

Groupon is the next Madoff, except big iBanks helped it rob investors - chmike
http://www.glgroup.com/News/Groupon-is-the-next-Madoff-except-big-iBanks-helped-it-rob-investors-54999.html

======
patio11
Groupon is a legitimate business, which sells a real product for real money,
in a manner that attempts to generate value for customers in a two-sided
marketplace. It is an exceptionally risky business, like every other startup
that aspires to the trajectory of "Go from nowhere to selling a billion
dollars of product in two years."

It is entirely possible investors will get burned in an extraordinary fashion
on Groupon. It is also possible they will end up with money hats. Capitalism
happens. If capitalism happening to you would negatively impact your ability
to feed your family, do not buy stock in Groupon. (Do not buy any individual
stocks, either.)

With regards to their accounting practices: I'm agnostic as to whether any
particular treatment of another company's numbers is maximally reflective of
the interests of third-parties wishing to invest in them. That said, have you
noticed we are not exactly a paint-within-the-lines industry?

Heck, even answering very freaking simple questions with intent to be
maximally honest while complying with all regulations gets very difficult. For
example, when do you think you can recognize revenue for selling someone $10
for 1,000 gold coins if they then immediately spend 500 gold coins on a Sword
of Dragonslaying? If you have not read about this specific case before, I
guarantee your first three guesses are wrong. Or, to pick an example near and
dear to my heart, what _exactly_ is getting sold when you take $29.95 from a
customer and mark their account as Registered? Is it real property? If so,
where is that property sold? "The location that a customer takes delivery",
swell: do they "take delivery" at my business or at my server or at their home
address or at their place of work? Is it perhaps not a real property and
instead royalties? Is it a fee for a service? Oh, that depends on whether
customization and support is offered: how much support is support? Answering
emails is support if I make changes to the product on the basis of them?

I have given tax offices on two continents head-explosions just with the
accounting for BCC. This stuff is _hard_.

~~~
teej
I think you've woefully misunderstood the issue at hand here.

No one is claiming that Groupon isn't a real business. They've made a
household name and their reach is undeniable. Many of us have paid out of our
pockets to buy from Groupon. I know I have.

No one is saying that investing isn't dangerous. The market has always worked
this way and Groupon is no exception.

Recognizing & reporting revenue for software and virtual goods is a -solved
problem-. Take a look at EA's earnings report or Zynga's IPO filing if you
want to understand how the big boys do it. The accounting required is
certainly tricky, but it's also widely accepted and tied to reality. While
Zynga's profitabilty in the future is uncertain, their profitabilty right now
is NOT.

====================

There are two core issues with the Groupon filing:

* Their use of ASCOI grossly misrepresented their profitability -right now-. They may have an innovative business, but the way they handle money isn't that different. Certainly not different enough for them to invent new ways to report earnings. Thankfully, the SEC agrees with me here and has asked Groupon to redo some of their funny math.

* Their last round of financing almost ENTIRELY went to cashing out previous investors. That has nothing to do with "taxes being hard". It has everything to do with sketchy business practices.

In conclusion - Groupon's filing isn't scary because IPO's are hard. Groupon's
filing is scary because they were a little TOO creative with their math and
they've done some undesirable things with their cash in the last 6 months.

~~~
timack
"Their last round of financing almost ENTIRELY went to cashing out previous
investors."

Sounds a bit like a Ponzi scheme.

~~~
Cushman
Sounds almost entirely like a Ponzi scheme.

~~~
zwieback
For a Ponzi scheme to work it's important that the early investors not cash
out for a long time. They see their investment rise in value and talk about it
but don't cash out until almost the very end.

Sounds to me more like Groupon is going down already, at least it's being
talked down. I could be wrong but I'm wouldn't buy any shares even if I could.

~~~
watchandwait
The Groupon IPO could easily not happen, given the current market turmoil and
the SEC scrutiny. If forced to wait several months before the IPO, the company
may need to raise more money privately, or could basically fail and fall into
the arms of a suitor like Google.

~~~
amorphid
Groupon is not a Ponzi scheme. In the process of raising money from late stage
investors, Groupon has to say what the funds will be used for, which includes
paying off earlier investors.

~~~
Cushman
Using investment money to pay off earlier investors while claiming to be
profitable to drive further investment is the _definition_ of a Ponzi scheme.

They probably don't mean for that to be their business model, but it is what
it is.

