BRAVE Southeast Asia Tech: Singapore, Indonesia, Vietnam, Philippines, Thailand & Malaysia Startups, Founders & Venture Capital VC (English)

Founder Frauds, Startup Accounting Tricks (GMV, Revenue, Gross Margin, Contribution Margin) & Revenue Bundling & Valuation Multiples with Adriel Yong - E453

Jul 30, 2024

43:05

Adriel Yong, Head of Investments at Ascend Network, and Jeremy Au discussed three major topics:

1. Startup Accounting Tricks (GMV, Revenue, Gross Margin, Contribution Margin): Local VCs have often confused Gross Merchandise Value (GMV) with actual platform revenue, and gross margins with actual unit profitability. Startups have also split reporting contribution margin into CM1, CM2, CM3 and CM4. This has caused investor misunderstandings, accusations of misleading financial reporting and startup boards to focus on the wrong metrics. Prevalance is high due to inexperienced finance teams, emerging VCs and poor market norms/ incentives.

2. Revenue Bundling & Valuation Multiples: Jeremy and Adriel addressed how one-stop-shop/ superapp startups may bundle multiple revenue streams under a single total "revenue" term: one-off sales, onboarding fees, GMV-based revenue, direct material sales, SaaS subscription, and lending revenues. VCs may mistakenly apply the same "tech valuation multiple" to all of these different revenue streams, leading to inflated valuations and later misunderstandings of the actual growth rate. For example, many VCs failed to understand net interest margins for lending startups, thus failing to account for non-performing loans.

3. Founder Frauds: Jeremy and Adriel discussed real-life anonymized examples of theft, misrepresented financials, inflated invoices, related party transactions without proper disclosure and fake school credentials. They noted that these practices are common in markets with less rigorous due diligence processes or less professional founder / executive business norms. VCs face challenges in detecting fraud, such as spot-checking large-scale operations or non-existent offices, underscoring the need for thorough due diligence to verify data accuracy.

Jeremy and Adriel also talked about the impact of bribery and kickbacks on market operations, effective methods for verifying company operations, and the importance of appointing neutral CFOs to oversee transparent financial practices.

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