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Many tech startups are just making up their profit and revenue numbers

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The financials for many companies don't look as rosy after they go public

Frazer Harrison/Getty Images

We are living through an unprecedented period of investment in tech startups, with many private companies reaching massive multi-billion-dollar valuations faster than ever before. The numbers have gotten so big that they increasingly can't be matched by the public markets when these companies decide to IPO. How did things get so out of wack? According to a report from The Wall Street Journal, a big part of the problem is that startups are increasingly inflating or inventing the financial success they tout to investors and the press.

The article looked at 50 tech startups that went public, and compared the numbers before and after public disclosure to the SEC. Fifteen of the companies had sales figures that were far lower, a total of $760 million that simply vanished once these firms were subjected to more skeptical accounting. Rubicon Project Inc, for example, said in 2010 that it had over $100 million in revenue and was profitable and growing. Its IPO last year revealed it actually made less than $40 million a year in 2011 and, far from profiting, lost $15.4 million.

"No one is really checking the numbers."

For private startups with large valuations, the other option for an exit is to be acquired. When they get bought by a public company, the truth about their financials can also be revealed. Twitter, for example, acquired the ad-tech company MoPub. In May of 2013 the company's CEO, Jim Payne, had written in a blog post that the company was on pace to generate $100 million in revenue that year. Subsequent filings from Twitter show that in fact, MoPub generated just $6.5 million during the first half of 2013. A spokesman at Twitter says the discrepancy at MoPub largely reflects the difference between gross revenue and net revenue.

Asked about the discrepancy between what he said before being acquired by Twitter and what was revealed afterwards, Payne gave the Journal a remarkably candid answer. "No one is really checking the numbers."