~~~
amorphid
Groupon is making a fist ton of cash. If they stopped spending money on hiring
and marketing, they'd be wildly profitable. Investors have access to all this
information.

Also, Groupon has a clear formula for growing and how long it takes that new
business to become profitable. That is why they can raise so much investment.

If you can come up with a convincing argument why Groupon is a Ponzi scheme,
then call the law enforcement. You'll get on the news for sure!

------
byrneseyeview
I tried to find where Groupon was "hiding $180 million of actual online
marketing spend," but it was really tough. Unfortunately, Groupon's financial
statements include that allegedly hidden number.

The author of this piece is not especially familiar with the daily deal
market. OpenTable has consistently said that they don't want to be in the
daily deal business, for example; they absolutely don't want to be a Groupon
competitor. The author is also unfamiliar with developments in capital markets
in the last ten years: it's gotten harder to IPO, but there's a lot more
capital available for growth-stage companies. So it would be surprising and
unprecedented if investor cash-outs _didn't_ shift to the pre-IPO stage.

Finally, this is old news. This kind of article and analysis showed up when
Groupon first filed their S-1 with GAAP financial statements (i.e. statements
that would allow you to completely ignore CSOI). Calling it the next Madoff is
a boring rhetorical trick. Groupon is not a great business, and I would rather
be short than long at the projected IPO price. But it's also a real business
that could be structured to earn a decent return for investors. Everyone can
see that Groupon adds _some_ value, and the real question for investors is
whether they're right about the market size and the economics of the business.

Calling Groupon a ponzi scheme is amateurish.

------
mitultiwari
A few ways Groupon is helping local businesses:

1\. Groupon is bringing offline local businesses online. The same way Google
brought small advertisers/small businesses online.

2\. Groupon could be a useful way for business to get some cash up front for
future customers. That cash may help small businesses expand, instead of
taking loans to expand.

3\. Groupon cost of small businesses could be useful marketing cost since
Groupon deal reaches out to many local customers.

Slightly old but interesting read on this: <http://www.evanmiller.org/is-
groupon-the-next-google.html>

Further, this article itself mentions "Note massive competitors like Google,
Facebook, Walmart, Opentable, etc. already doing their own versions of daily
half-off deals". As people have said "imitation is the best form of flattery".
So many Groupon clones show that there is a demand for such a service from
both small businesses and consumer sides.

However, some of the accounting practices of Groupon and the way Groupon used
recent investment money seems unusual and have raised a lot of eye-brows.

~~~
cowboyhero
Fair points, but:

1: This isn't exclusive to Groupon, and I'm not sure they're doing anything
that CitySearch and AOL weren't doing in 1998.

2-3: Purely anecdotal but I've heard too many horror stories of small
businesses being screwed by their groupon deals, essentially losing money on
the discount and not attracting enough repeat business to justify the deal in
the first place.

The problem with the model is that it attracts customers who are focused on
price, not value. That's at odds with the proposition behind many specialty
stores and boutiques (eg vinyl records, hair salons, upmarket clothing, etc).

Groupon as a standalone business just digitizes those local coupon books that
used to come in the mail or be sold at bulk for ten bucks or whatever. That's
a good web based business but not a great one.

~~~
tzs
There are also many stories of businesses that did well. It probably depends
on the kind of business, and exactly what the deal is. The local NPR station
did a story on this a while back, and looked at a couple businesses and how it
worked for them.

One that was a success was a small auto repair shop. They did a Groupon deal
for $30 oil change for $10, so they were only getting $5 out of it which
doesn't even cover the oil. They expected to get about 90 customers. They got
2277.

After three days of not sleeping and throwing up everything he ate, the owner
snapped into action and bought a second car lift, added more staff, and
scheduled appointments for all those people (which had people scheduled out
for 8 months).

Overall, it worked out. The owner told the reporter that before this, he was
driving a '93 Ford F150. Now he's got a Mercedes convertible and his wife has
a BMW, both paid for. Sales are up $200k over the previous year, and half of
the people from the deal have become repeat customers.

Compare this to the other business they looked at. This was a cafe that sold
crepes and coffee. They were trying to get people to think of them also as a
dinner place. They did a Living Social deal that for $40 let you come in six
times (no more than once in a given month) for two entrees and a bottle of
wine or a drink of your choice.

They got 1200 takers.

