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Stop lying to me

The Saturday Essay
Stop lying to me
By Alex Wilhelm • Issue #2 • View online
Welcome to The Saturday Essay, a relaxed weekend writing project from technology and financial journalist Alex Wilhelm.
The Saturday Essay publishes once per week, on Saturday, discussing business, economics, and politics.

Stop lying to me
While I am all for optimism and belief in oneself, I am tired of companies lying to me. Sometimes they don’t even bother to obfuscate their bullshit.
Startups are well-known for presenting reality in a creative manner. The market tends to chalk up overly-lofty projections by upstart companies to enthusiasm, dismissing the occasional half-truth as part of the game.
But the laxity shown to startups is metastasizing into tumorous gibberish from companies big enough to go public. It’s not good.
Too often in recent months well-known concerns have been found out to be whole-cloth fabricators concerning their historical performance, or willing to present results in such a twisted way that they are lying by omission, and it’s driving me mad.
Perhaps unicorns are simply unwilling, or unable to grow out of startup math. That’s little excuse. Larger, better-funded, more fully-staffed firms need to knock off the drivel.
Sweetgreen is a good example of the problem. The company told reporters repeatedly that it was profitable, claiming green-ink in 2018 and 2019, for example.
That was complete bilge, it turned out. Once the company had to answer to the SEC – business’s higher power, if ineffective conscience – the drapery fell.
For reference, numbers in brackets are negative, and in every period that we have data for Sweetgreen lost money. Gobs of it, in 2014 and 2015 and 2016 and 2017 and 2018 and 2019 and 2020.
2021 is not looking much better.
You could argue that Sweetgreen was, and remains a private company, and thus doesn’t have to comply with standard definitions of profitability. This is far too accommodating a standard for any company. Don’t coddle the venture-backed.
Even if we wanted to be incredibly generous with Sweetgreen, and measure its profitability using the adjusted EBITDA metric as the lens through which we vetted its ability to make money, it still posted losses in every single year we have on file; from 2014 through 2020, Sweetgreen posted not only negative adjusted EBITDA, but generally speaking more of it as time went along.
That means the company became less and less profitable, or more and more unprofitable, as the years ticked by. And yet it was willing to go into the public sphere and say that it was, in fact, making money.
What was the company thinking? My hunch is that Sweetgreen was willing to say it was a profitable company because its invented metric of “Restaurant-Level Profit” was positive on a historical basis until 2020, when even that bent measuring stick dipped into the red.
Restaurant-Level Profit is the Community-Adjusted EBITDA of the salad world, and we shouldn’t let companies pretend that non-profits are something different.
Rent the Runway
Sweetgreen is not the only company ashamed of its own performance to the point of stuffing its numbers full of shit. Let’s talk about Rent the Runway, a company that recently went public only to see a great portion of its market value evaporate.
In early 2019, Rent the Runway CEO Jennifer Hyman told CNBC that she had not been “given the permission or privilege to lose a billion every quarter,” and that she had had to “bring [her] company towards profitability.”
In late 2020, Hyman told Fortune that COVID-19 had “accelerated a movement towards being a much higher margin business, and it accelerated [Rent the Runway’s] path to full profitability.”
Now let’s check the tape:
That’s a hard no for profitability in calendar 2019 – the company’s fiscal year ends January 31 of each year – and calendar 2020. The periods in which the company’s CEO said that she was moving towards profitability and that the pandemic had accelerated Rent’s path to complete profitability.
It was all bippity-bopping-bunk.
As before, the company has some invented cover to hide behind. I am sure that if we sat its investor relations team down, they would claim that their CEO was referring to a particular metric that Rent the Runway favors. It’s mega-massaged “gross profit excluding product depreciation,” perhaps.
Rent the Runway’s calculation of gross profit excluding the cost of product depreciation is galling. In the math, it strips out the decline in value of the clothes that it rents out, instead wanting to put a key expense of its core product into its cash flow calculations, away from its more pedestrian operating results.
It needs to do this because its actual gross margins are poor. So lacking, in fact, that the company is not profitable on even a modified basis. Rent the Runway posted negative adjusted EBITDA in every quarter we have on record, except for the first shared, the three months ending April 30, 2019. From there even its fake profit is entirely negative.
That Rent the Runway had the gall to chat profits while posting rising losses, and then go public with an S-1 filing chock-full of financial mathmagic would be hilarious if it wasn’t terrifying.
This from a company that raised hundreds of millions of dollars of debt and equity capital during its life as a private concern. And from where we sit, it appears to have built little more with all that funding than a way to take other people’s money, and use the cash to subsidize consumers’ ability to rent garments that they cannot afford to buy.
That Rent the Runway cannot afford to buy them itself is merely irony.
So what?
If you thought that the infamous WeWork IPO filing was the high-watermark of nonsense, and that the goat rodeo of adjusted, company-specific metrics was behind us, you were wrong. In fact, it appears that WeWork’s deceptive document was more preamble than finish-line for crocked metrics from companies that should know better.
The profit-massaging doesn’t end with our above examples. I’ve noticed that more companies are stripping out the cash costs associated with share-based compensation from their adjusted profit metrics. It’s already incredibly bold to yank share-based comp costs from profit results. Those shares paid to employees are an expense, and one that investors themselves pay through dilution now, and, later, cash-powered buybacks. Removing them is silly.
Max A. Cherney
Unity, come on now. Removing the cash paid on the stock comp. from adjusted profit? 🧐 @alex figured you would like this table
To also deduct the cash costs associated with them is high-art bunk. It’s unconscionable. It’s a way of lying about your profits and hoping that no one is reading your tables too closely while also not getting into trouble with the SEC, because, technically, etc.
Spare me.
I don’t know why we’re seeing more of this sort of obfuscatory trash, but I’ve had enough. Tighten up your darn metrics. Lean on GAAP like the grown-up company that you are. If a startup has more than 100 employees, a valuation of $1 billion or more, or anything similar, it should act, and report, like a grownup.
Did you enjoy this issue?
Alex Wilhelm

A weekly essay digging into economics, startups, and fun. Written by Alex Wilhelm, a medium-quality nerd and S-1 fanatic.

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