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Financial Misstatements

blog.samaltman.com

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161–170 of 194 posts

Re: Financial Misstatements

#161

Post by timv »

ISL wrote: post #136
kevin wrote: post #8

Here's the biggest offenders I see when talking to founders: revenue vs GMV (if you give GMV, give me your cut/margin) contract vs LOI burn vs expenses users vs customers (customers pay) signups vs users vs active users (you should give active with time interval and measurement of active. eg. logged in last 30 days) profitable vs cash flow positive Others people should know: diff between retention rate vs churn rate…

For those who didn't realize the difference between expenses and burn (I'd always equated them): "Your burn rate is the speed at which your cash balance is going down." http://avc.com/2011/12/burn-rate/

Part of the problem is that most startups run with zero revenue for the first few months (or longer).

Generally speaking, if you have no revenue then burn == expenses.

So for the period during which most founders are starting to learn about these terms, "burn" and "expenses" are indistinguishable. That tends to cause them to think of them as essentially the same thing for far longer than they should.

Re: Financial Misstatements

#162

Post by gnufrra »

sumanthvepa wrote: post #160
Havoc wrote: post #155

Earlier quoted context omitted.

>“GMV” (gross merchandise volume) Interesting...been in finance all my life & dealt with pretty much every industry out there...never heard this one before. Must be some type of startup slang so to speak.

It's a term of the trade in the retailing (and by extension e-commerce) industry. It refers to the value of the goods sold. If a retailer sells a widget for $100 at 50% margin, then the GMV is $100 and revenue to the retailer is $50.

I always thought GMV is more like gross revenue. So if you sell 5 of these widget at $100 your GMV is $500.

Which is different from your Net Sales. Because let say if one of these widgets got returned. And one of them was sold at 20% discount. Your GMV will still be $500 but your net sales will be:

Net Sales = GMV - (discount $20) - (returns $100) = $500 - $20 - $100 = $380

Re: Financial Misstatements

#163

Post by dkural »

tempestn wrote: post #145
rokhayakebe wrote: post #141

Earlier quoted context omitted.

mistakes Color me stupid, but I am sure the vast majority of founders know exactly what they are doing when they give GVM in place of revenue. For example no one would buy a home for $200M, sell it for $201M and say I made $201M last year.

Not necessarily; many would consider $201M the revenue and $1M the "profit" or "earnings" in that case.

but they'd know they didn't make 201M - and conceptually that them buying and selling that house doesn't value them like a 201M revenue publicly traded company with billions in market cap. Founders know exactly what they're overselling. They do it for spin.

Re: Financial Misstatements

#164

Post by rz2k »

sumanthvepa wrote: post #160
Havoc wrote: post #155

Earlier quoted context omitted.

>“GMV” (gross merchandise volume) Interesting...been in finance all my life & dealt with pretty much every industry out there...never heard this one before. Must be some type of startup slang so to speak.

It's a term of the trade in the retailing (and by extension e-commerce) industry. It refers to the value of the goods sold. If a retailer sells a widget for $100 at 50% margin, then the GMV is $100 and revenue to the retailer is $50.

What is the value of this number? I can see how some research into operations would identify the cost incurred by holding a certain value of inventory, but decreasing inventory costs by selling at a discount without recognizing that decrease in value really seems like it is using the number for the wrong purpose entirely. Sure, if you're looking into decreasing insurance costs or something, but I how is it defensible when trying to explain your value to investors?

Re: Financial Misstatements

#165

Post by snake117 »

After reading this and going through some of the comments, it may be worth while for YC to hold a small online course, or at least make a small business wiki, that discusses these terms and other concepts specifically in the start-up domain. I mean especially if misusing these terms, unintentional or not, can be considered as a felony, then it would really be worth while to at least give them some information to read up. Even though the ideal team of founders is one CompSci and one business, it seems that some of the business gurus posting here have a hard time defining a few of these terms, like GMV. That's just my two cents.

Re: Financial Misstatements

#166

Post by timv »

codemac wrote: post #21
cryptoz wrote: post #3

There are so many startup accelerators that take a team of engineers / product people and do their best to make businesspeople out of them. I'm one of those CEOs, for sure, and learning about the financial world, accounting, and trying to make sure to not mis-speak was quite difficult. The primary training I received during the accelerator helped a lot, but it was more along the lines of how to more accurately model…

What are the reasons startups can't hire good finance people? Or at least contract with an expert? Is it a difficulty in judging their abilities when it's not your area? Is it something where only at a certain size would it be worth the reduced financial risk to have someone on it? Learning from scratch has to be the slowest, highest risk way of doing it -- which is the exact opposite of what a startup should be opti…

What are the reasons startups can't hire good finance people? Or at least contract with an expert?

In the early stage, when your total team is 2-5 people, there's rarely enough work to justify spending a full time, senior salary on a good finance person. You probably have close to zero revenue/billings, so the main jobs are around payroll, taxes, a few accounts payable, and cash-flow projections.

