The Internet business start up has always been kind of a conundrum to Wall Street, investors, venture capitalists and anyone else involved in their success in a financial way. Internet startups often begin with a brand-new idea that has no parallel anywhere else. Getting initial traction for business startup is very important. Investors sometimes need to wait years before any of the promised profit actually shows up. Until then, no established way of measuring their success ever works. Investors need to come up with strange new ways of measuring performance. When the whole Internet show started about 15 years ago, search engines, portals, e-mail services and others often used strange new phrases to showcase the abilities to investors – terms like mindshare or eyeballs were bandied about. And no one really knew what they meant either. No sooner has the world come to terms with them than a whole new generation of ideas for Internet businesses have to turn up. With their own unique ways of measuring chances of success.
Groupon, the group buying coupon company that’s been quickly valued at $6 billion for instance, has a pretty impressive-sounding yardstick – called Adjusted Consolidated Segment Operating Income. The normal way to gauge how well a business is doing would be to judge profitability by looking at profit after all expenses. Groupon’s new ACSOI measures profit before these expenses. If they didn’t do that, Groupon would appear to be deeply unprofitable.
When you hear that Facebook is valued at $50 billion or LinkedIn at $12 billion, you have to know that investors are using all kinds of strange new metrics to arrive at that figure. There are lots of people who think that this is bad news – it makes them think of all the strange fictitious investment opportunities that Wall Street thought of in the years leading up to the big collapse three years ago. No one knows how to value businesses like these and whether these businesses are even expected to live for long. Facebook for instance has already famously begun to shrink in North America. With remarkably new ideas like location sharing or the group buying or farm games at the core of many an Internet business start up, and with an inability seen all around in finding universally accepted ways of measuring their success or their lack of it investors could be in trouble.
It’s the same story with the online music service Pandora and Groupon. The more people listen to music on Pandora , the more royalties Pandora has to pay to the record labels. They don’t pull in as much income. Pets.com may have had a wonderful reputation. But when all the money that they had to spend to win that reputation caught up with them, they closed. If Groupon’s investors refused to value the company’s profits in an unconventional way, all of the company’s advertising expenses would have to be accounted for. And then, the company would be seen to be loss-making. No one knows whether any of these Internet business start up ideas will succeed. And these new metrics certainly aren’t helping.