Initial public offerings can be very revealing. When companies go public, they're obliged to file a prospectus with the Securities and Exchange Commission that contains all kinds of information about revenues and earnings (or losses). Sometimes, there are surprises. When Santa Monica-based Demand Media, the high-profile, well-financed Web content company, filed its IPO, everybody was expecting to see a business that was solidly profitable. That's certainly what co-founder Richard Rosenblatt had been telling reporters for several years. Well, surprise! The company hasn't been profitable since its inception in 2006. Last year it lost $22 million; the year before $14.2 million. From Venture Capital Dispatch:
That's the trouble with privately held companies - no one outside the company can verify a start-up's financial claims. This probably happens more than we know. Liz Gannes, a technology reporter for Malik's GigaOm, wrote about being duped by youth-oriented news company Current Media in 2008 after an IPO filing revealed the company had never been profitable. She wrote: "[U]ntil now, while the company -- which is perhaps best known for being co-founded by Al Gore -- wasn't obligated by the government to tell the world, Current kept telling me it was profitable. Just last week an external PR person pitched me in an email: 'Unlike so many Web 2.0 companies, they're profitable.'" A Current Media spokesperson replied to Gannes' post by saying the company's previous comments about "being profitable" were on an Ebitda basis (excluding non-cash items such as interest, taxes, depreciation and amortization).
Oh. It's possible that Demand Media will wriggle its way out of those previous declarations in much the same way - that is, by saying that the numbers didn't include interest, taxes, depreciation and amortization. That's what the dot-com high-fliers often said in the late 90s - and plenty of investors were dumb enough to be suckered in. By the way, Demand Media creates content for a bunch of online brands, most notably eHow. It also makes money by customizing content pages for large Web sites like USAToday.com.