You can (and should) hire an accountant to do the first 2, and work with your accountant to do the second 2, but

1) Pushing all of payable through the accountant is an easy way to lose track of what your outgoings looks like, and end up with dangerously high expenses. At an early stage startup, the founders should be aware of every expense.

2) The founders definitely need to own the projections. Some help from an accountant is going to make a big difference, but they can't do it for you.

But the more important issues are:

- You aren't likely to drag your external accountant into investor presentations. You might (should) get the accountant to review the financials that go into the presentation, but they won't be there to talk about them, so the founders need to know what they mean, and use the right words.

- The average accountant cares about accounts, not investor terms. You cannot really expect your external accountant (who you hired based on their ability to keep the books to an appropriate legal standard) to know whether that piece of paper in your drawer )that they had no part in producing) is a contract or LOI or MOU. Nor would they necessarily know whether certain income streams should be classed as revenue or GMV unless they are quite familiar with your business. They know about income & expenses & liabilities, but those aren't the same thing and part of the problem for founders is that they seem like they should be.

Re: Financial Misstatements

#167

Post by Havoc »

sumanthvepa wrote: post #160
Havoc wrote: post #155

Earlier quoted context omitted.

>“GMV” (gross merchandise volume) Interesting...been in finance all my life & dealt with pretty much every industry out there...never heard this one before. Must be some type of startup slang so to speak.

It's a term of the trade in the retailing (and by extension e-commerce) industry. It refers to the value of the goods sold. If a retailer sells a widget for $100 at 50% margin, then the GMV is $100 and revenue to the retailer is $50.

>It's a term of the trade in the retailing

No its not. I've seen dozens of retailing operations in multiple countries. None use this term, which brings me smoothly to my next point...

>It refers to the value of the goods sold.

aka CoGS (Cost of Goods Sold) (or CoS in some regions). Unlike GMV you'll actually find that on the financial statement of major retailers. As I said:

>Must be some type of startup slang so to speak.

Would be curious to hear if there is some actual business reason that warrants giving this a new name in the startup context though...

Re: Financial Misstatements

#168

Post by logn »

> One particularly bad one is misunderstanding or misusing basic financial terms. I started noticing this in Y Combinator applicants a couple of years ago [...] I’ve seen people use GMV for revenue or refer to an LOI as a contract many times in the past year when talking to investors. This is a felony.

Not sure who the target audience is. If a business person is willfully deceiving people, let's call that out. But if a programmer is using financial jargon they don't understand, then let's educate them.

It's not hard to read this blog post and come away believing that if you use the wrong acronym accidentally the author thinks you're a felon. I'm sure that's an overstatement, but overall this could have been an article that was educational yet had a serious warning. Instead it kind of stirs drama and fear. That's fine but I can't help but compare PG's essays which are a delight to read and get lost in.

Re: Financial Misstatements

#169

Post by saurabhtandon »

Havoc wrote: post #167
sumanthvepa wrote: post #160

Earlier quoted context omitted.

It's a term of the trade in the retailing (and by extension e-commerce) industry. It refers to the value of the goods sold. If a retailer sells a widget for $100 at 50% margin, then the GMV is $100 and revenue to the retailer is $50.

>It's a term of the trade in the retailing No its not. I've seen dozens of retailing operations in multiple countries. None use this term, which brings me smoothly to my next point... >It refers to the value of the goods sold. aka CoGS (Cost of Goods Sold) (or CoS in some regions). Unlike GMV you'll actually find that on the financial statement of major retailers. As I said: >Must be some type of startup slang so to…

Here is the wiki definition - https://en.wikipedia.org/wiki/Gross_merchandise_volume

eBay and many other marketplaces use it. My guess is that since these marketplace platforms are not actual retailers their GMV is pretty high as compared to revenue. To showcase the dollar value of total sales that happened on the platform they use GMV. But again I am not an expert in this field.

Re: Financial Misstatements

#170

Post by waterlesscloud »

Havoc wrote: post #167
sumanthvepa wrote: post #160

Earlier quoted context omitted.

It's a term of the trade in the retailing (and by extension e-commerce) industry. It refers to the value of the goods sold. If a retailer sells a widget for $100 at 50% margin, then the GMV is $100 and revenue to the retailer is $50.

>It's a term of the trade in the retailing No its not. I've seen dozens of retailing operations in multiple countries. None use this term, which brings me smoothly to my next point... >It refers to the value of the goods sold. aka CoGS (Cost of Goods Sold) (or CoS in some regions). Unlike GMV you'll actually find that on the financial statement of major retailers. As I said: >Must be some type of startup slang so to…

Wait... I thought COGS referred to the production costs of goods sold. The direct material and labor costs. For example, in a restaurant it would involve food costs and wages for cooks.

GMV sounds like it refers to what in this example would be revenue from the finished food. A burger COGS is meat+bun+cook, a burger GMV is the menu price.

Am I wrong in my understanding?

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