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Financial Misstatements

blog.samaltman.com

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Re: Financial Misstatements

#171

Post by pmikesell »

waterlesscloud wrote: post #170
Havoc wrote: post #167

Earlier quoted context omitted.

>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?

If I build a box and sell it to you, the cost of the parts is cogs. If you buy someone else's box through my website that's gmv. Your example is correct too, but probably not what somebody would use because in that example it's also the revenue.

Re: Financial Misstatements

#172

Post by martinflack »

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'm pretty sure if a retailer sells a widget for $100 then the revenue is $100. COGS is $50.

GMV is probably a term more useful in situations where the entity is not a retailer per se, like eBay, who still wants a number to represent the value of the goods they are facilitating transactions upon. They don't own the items on auction so the purchase price is not revenue to them, but the fees are revenue.

Re: Financial Misstatements

#173

Post by chernevik »

unreal37 wrote: post #49
taylorwc wrote: post #45

Earlier quoted context omitted.

Your point stands, and this is a nit, but... Fraud, by legal definition, must be intentional. It is a deliberate attempt to mislead.

Is there a concept in law as "you should have known"? Like, its one thing to not know that the thing you are saying isn't true (i.e. "my co-founder went to Yale" when he actually believes that he did). But another to not know the definitions of words you are using when you should know that? Can you say "I have a million dollars in the bank" when you honestly believe "a million" = 1000?

I know nothing about startup investor terms. But I wouldn't be surprised if they often included some clause "accounting shall conform to Generally Accepted Accounting Principles [GAAP]", at which the signing company is responsible for knowing and using the GAAP terminology for various items.

How those responsibilities translate over to criminal / civil law would be a question for a lawyer. I think Sam's use of "felony" might be meant to get people's attention. Even finding yourself in an argument with your investors over civil liabilities probably means you have huge reputational issues that could kill you among the investor community.

Re: Financial Misstatements

#174

Post by chernevik »

evo_9 wrote: post #121

Mr. Altman is talking about the basic misunderstanding of these terms and it's surprising to me that he didn't take a bit of time to define the terms himself. Maybe I'm naive and those terms are a lot harder to define than I'm imagining, but even then some references linking to other sites could have been provided. I really enjoy reading Sam's posts and I'm usually bookmarking and/or forwarding his articles to a ton…

I think the point is less these particular terms and more the general responsibility to know and use the accounting terminology properly. Sam probably has a dozen examples of financial terminology errors, of varying seriousness and intent, and startup models, by definition, are going to raise still more questions. Sam can't possibly lay out a definitive vocabulary -- the applications of these terms is always dependent on the particular business. He can raise a flag that founders have to take this stuff seriously.

Whether this is exactly the best post for that is maybe another question. It definitely raises the question of how, exactly, founders without any accounting are supposed to navigate this stuff. Accounting is a language of its own, whose conventions make sense once you understand the various problems it must solve, but absent that knowledge it is very easy for people to make innocent but very important mistakes.

Re: Financial Misstatements

#175

Post by marincounty »

Havoc wrote: post #155
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…

>“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.

I'm not sure if it is Internet slang, but if it is--I wish people would stop reinventing words/concepts. It's not cute, or interesting anymore. I'm so glad "wired in" didn't catch on.

I picture the writers on that movie thinking, "How can we make typing on a laptop, while listening into whatever on head phones seem cool?" Awe--"Wired in" will get their attention?

Re: Financial Misstatements

#176

Post by matthewrudy »

liyanchang wrote: post #158
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…

I am not an accountant - I was looking most of these up so do let me know if I got something wrong and I'll edit as needed. Just trying to compile things in one place. Gross Merchandise Value is how much money flows through your system while Revenue is how much lands in your bank account. For instance, a payments processor like Stripe might have a GMV of $100 million while their revenue would only be the 3% commissio…

I think stripe is the perfect example of GMV. A clear distinction between the transaction volume they handle and the revenue they take from that volume.

There are more confusing examples though.

If Uber accepted cash payments, and the driver post paid just the commission, would the whole trip cost be GMV or just the commission?

eg Regular Uber:

Ride Cost: $20.00 GMV (goes through ubers payment system)

Commission: $4.00 revenue

Credit card fees: $0.60 expense

Cash Uber

Ride Cost: $20.00 (Uber never handles this)

Commission: $4.00 revenue

Credit card fees: n/a

Edit: formatting

Re: Financial Misstatements

#178

Post by asmithmd1 »

rokhayakebe wrote: post #141
tkiley wrote: post #85

I agree with Sam's message, but I sympathize with founders who make mistakes here. Founders are told to hustle, to aggressively push themselves and their visions in order to build momentum for their businesses. Founders are encouraged to bend - if not break - the rules in order to get things done. First-time founders are thrown into the world of finance with a good deal of ignorance about the meanings and conventions…

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.

Using your example for a business more people understand - A real estate agency can honestly say "We sold $20M of real estate last year" and everyone knows they probably took in about $1M in revenue. With new businesses where revenue models are changing it is possible to make honest statements that mislead an investor.

Re: Financial Misstatements

#179

Post by Havoc »

saurabhtandon wrote: post #169
Havoc wrote: post #167

Earlier quoted context omitted.

>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.

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

Yeah I googled it too - a while ago - wikipedia isn't exactly a winning moving here.

>eBay and many other marketplaces use it.

That is deeply disingenuous. You originally said its "term of the trade in the retailing". I called bullsht - because I know its not used in retailing. In response you shift your argument (!!!) and reckon its used by ebay (FYI NOT A RETAIL OPERATION) - and copied the ebay stuff straight off wikipedia.

>I am not an expert in this field

Indeed.

Re: Financial Misstatements

#180

Post by TheCoelacanth »

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…

GMV is only meaningful for "marketplace" businesses that facilitate sales for third parties. It's essentially the combined revenue for all parties involved in selling through the marketplace. For example, if someone sells something for $100 through eBay and eBay takes a 10% cut, that's $100 GMV for eBay, $90 of revenue for the seller and $10 of revenue for eBay.
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