
The Missed Red Flags on Groupon - OstiaAntica
http://dealbook.nytimes.com/2011/10/17/the-missed-red-flags-on-groupon/
======
goodweeds
Who missed these red flags? Nobody I know in the valley. We've all been
mocking @Groupon as an un-defensible and unsustainable ponzi scheme. For at
least a year and a half there have been enough major news organizations
backing this sentiment.

Come on. Online coupons. Groupon is the hype of boo.com, webvan, and Kozmo.com
all rolled into one, with greedy investors hoping they can make a quick buck
before people realized what happened.

Groupon is a glorified wordpress blog with 10,000 sales reps propping up the
fake market with unsustainable or warranted demand. It's like watching Boiler
Room play out in real life. There is no business process innovation here or
technical innovation. The only innovation here is using huge marketing dollars
to perpetuate a pump and dump ponzi scheme long enough for an IPO. Oh wait,
that's not innovative, they did the same thing with dozens of companies a
decade ago just before the first web bubble burst.

~~~
pitdesi
I am not at all a Groupon apologist (I think their base business is declining
and doesn't make sense for most local businesses in the long-term), but you
have gone way overboard by comparing Groupon to boo, webvan, and kozmo.

For all its faults, Groupon is on track for $1.5Bn in NET revenues (this
doesn't include pass-through that they initially included in revenues) this
year, and will probably still IPO somewhere around 10 billion dollars. All of
the companies you mentioned only existed for 2 years before being liquidated.

As for everyone in the valley knowing Groupon was a ponzi scheme for the past
year and a half - then the folks from Battery, Accel, Kleiner Perkins,
Greylock, NEA, TCV, Silver Lake, etc (all of whom made investments in Groupon
this year) would have to be complete idiots to invest in Groupon, and that is
certainly not true.

Sidenote- a quick reminder on what it was like in the 00 bubble that you
reference: [http://feefighters.com/blog/ff_infographic/tech-boom-or-
bubb...](http://feefighters.com/blog/ff_infographic/tech-boom-or-bubble-lets-
look-at-the-data/)

~~~
Retric
You can call a loan Revenue that does not make it so. And when you need
advertizing to sustain your business you don't get to call it revenue neutral,
it's still just another expense.

June 2nd, 2011 "Groupon lost $456 million last year, and another $147 million
last quarter." [http://techcrunch.com/2011/06/02/groupon-
growth-2-6-billion-...](http://techcrunch.com/2011/06/02/groupon-
growth-2-6-billion-revenue-run-rate-charts/)

PS: The #1 investing rule is the second a company starts playing games with
their books avoid them.

~~~
pbreit
Much of business consists of selling product before paying vendors. Have you
heard of "Net 30/60/90" terms?

The advertising is to acquire customers. But then it can obviously promote
deals to existing customers for essentially no cost. This is also the reason
it wasn't crazy to consider the mailing list an asset and account for it
accordingly. Progress is only made when someone pushes.

~~~
anigbrowl
What, they are going to lay off their massive sales staff and the vendors are
going to keep coming back to offer zero-margin daily deals because...? This
company doesn't have a USP; its business model is being cloned left and right,
and customers have zero brand loyalty to the coupon broker. I can't understand
your unshakeable faith in it. Your pricetack.com project looks vastly more
interesting to me than Groupon ever has.

~~~
goodweeds
Even then, Groupon was basically a modified rip-off of Woot.com and other
deals sites. Bernie Madoff would be proud of Groupon.

------
aresant
Groupon is a huge, fun target but there are compelling fundamentals under all
the noise and pre-IPO PR blunders:

1) "66% of Groupon deals are profitable for the seller, and 40% of businesses
would not use Groupon again, according to a Rice University study."

[http://www.quora.com/Groupon-IPO-S-1-Filing-
June-2011/What-i...](http://www.quora.com/Groupon-IPO-S-1-Filing-
June-2011/What-is-Groupons-redemption-rate)

2) Groupon has a hidden vat of PURE margin - breakage / un-redeemed deals that
could be a shocking amount of money once financials are disclosed.

3) They have enormous growth potential in key markets which is why they are
spending money like drunken sailors on customer acquisition. They can grow by
10x in the restaurant space alone.

[http://answers.ask.com/Food_and_Drinks/Restaurants/how_many_...](http://answers.ask.com/Food_and_Drinks/Restaurants/how_many_restaurants_are_in_america)

4) Restaurants, spas, and other retail vendors have fixed (and perishable
costs). This means that at particular times they can offer incredible deals as
the alternative is burned or thrown out resources.

Groupon's team has indicated their #1 mission moving forward is to figure out
this perishability equation.

Their VP says “If we can eliminate 10 percent of perishability, we can change
the dynamics for small business owners,” he says. Small businesses would
become more like airlines, matching supply against demand to maximize
revenues."

[http://moneyland.time.com/2011/03/18/impulse-
shopping-2-0-gr...](http://moneyland.time.com/2011/03/18/impulse-
shopping-2-0-groupons-new-deals-tempt-anyone-whos-hungry-or-bored-right-
now/#ixzz1OFeK6lY0)

