A company has 40% gross margins but negative EBITDA. Where would you look?

How to answer

40% gross margin is healthy for most industries, so the problem is below gross profit. EBITDA = Gross Profit - Operating Expenses (SGA). If gross margin is 40% but EBITDA is negative, operating expenses exceed 40% of revenue. On $100M revenue: $40M gross profit but >$40M in SGA. Investigate: (1) Sales force — is the company over-invested in sales relative to revenue stage? (2) Marketing — is customer acquisition cost (CAC) too high? (3) R&D — heavy investment without corresponding revenue? (4) G&A — bloated corporate overhead from over-hiring? (5) One-time costs — restructuring, legal settlements. This is common in high-growth startups that prioritize growth over efficiency. The fix is usually a combination of revenue growth and SGA discipline.

Key idea: Healthy gross margin but negative EBITDA means SGA is the problem