Mike DelPrete: Is Pacaso Duping Retail Investors?

This article was shared here with permission from Mike DelPrete for Inman Intel, a data and research arm of Inman offering deep insights and market intelligence on the business of residential real estate and proptech. Subscribe today.

To me, the truth matters – and a recent example from Pacaso’s fundraising deck reveals the latest example of a company toeing the line between accuracy and what looks good.

Why it matters: In Pacaso’s case, this is information that retail investors are using to make investment decisions – but more generally, this is about the importance of leading with transparency and accuracy.

Dig deeper: Pacaso recently revealed its financials as part of its crowdfunding campaign, a fascinating peek inside the operations of a high-flying and highly-funded real estate tech startup.

• A point of contention in the release was the use of non-standard “cumulative” financials instead of annual: cumulative revenue and cumulative gross profit.
• Making matters worse, the graphs were not labeled, giving the impression that the reader is being misled into thinking they are annual numbers.

Pacaso then updated these graphs, and, in a weird twist of fate, did so in a public Google Slides document that I happened to be viewing, producing a real-time feed of comments as they debated what to change.

• During this process, the team clearly evaluated a more traditional annual presentation of its financials, but ultimately decided to retain the cumulative charts because the annual ones “don’t look great visually.”

Ultimately, labels were added to the existing cumulative charts in the investor deck, but the same charts remain misleadingly unlabeled on the investor site.

Pacaso is not alone; companies have been stretching the truth for years in order to tell a particular story or mislead investors.

• The most common area is reporting profitability, where unprofitable companies have a tendency to highlight “gross profit” or “unit economics,” metrics which exclude many expenses like salaries and marketing (read more: Zillow and Opendoor, be transparent about iBuyer profitability: DelPrete).
• Net Profit, EBITDA, and Adjusted EBITDA is another veritable minefield of manufactured metrics that tell a one-sided story, which is why I recently dug into cash flow as the ultimate profitability metric.

The bottom line: Information is power, and transparency is powerful — it’s easy to tell whatever story you want by subtly manipulating the display of data.

• It’s one thing to mislead experienced investors whose job is to see through statistical illusions, but it’s another to mislead individual retail investors.
• There’s a thin line between painting yourself in a favorable light and outright deception — there may be a short-term benefit, but the long-term consequence is the erosion of trust, arguably the most valuable factor for any person or business.