Like the auto repair deal, this one is a loser, depending on the customers
buying other things to turn it around. Unfortunately for the cafe, the
customers with the deal did not buy other things. They would not buy
appetizers or desserts. They would just come in once a month for their six
months, get their two entrees and a drink, and that's it. The owner says she
lost $100k.

~~~
LiveTheDream

        This was a cafe that sold crepes and coffee. They were trying to get people to think of them also as a dinner place. They did a Living Social deal that for $40 let you come in six times (no more than once in a given month) for two entrees and a bottle of wine or a drink of your choice.
    
        They got 1200 takers.
    
        Like the auto repair deal, this one is a loser, depending on the customers buying other things to turn it around. Unfortunately for the cafe, the customers with the deal did not buy other things. They would not buy appetizers or desserts. They would just come in once a month for their six months, get their two entrees and a drink, and that's it. The owner says she lost $100k.
    

This blows my mind. The cafe owner should know exactly how much she is
spending for each deal that is purchased. It's a marketing expense; each deal
also has some estimated upside (repeat buyer, up-sell on the original visit,
etc). By not placing a limit on the number of deals sold, the owner gave
herself an unlimited risk. Why not just place a reasonable limit on the number
of deals, thus capping the potential exposure to an acceptable level?

------
craigmc
Groupon's biggest issue as far as I can see is that the value of their cut of
the deal will eventually be heck of a lot closer to $0 than it currently is.

They are exploiting a market inefficiency (the gap between small biz and their
potential customers) and it one that is closing rapidly via a multitude of
sources, and not just from competition within the daily deal sector.

And although this post title is clearly being deliberately provocative, one
thing is true: there are going to be plenty of businesses and deals currently
being lauded, which turn out to be total disasters (as there were in previous
cycles - Enron, AOL Time Warner, Excite@Home, Webvan, et al). It is certainly
not unthinkable that the Groupon IPO is going to be one of them...?

(the amount of money that has already been taken off the table must be a near-
deafening warning bell)

------
tomgallard
Groupon can work excellently for small businesses. They just have to know what
they're doing.

A friend runs a coasteering/outdoor activity business that has used them
multiple times. As they have under utilized capacity , the marginal cost of
extra customers is near zero (imagine they can take up to 12 people on an
activity, but only have 3 booked in).

It doesn't matter if Groupon is taking 50% of this, they still see an
increased profit.

The danger is, of course, cannibalizing their existing customer base, but, as
a reasonably new company, its much more important to get money, and customers,
coming through the door.

~~~
WarDekar
That's great if the businesses purchasing Groupons are aware of this and know
how to use the deals to their advantage. The problem comes when Groupon
doesn't care about the businesses they're selling to at all and push sales
that actually hurt those businesses. It's great for Groupon's current revenue,
but it's horrible for their long term prospects- there are only so many small
businesses you can screw over before they all realize it isn't a good deal for
them, and Groupon's business drops off a cliff.

And I'm not excusing the small businesses here- certainly they should do their
own homework and determine whether doing a Groupon deal is a good business
decision for them, but when Groupon sales people are pushing these things like
crack and pressuring businesses into buying what is an obviously negative
value deal, they (meaning Groupon) won't get good referrals in the business
community, they won't get repeat customers, and they'll run out of 'users' to
exploit.

From all accounts it seems sales reps at Groupon have no interest in helping
their customers come up with deals that actually make sense and are only
interested in volume because they get commission bonuses- this is not a long
term business model.

------
lsc
Now, I'd certainly never put any of my dollars anywhere near a groupon IPO,
but the article seems a little harsh.

"Recognizing phantom revenue (dollars that are supposed to flow to their
clients) and not actual revenue (their cut)"

This seems fairly standard to me. I mean, when I sell co-lo, rather more than
half what my customers pay me goes directly to pay /my/ provider, and yet my
revenue is all of what my customer pays me, even though no matter how
efficient my operation becomes, more than half of the money only sits in my
account momentarily. This is my understanding of the commonly accepted
distinction between revenue and profit.

