Risk & Compliance

Startups’ Use of Non-GAAP Metrics Stirs Concerns

Critics say use of nontraditional numbers that often far exceed actual revenue could inflate companies' valuations.
Matthew HellerJune 11, 2015

Tech startups are using “bookings,” “annual recurring revenue” and other nontraditional accounting terms to solicit funding from investors, a practice that critics say could inflate companies’ valuations, The Wall Street Journal reports.

Companies that haven’t sold shares in an initial public offering can use “non-GAAP” metrics without having to explain them and disclose how they differ from measurements that follow strict accounting rules.

The term “bookings” has been used by companies including Uber Technologies, the world’s most highly capitalized startup. Some investors have been told the number is on pace to reach $10 billion for 2015.

A Better Way to Do Ecommerce

A Better Way to Do Ecommerce

Learn how Precision Medical leveraged OneWorld to cut the cost of billing in half and added $2.5M in annual revenue.

According to the WSJ, tech company executives argue that such numbers are a better barometer of a firm’s progress at luring customers, outrunning competitors, and pushing the company’s value higher. But skeptics say “investors who go along with vague, unconventional financial terms are inflating valuations and leaving almost no room for error at fledgling technology companies.”

“The chances of surprises go up a lot more,” said Venky Ganesan, a venture-capital investor at Menlo Ventures. “It’s not to say the numbers are wrong, but that’s when caveat emptor really applies.”

The Journal compared sales figures and projections made by 50 tech companies when they were private with financial results reported later for the same period. Fifteen of those firms reported lower numbers and, in at least six cases, the difference resulted from using more conservative accounting measurements when the companies went public.

The combined decline by the 15 companies was about $760 million, or 25% of their original sales or projections, according to the Journal’s analysis.

The Securities and Exchange Commission usually doesn’t intervene until a company seeks regulatory approval for an IPO, but it has been increasing its scrutiny of non-GAAP terms at young companies.

According to law firm Proskauer Rose, the commission last year asked 88% of technology, media and telecommunications companies preparing for IPOs questions about how the firms accounted for revenue, up from 79% in 2013. Last year’s average across all industry groups was 46%.