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4/16/2016

TheRightWaytoCalculateRevenueandMarginsMaheshVC

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TheRight
Wayto
Calculate
Revenueand

Iworkasagrowthstageinvestorat
RedpointVenturesandpost
practicalinformationrelatedtothe

Margins

ConsumerInternetsector.
Subscribetomyemailnewsletter

June26,2015

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http://www.maheshvc.com/blog/therightwaytocalculaterevenueandmargins

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4/16/2016

TheRightWaytoCalculateRevenueandMarginsMaheshVC
Thispostispartofanongoing
serieswhereIpracticallywalk

OtherPostsbyCategory:

throughimportantcalculations,
metricsanduniteconomicsfor
consumerinternetbusinesses.
Firstup,incomestatementand
margins.

Healthcare(3)
SectorBreakdowns(22)
ConsumerServices/
Marketplaces(14)
Abstract/Theory(3)

Inconsistenciesaround"margins"
aresomethingthatIcomeacross
everyweek.MetricssuchasGMV,
revenueandEBITDAarecited
often,butthereisfrequently
confusionaroundwhatthese
metricsreallymean.I'vealsoseen
manyinaccuratecomparisonsand
benchmarksforthesemetrics
giventhattheyvaryfromcompany
tocompanyandaren'talways
apples-to-apples.Let'sclarify:

Gaming(6)
PublicSpotlight(13)
Valuation(8)
China(2)
Mobile(5)
Ecommerce(4)
S-1Teardowns(7)
Education(2)
FinTech(1)
Marketing(1)
UnitEconomics(4)
Hardware(1)

GMV
GMVisthetoplevelmetricfor
manybusinesses.Itstandsfor
grossmerchandisevalue,but
couldalsobesynonymouswith
termsliketotalordervalue,total
dollarsprocessedandgross
revenue.GMVisarelevantmetric
foryourbusinessifthereare
dollarsflowingthroughtheplatform

MaheshVellanki
Uber/LyftdriversinSF
mustobtainlicenseand
registerwithcity,pay
$91andbackpay
previousyears.Letters
justsentto37kdrivers
14hoursago

thatarenotnecessarilybookedas
directrevenue.Forearlierstage
businesseswherethissometimes

MaheshVellanki

maybetheonlymeaningfulmetric,

VentureSource:"deal

it'simportanttounderstandthat

volumeisdowninQ1"

thesebusinesseswillultimatelybe

MoneyTree:"deal

valuedonrevenueandprofitability,

volumeisupinQ1"

not"GMV".Ifyoulookatthefilings

NVCA:"Q1wasbest

forcompanieslikeAmazon,Ebay

starttoyearsince

andEtsy,youwillfindthattheyare

dotcomboom"Huh?

valuedonrevenue,notGMVor

15hoursago

transactionvolume.GMVisagreat

http://www.maheshvc.com/blog/therightwaytocalculaterevenueandmargins

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4/16/2016

TheRightWaytoCalculateRevenueandMarginsMaheshVC
metrictolookat,butit'sevenmore
importanttounderstandrevenue

Follow@mvellank

take-ratefollowedbygrossmargin.

Revenue
Revenueisthelevelofsalesthat
thebusinessisgenerating.It's
arguablyamoreimportanttoplevelmetricthanGMV,particularly
whenGMVisn'tevenrelevant.If
thereissomeportionofthe
revenuethatwillbeautomatically
owedtoavendororsupplier,then
thatisprobablyGMV,NOT
revenue.

GrossMargins
Grossmarginisjustrevenueless
anycostofgoodssold(COGS),
whicharevariablecosts.To
calculate"grossmargin%",take
grossprofitanddivideitby
revenue(NOTGMV).Gross
marginsshowtheamountofprofit
beforeoperatingcostssuchas
marketing,overheadandsalaries.
Itisaproxyfortheprofitpotential
ofabusiness.Youmayhave
negativeEBITDAandnetincome,
butifyouhaveadecentgross
margin,thenperhapsasyour
businessscalesyouwillbeableto
coveryouroverheadwithyour
grossprofitandeventuallybecome
cashflowpositive.

OperatingCosts
Operatingcostsincludelineitems
suchassales&marketing,
overhead,payroll,travelexpenses,
etc.Thesearecostsassociated

http://www.maheshvc.com/blog/therightwaytocalculaterevenueandmargins

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4/16/2016

TheRightWaytoCalculateRevenueandMarginsMaheshVC
withrunningyourbusiness,unlike
COGSwhicharethecosts
DIRECTLYattributabletodelivering
yourproductorservice.A
companywithgood"operating
leverage"isonethathas
decreasingoperatingcostsasa%
ofrevenueovertime.Takeyour
grossmarginandsubtract
operatingcoststocalculate
operatingprofit,otherwiseknown
asEBIT.

ContributionMargin
Thisisanadjustmentofgross
marginwhichIsometimescall"true
grossmargin".Takeyourgross
marginandalsoloadinany
operatingcostswhichseemlike
theyaremorevariablethanthey
arefixed.Inotherwords,arethere
anyoperatingcoststhatshouldbe
allocatedtoCOGS?Foran
ecommercecompany,youwill
wanttoincludeapro-ratedamount
ofcostsforitemssuchas
returns/refunds,customerservice,
etc.Thesecostsshouldbe
broughtabovethegrossmargin
lineinordertobetterunderstandif
acompanyhasaworkingbusiness
thatcanbeprofitableinthelong
run.

SampleP&Lfor
CompanyX:Food
OrderingMarketplace
(likeGrubHub)

http://www.maheshvc.com/blog/therightwaytocalculaterevenueandmargins

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4/16/2016

TheRightWaytoCalculateRevenueandMarginsMaheshVC

Intheaboveexample,whilethe
companygenerates$2.5BofGMV,
theactualrevenuetothecompany
is$375M.Grossmarginsarequite
highat70%,yielding$263Mof
grossprofit.Afteryouloadinallof
theoperatingcosts,youareleft
with$93Minoperatingprofit,a
modestamountcomparedtothe
$2.5BGMVatthetop!Ifyou
wantedtobereallyprecise,then
couldaddinacontributionmargin
linebelowgrossmarginandfurther
"burden"thegrossmarginwith
someadditionaloperatingcosts
thataredirectlyassociatedwithan
incrementalorder.

I'llstopthere.Generally,thoseare
themostimportanttop-level
metricstounderstand.When
comparingvaluationmultiples
betweencompanies,itisextremely
importanttomakesureyouare
comparingmetricsproperly.GMV
shouldbecomparedtoGMV,
revenueshouldbecomparedto
revenue,etc.Therearealsoother
importantmetricssuchas
EBITDA,netincome,cashflowand
others.However,forveryearly
stagebusinesses,the
aforementionedmetricsarecrucial.

http://www.maheshvc.com/blog/therightwaytocalculaterevenueandmargins

5/6

4/16/2016

TheRightWaytoCalculateRevenueandMarginsMaheshVC
Inmynextposts,wewilltake
thesemetricsandusethemto
betterunderstanduniteconomics,
LTVandpayback.

TagsUnitEconomics

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