I mean, clearly, groupon is a very high-risk "swing for the fences" kind of
startup, and ACSOI does seem to be sketchy to the point of being deceptive,
but revenue is revenue, and profit is profit. There's nothing wrong with
reporting your actual revenue numbers before taking out your expenses; that's
what revenue /is/

~~~
_delirium
If you're passing through revenue, though, it's often not counted, though it
seems to vary by industry and exactly how it's passed through. For example,
Paypal's revenue is only its fees on transactions, not the entire volume of
transactions that flow through Paypal: its role is a facilitator, and its
revenue is what it gets paid for facilitation. The same is true of
marketplaces, typically; eBay's revenue is its fees, not the entire volume of
purchases that happens on eBay. Groupon arguably has a similar structure, in
that they're a marketplace facilitating sales, in which case only their fees
should be revenue, not the total volume of goods whose sales they facilitated.
But it's arguable.

------
ForrestN
The premise of this article, that Groupon is the next Madoff because it has
already scammed many of its investors, is calling out some pretty powerful
investors as idiots. This isn't saying just that participants in the IPO will
be getting scammed, it's saying that the last rounds of private equity got
scammed too.

I somehow doubt that this simplistic analysis trumps the thinking of major
investors putting hundreds of millions into Groupon. Don't you think they were
asking about customer acquisition? Don't you think they asked about why the
initial investors were taking money off the table?

~~~
raganwald
Your argument is an Appeal to Authority. "Smart people invested, so it must be
a good thing." Social proof is useful for making certain types of decisions,
however discussions about posts on HN are not decision-making exercises, they
are--ideally--analyses of the arguments advanced in the post itself.

If the analysis is wrong, we ought to be able to dispute it directly rather
than assume that since all that big money is in the game, _they_ must have
analyzed these arguments and _they_ must have disputed them.

~~~
ForrestN
Lots of other people are digging into the arguments themselves. But it's not
just about the superior analysis of the investors, it's about their superior
access to information. The idea that two simple, broadly available pieces of
information (investors taking money out and completely transparent, though
non-traditional accounting practices) are obviously disqualifying and yet
people with strong track records are investing huge amounts of money makes me
suspicious.

There are other signals of silliness here, most conspicuously the comparison
to Madoff and Ponzi Schemes. It's link bait; even if Groupon is being
manipulative with their accounting, they're still providing a real service to
real people. They're providing value to businesses and customers. If their
argument was about the sustainability of the model, or even just about the
justification behind recent valuations, that would be something I'd be more
interested in approaching in the way you describe.

I guess I wasn't aware that HN's limitations on ideal discourse are so severe.
I figured there might be a way to add value by getting some perspective about
the implications of this argument and their improbability.

~~~
fauigerzigerk
You're making one very big assumption, which is that professional and well
informed investors would not want any part in it if they knew it wasn't a
sustainable business model.

They might know better than we do when this thing is going to blow up. Or they
might have an idea for a transition to a more sustainable business model once
Groupon has reached ubiquity.

Right now it looks to me like they have misjudged how quickly opinions would
turn against Groupon's business model or rather against their accounting
practices. An SEC investigation isn't something any investor, no matter how
professional and knowledgeable, wants or expects to see.

------
lucasjake
I think ultimately what might happen here is that the government will regulate
VC to make it difficult or illegal for fundraising rounds to be used primarily
to pay off earlier investors. Saying it out loud like that made me realize how
close to a ponzi scheme such a thing could easily become.

~~~
ebaysucks
So it's OK if you raise money in an IPO from a lot of small investors, but it
becomes illegal if you raise money from a few experienced investors?

------
treelovinhippie
The Groupon model IMHO is not sustainable unless they can generate repeat
business. It's great a system for securing guaranteed customer numbers. But
with such a huge discount to attract them, and with 50% of that going to
Groupon coffers, I don't see the benefit to small-medium businesses. Larger
businesses could write-off the deal and attempt to either increase brand
awareness or upsell instore. But even then, they're risking enforcing a
consumer mentality of only buying at the discounted rate.

------
dedicated
The local space is still to be figured out. The fact that Groupon can generate
so much revenues, despite bleeding margins in its marketing expenditures,
still makes it the leader in this disruptive field.

The bigger question is how and whether they will retain this lead, when local
retailers and competitors get smarter about this space, and create better
margins for themselves.

At the end of the day, the Wall Street traders will make the "proper" move and
properly price it on its IPO day. How it will fare in the long run is still
anybody's guess.

------
nsimplex
Is it the case the group buying model is inherently flawed as a business, or
did Groupon screw it up just because they didn't execute properly and over-
expanded? (assuming they did screw up, based on the recent reports analyzing
their finances.)

In other words, what are the chances that other group buying sites will go
downhill as will?

