This week, Menlo Park, California-based venture capital firm Andreessen Horowitz published a list of 100 fastest-growing marketplace companies. With big brands like Airbnb, Instacart, Doordash, and Postmates at the top, the list looks legitimate. But underneath these big headliners is the methodology used to pick the winners, a methodology that plagues Silicon Valley startups and one I'd argue ultimately leads to the demise of some of the largest.
The list was based on GMV, or Gross Merchandise Volume. GMV, similar to gross revenue, measures the total dollar amount that flows through your company. In other words, if you have a website that sells $100 bills, and you sell 10 of them, your GMV would be $1000. What GMV fails to take into account is how much money your company pockets from the sale of those 10 $100 bills. If you had to buy those $100 bills for $100 each, you are not taking home any money from selling 10 of them.
Still with me? GMV is clearly a problematic measure because it fails to take into account how much money actually goes into the company's bank account -- it only measures how much money is transacted through the platform.
So what about looking at net revenue instead?
Net revenue is better because it removes the cost of the goods sold. In the above example, net revenue would be $0. That seems more fair to judge a fast-growing company by.
But famously, companies like WeWork have had high net revenues and have still been extremely unsustainable. So what is missing? All the other costs--salaries, rent, marketing--are not accounted for when only looking at revenue. At the end of the day, your company lives or dies by your bottom line.
What should you be measuring instead?
Profitability is the true measure of sustainability. As a company leader, it's important not to get caught up in the hype of growing GMV or revenue at all costs. That approach may help you attract the attention of top venture capitalists, but ultimately, without a focus on how much you're really spending to achieve those numbers, you can crash and burn. You don't have to look far down at Andreessen Horowitz's list to see No. 24 ranked Wag, a dog-walking startup which after raising $300 million from SoftBank in 2018, had such high expenses it had to undergo multiple rounds of layoffs two years later and ultimately was given up by SoftBank.
Many are predicting that 2020 is the year that companies will focus on achieving profitability due to increased tech startup layoffs and a tightening funding environment. Regardless of whether it's a trend or the real deal, focusing on profitability will allow you to control your company's destiny because you're not beholden to raising money.
Lists like the one released by Andreessen Horowitz reward metrics that aren't true indicators of success. Don't be fooled into focusing on GMV to evaluate how your company is doing. If your GMV or revenue is growing fast, make sure to look at how fast your expenses are growing too. When the venture capital well runs dry, you'll be glad you did.