As I wrote here several weeks ago, I use a simple test to determine whether we're in a 'bubble'. That test says we definitely are. But, maybe there's room for one more nail in the coffin of the debate...with an oblique lesson for entrepreneurs and their startups.
When Groupon filed for its IPO, commentators (example) pointed out the unusual, informal accounting used by the Company. Yesterday, the SEC announced that it's reviewing that accounting (strictly speaking, Groupon does actually present its financial statements in accordance with GAAP (SEC requires it), but spends a lot of time pointing investors to a bunch of novel, more favorable, non-GAAP accounting measures that present a more attractive growth story than do the GAAP financials).
When companies start doing this, all I can think of is the last bubble, with bad accounting stuff happening all over the place: e.g., WorldCom recognizing hundreds of millions of dollars of revenue from bandwidth swaps, AOL recognizing tons of "revenue" on "round-tripped" revenue, etc. It's always been a harbinger of trouble, and, having been in the business for 30+ years, always forebodes bad news.
For early-stage entrepreneurs, there's an indirect lesson here: honestly and transparently report, analyze & deal with the core "financial" metrics of your business with your board and investors. When you are presenting, say to your board of directors, on the health of your startup, never lead with any statistic other than revenue and earnings (or losses -- as all startups have initially). As a board member, I can always tell how a company is doing, and how confident a CEO is in the business by how long it takes in the board presentation for the CEO to talk about (1) revenue and (2) earnings (however accurately defined for that business). When a CEO spends time talking about press mentions, conference awards, employee growth, buzz about the company -- but not about how the company is progressing towards the goal that all self-sustaining companies must reach -- receiving more from customers for what you're selling than it costs you to make and sell it -- you know your investment is in trouble.
My advice to startup CEO's: don't be afraid of this. Instead, embrace it. Stringently measuring yourselves against this standard shows your board and investors that you're serious and honest. Focusing on other "metrics" about how the business is doing to the exclusion (neglect) of financial accounting metrics is usually interpreted as a sign that your startup isn't doing well on what matters.
Postscript: this is not to say that other metrics aren't important. Particularly for startups building a "media" model, in which they need to generate large audiences for content (however defined), other metrics are also important: unique visitors, user engagement with the site, effectiveness of the site in getting users to help market the site to other users (virality, WOM, etc.). For businesses like this (more in a future post), it makes sense to pursue the GEM model: (1) Growth, (2) Engagement and (3) Monetization -- and, importantly, pursue them in that order.
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