~~~
veyron
Both are true.

Groupon picked the low hanging fruit already without consideration to their
existing customers. I haven't heard a single compliment from my business-
owning friends about working with groupon, and almost all of them now refuse
to work with any daily deals site. So now they are pushing for other
businesses which are much more expensive to find and woo.

The model itself is broken: the most successful places have no need to run a
daily deal. The failing businesses have real incentive, but there's probably a
good reason why they are failing in the first place (and some of my friends
have noticed strange service irregularities -- recall the FTD issue earlier
this year). Finally, New businesses are inadvertently hurting themselves. When
you give out a free sample, people don't expect an item to be free. When you
give a daily deal, everyone (not just the participants) mentally shift their
price expectations, and it's hard to raise the price again without alienating
both the daily deal followers and true customers.

What will win is a group buying program where people can come together and
order a service (such as minibuses or family-style restaurants).

------
puredemo
So Google wanted to buy them for $6B because... why?

Just to jump into the action late and lose money?

~~~
luckyisgood
Because Google wanted to buy time AND customers.

By buying Groupon, Google wouldn't have to spend their own developers' time to
create what is now Google Offers. And time is expensive. Time spent on Google
Offers was not time spent on, let's say, Google+.

Customers: E-mail addresses of 115M people have to be worth something. To
Google, those addresses are probably worth more than something.

Also, Google has something Groupon does not: real cash in their pockets.
Groupon must spend a lot of $$$ on avertising; to Google, marketing would be
virtualy free.

What I'm saying is this: Groupon is running itself into bankruptcy; Google
probably found a way to use their own resources to make Groupon wildly
profitable.

------
ebaysucks
I really hope the Groupon IPO fails, because if it pops like the Linkedin one
the bubble becomes undeniable IMO.

With all the free freshly printed money floating around on Wall Street, I am
not holding my breath though.

~~~
Jarred
I'm not educated well in economics, but I don't think there will be a bubble
until massive amounts of people start investing in ideas for websites.

~~~
ebaysucks
The US bailouts were approximately $16K per capita, so whatever the banks
receiving that money do with it replaces the massive amount of interest needed
for a bubble.

------
shareme
To give you an idea of ethically challenged Groupon is:

In the recent SEC statement mess Groupon attempted to pull a fast one by
subtracting employee stock compensation. in the USA we have the accounting
standards board which governs the accounting rules that accountants follow.

In fact you cannot get a state accountant license without committing to those
rules and standards. Guess what one of those standards is never using a basis
to subtract employee stock compensation from costs.

Which begs the question where did they get an accountant to sign off on that
given that if it went through he or she would be subject to losing their state
accountant license?

There is more here that we are not hearing..

I feel bad for Lightbank having such a bad shadow cast on their Startup
incubator work by some of the founders.

~~~
awakeasleep
Have you read about Lightbank's history? Groupon is one of the least shadowy
things it has been involved with.

Also, if you think Eric and Brad aren't behind every single aspect of how
Groupon is going public, you've got another thing coming.

Keep in mind, that Lightbank is not like ycombinator. It isn't settling for a
few percent of the company.

------
nhangen
I'm not a fan of Groupon either, but damn, just because they are easy to poke
at doesn't mean we should.

Investors are supposed to perform due diligence before investing in a company,
and if they didn't, then they weren't scammed, they were stupid. Groupon's
scheme is not that clever to the point where it can obfuscate the truth from
an equally clever investor.

This is like blaming McDonald's for having hot coffee.

~~~
burgerbrain
If investors are allowed to talk about it, then why are not we? And are not
many of us investors ourselves?

~~~
nhangen
Nothing wrong with talking about it, but reading the comments it seems like
everyone is piling on.

I get it, people don't like Groupon, but some of this is less based in
rationale than in emotion/personal disdain for the product.

~~~
burgerbrain
Example?

~~~
nhangen
Look at the entire comment chain. Many of the comments don't even address the
post itself, but their personal feelings of Groupon.

~~~
burgerbrain
You are delusional. Everyone here but you is discussing business plan
viability and questionable accounting. Both of which are _exactly_ what the
article is about.

~~~
nhangen
OK, so maybe I'm exaggerating a bit, but my original point remains - the
investors have to share some of the blame here.

