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The Daily

Shady Numbers from Tech Startups Demonstrate Why Accounting Standards Exist

Chris Gaetano
Published Date:
Jun 10, 2015
WordMazeWhile knotty philosophical issues like linguistic recursion and the problem of other minds are quite real, in the everyday world, when we say something, we generally assume the other person knows what we mean within some degree of reasonableness, hence allowing communication to flow freely. It's not a philosophically perfect system, but it lets us get by in day-to-day life. 

Investors dealing with tech startups, however, have apparently not found this to be the case lately, as they are expressing increasing frustration with companies that play fast and loose with financial terminology, sometimes giving a picture of their business's current and future health that's quite different from the reality, according to the Wall Street Journal. For example, one company, when dealing with investors, said on its website that it had generated $100 million in revenue annually. However, when it later went public and needed to follow GAAP rules, it turns out that what it had been calling revenue was actually the total amount of ad transactions on its network, and not just money directly flowing into the company itself, which is what most investors would think. When forced to explain itself, it turns out its annual revenue was closer to $37 million. Now, on its public filings, it reports the total ad transactions on its network as "managed revenues." 

Other large companies supposedly do similar things: Uber, for example, reports "bookings," but this is very different from its net revenue, as a good chunk of these "bookings" go to the drivers. Pinterest, meanwhile, has promised future revenues of $3 billion, but has failed so far to define what they count as revenue. Another startup, Hortonworks, talked about a $100 million "run rate," which included future projected business, though when it went public it was found actual revenues, as calculated by GAAP, was around $46 million instead. MoPub, which was acquired by Twitter in 2013, also used this term to describe $100 million it had made, though its actual revenues were $6.5 million, and the run rate was just the total value of ad spots placed on websites by the company. 

While such non-GAAP measures might be problematic, the companies using them are not breaking securities laws, as before going public, these companies are not actually issuing any securities. The WSJ found that, when they do go public, some companies wind up with smaller actual reported revenues because they tend to use more conservative accounting measures. Further, some companies defended the practice, saying standard GAAP measures do not give an accurate picture of their business's real growth potential. Critics, however, feel this is evidence that the tech industry is overvalued and heading for a disastrous fall.