Being a CPA & coder this statement really annoys me, GAAP for those that don't know simply means "Generally agreed Accounting principals" and there is really no acceptable reason for this acronymn to be used outside of the (accounting) profession. Maybe it wasn't the authors intent but it smacks of those people who use jargon to help aggrandize their position when a simple inclusive explanation would have been more appropriate.
1) Whether or not people outside the accounting profession should use the acronym 'GAAP'.
2) Whether people use the term as jargon to help aggrandize their position.
I have no comment on point 2. On point 1, though, my position is the polar opposite of yours. Business people in general (and especially CEOs!) should understand the principles of accounting, the ways in which transactions are recorded etc. If they don't understand these things, how are they meant to understand their company's financial statements? If they can't understand their company's financial statements, how are they meant to manage the company?
BTW - I am also a qualified accountant, although this is not related to my current job. I feel so strongly about these issues, though, is that I periodically run an 'Intro to Accounting and Finance' course for interested colleagues, and have delivered similar training courses at other large tech companies in the past.
And that they are determined in the US by the FASB, which is part of the SEC:
The SEC, of course, being the federal agency that regulates all attempts to take investment.
So I think the acronym's use here is important, because it signals that there is a precise legal definition of the term revenue, and that startup founders, so used to hustling and half-assing things, should not fuck around when using that word.
GAAP for those that don't know simply means "Generally agreed
If anybody is looking for further reading on this subject, I enjoyed "Financial Statements" earlier this year(http://www.amazon.com/Financial-Statements-Step---Step-Under...). Quick and straightforward, it starts with the vocabulary and explains the major financial statements (Income, Cash Flow, Balance). The majority of the book follows a company from inception to dividend disbursement, explaining how various business activities (e.g. signing a lease) hit the financial statements.
I hear it almost everyday among startups, where they talk about bookings, revenue and incoming payments interchangeably. And sometimes even in the same sentence such as
"We made 100 k in the whole last year [meaning revenue], we currently make about 50 k per month [meaning bookings] and just last week we made another 30 k [meaning incoming payment]."
This makes it way to hard to properly communicate with founders. So great stuff this post.
I will certainly report back on how it goes though!
In other words, if @bgurley is right and the economics of money-losing companies have changed significantly, then historical burn rate numbers (from 'easy money' times) are not going to be particularly useful to you.
Short answer: burn rates will continue to be high until too late into the down cycle. So current levels matter, a lot.
I was talking about the next generation of startups... if this generation is, in fact, doomed, there are going to be, for example, more supply and less demand for small office sublets in the trendy parts of town
E.g. you may say consulting services or just charge monthly support subscription.
Especially in short term it is easy to convince yourself that it is recurring (e.g. monthly access to tutorials) when really churn is so high, since people use it on-need basis rather than long-term.
How do you deal with refunds? Let's say a customer buys a product, for whatever reason their expectation not met, and a refund is issued. Do you adjust revenue in the month the revenue was recognized? Or do you add negative revenue to the month in which the revenue was received? Or something else?
And for average monthly growth rate, that can vary a lot for the same company depending on where you start. If a company has monthly revenues of 1, 6, 10, 12, 14, 15, 16, it has an average growth rate of 58% over the past 6 months, but 10% over the past three months (and 7% over the past month). I see startups using arbitrary start dates to inflate average growth rates, and am wondering if there's something standard when presenting this metric.
2.) Monthly growth:
It is actually really simple, you just caculate:
(16/1)to the power of (1/6) which equals: 1.58
This means the average growth rate was 58 %.
16/1 is the total growth rate for all 6 months. And to the power of (1/6) because it is calculated among 6 months
2) Right, that's how I calculated 58%, but does it really make sense to calculate the base off of some arbitrarily low first-month revenue? Does it make sense that a company with strong first month sales should have a much lower growth rate than a company with abysmal first-month sales, given a certain current monthly revenue?
2.) If your growth curve flattens out than this approach obviously does not really give you a good representation of how well you are currently doing.
What is a typical or good (active users)/(total signups) rate for a SaaS company?
It's normal to see a lot of attrition right after users sign up, especially if the lowest tier of the service is free. More interesting is how many users you retain after the initial kicking of the tires.
Instead of looking at it this way, I'd instead look at it on a cohort basis over time. A product can have a really bad (total active users)/(total signups) rate historically but actually be in really good shape after iterating for a while. For example, you might be working on your product for 6 months, have 3,000 signups to date, and 300 active users. It would be unfair to measure how things are going by taking 300/3,000 (10%). If you were to look at the same data on a cohort basis, you might find that some group of recent users is stickier than others (because your product changed, or product positioning changed, or something else), and the rate might be something more like 90%.
Products like Mixpanel and Amplitude handle cohort analysis well. You can send in a couple events (Sign Up and some authentic usage metric you define depending on your goals) and pull a cohort analysis. An example: http://aacook.co/retention.png
This chart tells you quite a bit about how you're doing. Week/week acquisition (number of new users signing up) is in the first column, new user activation in the 2nd column (number of new signups who reached a moment of value) and a basic form of retention (number of users coming back at week N).
Tools like BareMetrics and ProfitWell do a nice job pulling revenue data via Stripe. Out of the box, tools like Mixpanel and Amplitude do a good job pulling giving you product and engagement metrics. It's up to you, though, to send all of the data over to those packages correctly and learn how to understand and interpret their reports. Other data, like burn rate, is often calculated back-of-the-napkin.
I'm working on a tool called Growth Report and shipped an MVP a little over a month ago. Hit me up if you want to check it out. firstname.lastname@example.org.
I suppose it could be productized, I am pretty surprised that there isn't a super-easy plug-and-play solution (a la Dropbox, Slack, etc). Probably because coming up with something that's customizable for different startups' needs must be really challenging.
> #5 LTV (Life Time Value)
Shouldn't the calculation factor in the time value of the money over the estimated life time?
I imagine that it's taken as the input for a net present value calculation by many investors.