revenue vs GMV
(if you give GMV, give me your cut/margin)
contract vs LOI
burn vs expenses
users vs customers
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
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
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
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.
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.
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.
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?
Ride Cost: $20.00 GMV (goes through ubers payment system)
Commission: $4.00 revenue
Credit card fees: $0.60 expense
Ride Cost: $20.00 (Uber never handles this)
Credit card fees: n/a
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 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?
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...
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.
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
Personal attacks aside, you point still stands and I want to thank you for bringing some actual financial expertise into the discussion :-)
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?
>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...
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.
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
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.
EDIT: Clearly I have no understanding of fraud.
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.
It works the other way around with all the ways people get screwed over by the other side.
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 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".
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.
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.
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.
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.
"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.
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.
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, 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.
If you sign up a $120k yearly contract, you have $120k in bookings, but can only recognize $10k of revenue each month.
"Your burn rate is the speed at which your cash balance is going down."
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.