~~~
anigbrowl
#4 is a viable point, but the problem for Groupon in trying to capitalize on
reducing this wastage is that the demand for such services is highly elastic.
To a large extent the problem here is a time-of-day issue that Groupon can't
particulary assist with. Sure, a restaurant is burning valuable energy outside
of lunch and dinner hours, but if such a business owner wants to give a
discount during certain hours why use Groupon? That's what 'happy hour' is
for, and merchants have a pretty good idea how far they can go with price
discrimination without alienating their busy-time customers.

Also: <http://xkcd.com/951/>

~~~
aresant
Speaking to Bloomberg Businessweek, Groupon showed off what it hopes will take
its business to the next level: A new service for smartphones and computers
called Groupon Now, the centerpiece of which consists of two buttons: One that
says “I’m Hungry,” the other of which says “I’m Bored.”

So: Impulse buying for Groupon customers, and a means for merchants to sell
off their spare capacity, and, hopefully for Groupon, a big, untapped market
in which to serve as the middleman.

<http://www.geekosystem.com/groupon-im-hungry-im-bored/>

~~~
VladRussian
>the centerpiece of which consists of two buttons: One that says “I’m Hungry,”
the other of which says “I’m Bored.”

<http://en.wikipedia.org/wiki/Bread_and_circuses>

------
twakefield
"All of this raises an obvious question: How did so many Wall Street firms
desperate to underwrite the Groupon I.P.O. miss these warning signs when
pitching such a sky-high valuation?"

Come. On. Is it really necessary to ask questions like these about the
motivation of Wall Street firms? They didn't miss it. They saw a trend that
they thought they could exploit, namely, the growing tech bubble and its
darling that they could flip (along with an eight figure underwriting fee).
Although, I am surprised they didn't manage the process (and Mr. Mason)
better. They let it get away from them, which is not like Goldman Sachs.

~~~
seven_stones
<http://www.crunchbase.com/company/groupon>

Funding Total $1.14B

    
    
        Series D, 1/11            $950M
        Digital Sky Technologies
        Morgan Stanley Venture Partners
        Fidelity Ventures
        Andreessen Horowitz
        Battery Ventures
        Greylock Partners
        Kleiner Perkins Caufield & Byers
        Maverick Capital
        Silver Lake Partners
        Technology Crossover Ventures
    

The only thing more ridiculous is Twitter.

Funding Total $1.16B

How much hardware would it take to clone Twitter, if done efficiently?

A year ago they were at 1,000 tweets per second and 12,000 queries per second.
[http://engineering.twitter.com/2010/10/twitters-new-
search-a...](http://engineering.twitter.com/2010/10/twitters-new-search-
architecture.html)

The Steve Jobs news set a new record of 10,000 TPS. TPS Report:
[http://techland.time.com/2011/10/07/twitter-breaks-tweets-
pe...](http://techland.time.com/2011/10/07/twitter-breaks-tweets-per-second-
record-in-response-to-steve-jobs-death/)

As of 7 months ago, they were at a billion tweets per week:
<http://blog.twitter.com/2011/03/numbers.html>

If the average message is half the maximum length, then that's around 70
gigs/week naïvely (not counting multibyte characters or metadata).

Around 3.6 terabytes per year. Older tweets are probably almost never accessed
so they can stay on mechanical HDs, and stuff that IS needed can get
temporarily promoted to SSD storage which can handle all that random seeking.
And older tweets can probably be nicely compressed.

Search is the only real challenge, but they "solve" that by not indexing most
tweets. A subset of recent tweets, not indexed in real time, pushing out older
ones.

