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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
  (both should be given with time interval. 
   eg. 30 day retention rate is...
       monthly churn rate is...)
  voluntary churn vs involuntary churn
  gross vs net
  top line vs bottom line

I've probably been guilty of this but I think revenue & GMV can be confusing terms based on how a lot of commerce works via the internet. For reference, our company used to do dropship e-commerce.

Amazon, for example, uses revenue for first party sales and GMV for third party marketplace, Amazon never owns the product in third party marketplace. If you are a dropship retailer though, you have flash ownership because you buy from the dropship wholesaler and then you sell to the customer using a marketplace or website. You could say Amazon is different here because they physically have the products, but with net payment terms up to and past 180 days, it really isn't much different.

Also, if you just consider revenue to be your cut of GMV and you have net payment terms that gives your company high free cash flow, that seems important to distinguish as well.

[Update] The main point of my post is to show how confusing these terms are in one instance, and every business is different so it is really important to clearly define how you use the terms you are using

Two quick points

1. You have switched the terms in your amazon example. Amazon uses GMV for 1st party and revenue (its cut of GMV) for 3rd party marketplace.

2. Why would you have flash ownership in a dropship model? Seems to me that would be a regular wholesale/retail model not dropship.

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% commission (in this case $3 million).

A contract is a legally binding and enforceable document. A letter of intent is when one party outlines what they are likely or would like to do - with some bits of it being enforceable like non-disclosure agreements. A memorandum of understanding is a letter of intent signed by all parties involved - it is still non-binding. A term sheet from a VC is like an LOI - however, it doesn't actually happen until after due diligence, negotiation, etc and only official when signed.

Burn rate is the delta in your bank account. Expenses is how much money left your bank account and revenue is how much entered. Thus burn rate is expenses - revenue and is -1 * profit.

Users are people on your site. Customers are paying users.

Signups are how many people created an account. Active users are how many people logged in over a certain period of time.

Cash flow positive means you have more in your bank account than you did before. However, a kickstarter which raised 1 million would be cash flow positive but not be profitable as it has many outstanding obligations.

Churn rate is the percentage of your users/customers who left over a certain duration. Retention is 1-churn.

Involuntary churn is when the customer leaves because they go out of business or in the case of dating apps, no longer need your services. Voluntary churn is all other churn.

Gross refers revenue - expenses of the product. Net is revenue - expense of the product - administrative costs - depreciation - payroll taxes etc.

Top line is referring to gross while bottom line refers to net. Top line growth means more revenue and bottom line growth means cost cutting.

This is a nice summary, and mostly correct enough. One part I'd like to correct. Revenue is not characterized by whether or not it hits your bank account. Its amount is about who is the principal in the transaction, and its timing is about when the seller has done the activity to earn the money.

So, let's say I'm a payment processor, and my business model involves me collecting money on behalf of my customers. My customer makes a $100 sale, and it all goes into my bank account. That's still not my revenue, as I received the whole $100 on behalf of my customer. Separately, I charge my customer $2, for the work I did to process the transaction. That part is my revenue.

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

For a marketplace, GMV is GMV regardless of how the funds flow. eBay and PayPal are separate. eBay still has GMV, and this number is useful to investors.

>“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?

Pretty standard usage in online marketplaces that connect buyers and sellers and take a commission/cut on the transaction. The first official use was probably in the ebay IPO prospectus from 17 years ago (they call it gross merchandise sales which is the same concept). So I wouldn't call it startup slang.


Maybe it's not used in your part of the world, but it's #6 on this list by Andreessen Horowitz: http://a16z.com/2015/08/21/16-metrics/

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...

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.

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


I think you were accidentaly conflating the two users sumanthvepa and saurabhtandon (happened to me too, btw).

Personal attacks aside, you point still stands and I want to thank you for bringing some actual financial expertise into the discussion :-)

You would be right, if the goods sold were purchased by the retailer and then resold. In that situation, you would have revenue and CoGS. However, often retails do not own the goods they sell. In that situation the price paid for the widget is not the revenue of the retailer. It counts as the GMV, and the revenue is the portion that goes to the retailer.

Maybe you have this switched? Many major retailers (supermarkets) to not own much of their product.

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?

No. Its a bit of a regional difference. UK affiliated people prefer "cost of goods sold" while the rest of the world uses "cost of sales". They're essentially interchangeable with CoGS leaning towards enterprises that produce physical goods.

>GMV sounds like it refers to what in this example would be revenue from the finished food.

GMV was pulled out of thin air & means nothing at all, aside from CoGS/CoS with a lick of startup paint. Anyone that reckons otherwise please step forward with a coherent argument...

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.

This also applies to `burn`, no?

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.

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

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?

What's voluntary vs involuntary churn? (googling but if anyone wants to save me the time) :)

A: Voluntary churn occurs due to a decision by the customer to switch to another company or service provider, involuntary churn occurs due to circumstances such as a customer's relocation to a long-term care facility, death, or the relocation to a distant location.

from: https://en.wikipedia.org/wiki/Customer_attrition

I've also heard of "happy churn", where the customer no longer needs your services (e.g. when a dating site's customers get married).

involuntary can also occur when you cannot renew for technical reasons, such as credit card rejected. these aren't always fraud related, you can have someone who wants to pay you but cant anymore.

