Related, “When the facts are on your side, pound the facts. When the law is on your side, pound the law. When neither is on you side, pound the table.”
How companies report their key performance indicators (KPIs), both financial and non-financial to their advantage. This remains one of my favorite investor notes of all time. Thanks @LeadEdgeCapital. Often times when we see presentations from companies, they have little information in them. They might show information about number of users, total downloads, awards the company has won…etc Many of these companies have raised tens of millions of dollars in financing, and should be able to speak to their traction in some way. To that end, we have created a hierarchy of information including in company decks;
These notes are mainly relevant to software and technology companies.
- If companies have good cash profits they report those
- If companies don’t have good cash profits, they report on adjusted profits
- If companies don’t have good adjusted profits, they report on gross profits
- If companies don’t have good gross profits, they report on revenue
- If companies don’t have good revenue, they report on adjusted revenue indicators (like Gross Merchandise Value – GMV)
- If companies don’t have good GMV, they report on Monthly Active Users
- If companies don’t have good Monthly Active Users, they report on Subscribers
- If companies don’t have good Subscribers, they report on Downloads
- If companies don’t have good Downloads, they report on Pageviews
- If companies don’t have good Pageviews, they report on that they were voted the ‘Best Place to Work in XYZ City’
Corollory: the longer you have to wait for the metrics slide in a pitch, the worse the metrics will be. Beware the Great Places to Work or combined years of experience!
“A common complaint about public companies, especially growth companies, is that they hate talking about net income but love talking about ‘Adjusted EBITDA,’ or even wilder metrics than that like WeWork’s ‘Community-Adjusted EBITDA,’ a metric that stripped out not just interest, taxes, depreciation, and amortization (the ‘ITDA’ in EBITDA) but also the cost of marketing, corporate overhead, and the upfront cost of designing and building out new buildings…
When management presents a non-GAAP view of profits, or they point to some new metric that they say matters more than revenue to them, they aren’t telling you everything. But they’re certainly telling you something.”
