Pros and cons for big-name startups using non-GAAP profit metrics.
The creative accounting is reminiscent of the late 1990s dot-com bubble, when money-losing companies went public touting “pro forma” profit as a better measure of financial performance. More recently, Silicon Valley startups have used unconventional financial terms like “annual recurring revenue,” “billings” and “bookings” that can give a more favorable impression than traditional accounting would. Many companies argue these nontraditional metrics are better measures for understanding the growth trajectory of their businesses. Venture capitalists often place a premium on startups that can grow quickly, ignoring some upfront expenses. Marketing costs, for example, might push companies into the red at first, but if customers who sign up are highly profitable in the long run, the losses would be worth the investment today, venture capitalists and entrepreneurs say.