IANAL, and Sam mentioned a felony charge. Are there any legal protections for investors (or.... whoever this is protecting) for e.g. misrepresenting "signups vs users vs active users"? Surely that falls under subjective fraud rather than a straight up objective lie, especially for sites e.g. reddit where the line between "active user" and "lurker" is extremely murky.

EDIT: Clearly I have no understanding of fraud.

Usually and investor makes a Due Diligence in the company. Depending on the stage of the company, investor profile, this due diligence can be a formal one, where you hire external auditors to make the process or in a more early-stage phase you can do VC firm (or angel) makes the due diligence themselves.

Either way, at least in Brazilian Law (I work with VC in Brazil, but I imagine there is something similiar in USA), we have a "Hidden Liabilities" clause in our termsheet. It says that anything prior to the investors investiment is liable to the founders only.

If an investor does not include such a clause and doesn't do proper due diligence but everything was handed over...

It works the other way around with all the ways people get screwed over by the other side.

RE: "Subjective fraud". Regardless of whether the fraud is intentional or accidental, misstating something to investors (i.e. "our revenue was $1 million last month" when you're talking about GMV) will still subject you to a lawsuit and/or arrest.

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?

In American law, there are civil offenses (torts) and criminal offenses (crimes). Criminal cases are prosecuted exclusively by the government.

In both categories of law, there is a subset of offenses that fall under "strict liability" — for which you can be punished regardless of your state of mind when committing the offense.

Fraud, like most criminal offenses, requires establishment of mens rea (knowing wrongdoing), so Sam is incorrect in saying that financial misstates are "felonies" on their face. But once you've become an investor you can bring a claim of breach of fiduciary duty (a tort) — rather than establishing that the CEO intentionally misled you, in this case you only need to show that they breached a "duty of care" — essentially, "you should have known".

The concept of mens rea[0] touches on this. One of its applications is that ignorance is not an excuse for being culpable. All of this is not to say that lack of intent makes someone blameless, only that it is not fraud without intent.

[0] https://en.wikipedia.org/wiki/Mens_rea

Ignorance of the law is no defense to criminal charges. But law might also specifically entail intent. For instance, this is the difference between first and second degree murder.

IANAL and I have no knowledge of the business/financial/contract end of things. I do know I've signed quite a few "due diligence" and "reasonable effort" clauses. I don't know how legally defensible they are in situations like user reporting when it's not specified.

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.

I have reason to think oral statements about your financial condition aren't actionable as fraud by your creditors in bankruptcy. I know nothing of liability to investors, securities law, etc.

Yes it's probably the line between just being liable for damages vs. going to jail.

We have the concepts of negligence and recklessness, which often constitute offences of varying severity. I don't know anything about the specifics of fraud.

I think this is vastly over-exaggerating.

Unless you specifically state that you are using the GAAP term "revenue", revenue could mean anything, just like "made" could mean anything, like saying "we made $1M last month".

I highly doubt if you were making a presentation and you said "We had 1M in revenue last month", and it wasn't actually GAAP revenue, I find it hard to believe you would be subject to lawsuit or arrest. In fact, arrest is even more of an over-exaggeration.

Even Groupon had a hard time defining exactly what its "revenues" were pre-IPO, and yet no one got sued or went to jail.

If someone invests in you because of a revenue claim when no one else in the room would agree with your definition of revenue, you might end up getting sued. That's pretty reasonable. If it's in a casual conversation, they should have plenty of time to look over the books later, so it's not a big deal.

That said, why not use appropriate GAAP values? You should already know them, assuming you're keeping proper books, so it should be the easiest value to give.

You could get sued, but in the US you can get sued for anything. But you would win the lawsuit.

"Revenue" can mean anything. Look up the term online, for example http://dictionary.reference.com/browse/revenue, and you'll see 6 different definitions. One of them is: "an amount of money regularly coming in". How is this definition of revenue wrong, or how could it result you getting sued? The answer is you won't.

Sure it could cause misunderstanding, but that happens all the time. As long as you don't misrepresent it as "GAAP revenue", you're perfectly fine using it in any reasonable way. Unlike what Sam Altman says, it's not a felony. My wife is a CPA and she laughed out loud when she read that.

Even Groupon?

There are substantial remedies. Civil courts allow actions for restitution and punitive awards.

If the fraud rises to a sufficient level, you can attempt to have the state lock the person up and/or prevent the person from interacting with you.

Really? Seems like that line is easily defined with a sentence or two.

Sorry, I more meant it in terms of:

1. What to the investors think the terms mean.

2. What does the service provider think the terms mean.

3. Can the difference between 1 and 2 be construed as a violation of a contract.

4. If 3, is it possible to discern unintentional vs fraud.

I used reddit because it so easily demonstrates the different tiers of the 1% rule[1], except with reddit there are un signed in users, signed in users who don't do anything, only voters, voters and commenters, people who submit, and "power users". I don't know the details now (and reddit has changed a lot), but last I checked they seemed to descend in numbers by about ~10%. This would be a place where you could easily portray a very different ecosystem than reality, intentionally or not, simply by categorizing the users as "active" or not, and how you're characterizing the value you're getting from them.

[1] https://en.wikipedia.org/wiki/1%25_rule_(Internet_culture)

I would add bookings vs. revenue.

If you sign up a $120k yearly contract, you have $120k in bookings, but can only recognize $10k of revenue each month.

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."


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.

billings vs revenue markup vs margin payout vs dividend

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