquidity without an IPO.
• 9.Raanan regrets selling Wiz shares early. He sold secondary shares in Wiz to demonstrate DPI to LPs as a new GP; in hindsight he calls it a mistake, though he says his LPs cheered the decision at the time and it was the right call for Cyberstarts at that stage.
• 10.Building a venture partnership means letting each partner play to their strengths. Raanan says the biggest management mistake is forcing partners into a single operating template; instead he lets each person lean into their relative advantages, which is how Cyberstarts maintains a team that genuinely enjoys working together.