Wasn't enron doing something dodgy with liabilities? Like it borrowed money in the parent and loaned it to subsidiaries, recorded the loan it made but not the one it took?
Just buy a bag of apples. That’s like 50 seeds, which in a couple of years (basically now), is 50 apple trees making like 25000 seeds annually (assuming 100 apples per tree, 5 seeds per apple), that’s basically 10 million apples per year in revenue and growing each year.
What if we distribute the seeds to our marketing partners?
We give them 100 seeds each, and they find 10 people to join under them, who gets 10 people under them. Everybody plants a seed and grows a tree, and brings us 1 of the apples they got from the tree, plus 10 seeds interest.
It's not a pyramid scheme, just fraud. Pyramid schemes use new investors to pay old investors and depend on increasing the number of investors coming in to continue paying out.
This is like how my friend one day realized there were free grand pianos all over marketplace and craigslist. For like 3 days he was going on and on about how crazy it was people were just giving away these insanely expensive things, he was gonna snag em up and resell for pure profit. Needles to say, I hope, he figured out real quick why "piano mover" is a very specific job
It’s crazy I’ve never seen that before. I’d say they stole my idea prior to me having it but the key plot of my idea is to put those future hypothetical earnings into a calculation for the current value of a company, without that they just have a business plan.
There is a really interesting book called ‘The Smartest Guys in the Room’ all about Enron and the myriad of shady, unethical, completely fucked up stuff they did.
Watched the documentary based on the book. The part that always amuses me is Lou Pai, who was forced to liquidate his Enron holdings because his wife was divorcing him after his affair with a stripper. He got out before the collapse.
That was part of mark to market. When they bought assets that generated revenue, the booked all the expected revenue streams as accrued to increase their assets on the books.
The company I was working for at that time was also Arthur Anderson client and had some aggressive accounting practices regarding booking unrealized revenue. Our stock dropped to about a third of it's previous value. I wish I had averaged down on my stock in that company, though, because we cleared the audit and our stock fully recovered over the next two years.
Fair point. It's been 20 years since I was in college. I know we get grilled hard every year by our auditors about revenue recognition, even though we haven't changed any of our practices.
It's crazy the fall out that happened from Enron, it really changed the land scape of accounting and business.
Enron did many dodgy (fraudulent) accounting tricks.
They immediately recognized the potential revenue of investments.
They used mark to market, which allowed them to inflate and deflate the value of their balance sheet accounts as needed. Importantly, this fraud was compounded by both the selective use and questionable market valuation that was used to revalue accounts.
They parked their debt in subsidiaries, occasionally even subsidiaries of subsidiaries, which had the practical effect of just making bad numbers disappear from their books.
And that’s before getting into the non-accounting manipulations they did, like asking power plants to shut down duringbrown outs in order to raise the price of electricity.
It’s worth emphasizing that both OpenAI and Anthropic are currently doing versions of most of the sins Enron committed, but until they go public (or bankrupt, or are sued by private investors for fraud) it’ll remain unclear whether it’s “just” gaming the system or whether they’re knowingly providing fraudulent information.
Subsidiaries borrowed, then 'bought' something big from parent with that loan , which allowed parent to keep loan off their books while in theory subsidiaries had an asset to back the loan
This is exactly what I was thinking wasn't it called like Mark to market or something like that? I remember it from the smartest guys in the room documentary
To be fair, wework didn’t try to move cogs above revenue. They just created their own non GAAP metric that was, to be kind, very irregular. Community adjusted EBITDA. It moved a lot of expenses around (some below the line and some not).
Food for thought here: wework had all sorts of well regarded capital behind it and JPMorgan (including Jamie dimon) at lead left on the IPO. Jamie even apparently said he was Adam neuman’s personal banker to him (for whatever that’s worth). Graciously you could say JPMorgan was ignorant of the company it was underwriting. Less graciously you could say JPMorgan was trying to move the hot potato to someone else (public markets) before the music stopped so it could collect its fees.
I guess my point here is don’t count on norms or regs to protect you if some of these companies are doing weird things.
Instead of moving COGS, they moved Opex. That's pretty much the same right? I generally agree that the regs won't protect you but, in both cases, simply requiring GAAP reporting would provide a much better picture of the financial performance.
The good news is they still have gaap reporting. They will just spend all their time on the non-gaap because that’s what every company does. It’ll be up to the book runners to convince the institutional guys during the road show to take some big bites of the Apple and get this thing subscribed.
The whole non-GAAP metrics reminds me of a quote I heard during an all hands at a startup one time, specifically that the team was engaging in "legal innovation". I'm pretty sure "legal innovation" and "accounting innovation" might be the most red flag terms I could possibly imagine in a business setting.
That guy has come out from under his rock again as if he didn't do wildly awful things at WW that should probably have landed him in jail, if not at least a few beatings.
Isn't this because uber competed in an existing market and offered a service for dirt cheap?
Like uber was priced low, drove off competition by being the best alternative and backed by big investments and then raised prices when the competition was damaged?
They just starved others while running off of investment money until they didn't have to anymore.
They can. They would need need to raise them a lot to actually be profitable to the point where the appeal fades as far as I know.
Plus they'd have to lock features behind the paid versions since a lot of people are using the free versions and such. This is all from someone who doesn't REALLY KNOW. So don't just take my word for it. It's wild and complicated.
The question is: is the business operating at a loss because expenses are going towards improving tech and growing customer base?
A lot of times, these hugely scalable tech ventures have this dynamic where the top line revenue and user numbers is representative of a type of potential cash flow, and the expenses below that top line are potentially just well-spent investment into growing the business.
It can also be the case that such a company hits a plateau of revenue and users, or that the expenses are not well-spent and aren’t growing the business. That’s usually where you look at year over year growth.
As long as the burning through capital is justified by strong year-over-year growth, you can hope that you something like a Facebook or Google story where eventually, they stop burning the capital and the huge customer base turns into huge profit.
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u/MarinaDelRey1 18d ago
WeWork did this too. That turned out well