~~~
georgemcbay
I've never written a "twitter clone" but I would suspect the real problem
isn't pure throughput but rather the mixture of having to n-way route messages
to the proper recipients combined with having to spread the load of that
across potentially many systems. I do not think doing that is as trivial as it
may seem.

However, I'm sure you're right in that someone could reimplement what twitter
does more efficiently than they do it if they paid proper attention to all the
mistakes twitter made along the way. Not sure it would be worth the bother
though, because twitter's real win is having their company name define the
action in much the way googling has come to define web search. You can't
overcome that by being marginally better.. or, as it happens, even by being
marginally better and giving away tons of free money (just ask MS/Bing).

~~~
seven_stones
Apparently up to 4B tweets monthly now:
[http://blog.twitter.com/2011/09/share-photo-via-text-
message...](http://blog.twitter.com/2011/09/share-photo-via-text-message.html)

Sending messages to recipients and load-balancing don't faze me. SMS gateway
costs do.

I could have cloned it, web-only, missing out on what I assume to be the main
userbase.

Of course now with smartphones, web-only is increasingly feasible.

Snappier performance, longer messages, and actually indexing them might make
it worth a shot. Except it wouldn't make any money either (I refuse to inflict
more advertisements upon the unhappy world).

------
vsl2
I don't see how Groupon is anything more than a huge bubble waiting to burst.
They may be worth something, but nothing even close to the valuation that
Groupon/bankers are trying to create with accounting tricks.

From a merchant perspective, I don't see how using Groupon helps long-term
profitability. Almost everyone I know who use Groupon regularly only visit the
participating merchants when using a Groupon and never again. Furthermore,
they are reluctant to pay full price at any merchant if they know that that
that merchant has previously had a Groupon promotion.

So the merchant not only effectively spends marketing $$$ (since Groupon is
supposed to be considered a marketing expense) for customers that will only
use the loss-producing (likely) coupon, the merchant also devalues itself in
people's (including those that did not previously use a Groupon) eyes.

Additionally, the daily deal industry itself doesn't have strong reasons to
remain tied to a company (unlike social networking where people tend to stay
where their friends are) and there are very low barriers to entry. Granted, if
you're the biggest player in the market, you have certain advantages like
economies of scale, brand recognition, but I don't know if that is sufficient
to thrive in this industry where people jump from site to site depending on
which site has the best deals for that day.

Add in pre-IPO accounting tricks and early cash-out (while the company is
running hundreds of millions in the red)...well, you get the point.

------
Gaussian
Sure. Groupon has a few problems.

But the idea that an underwriting firm such as Goldman or Morgan is some kind
of arbiter of wholesome business fundamentals is ridiculous.

Sorkin knows better than to suggest that.

------
traveldotto1
I am curious where is the Group in Groupon these days. Groupon is more like a
coupon company now than the group buying phenomena that made it successful.

------
untangle
"[we are]...not one of those uglies." (CEO using sonogram analogy in memo to
employees.)

This is the $310M man? Are you kidding me?

Next he'll be off killing elephants with the GoDaddy guy.

Bob

~~~
malbs
The "one of those uglies" quote is from the CEO, Andrew Mason.

The guy who took $319 million was Eric Lefkofsky (Groupon chairman). Nice pay
day.

------
moomin
I think all of the people who just didn't "get it", did the boring thing,
actually read the IPO and then started throwing around inflammatory words like
'Ponzi'...

...are feeling pretty smart right now.

------
revorad
I find it strange that Groupon gets so much attention on HN. It's not a
technology company. It's a marketing/advertising company with seriously
questionable ways of doing things.

Andrew Mason is a cool guy and I loved his talk at Startup School last year,
but his company is more into financial engineering than innovation, just like
Wall street and the banks.

------
Fliko
Hindsight bias is probably the most important 2 words here.

------
guelo
Cooking the books before an IPO to hide an unsustainable ponzi sceme?
Shouldn't someone be going to jail? At both Groupon and at Goldman.

------
mrkmcknz
I personally (if I could afford to) would buy as many put options that my
broker would allow on this stock on day one.

------
tomasienrbc
We haven't even SEEN the local merchants bail on Groupon yet, and that is
going to happen. Believe me. I deal with disenfranchised Groupon merchants
everyday, and they almost all hate it. The craziest part is they're all
considering doing it AGAIN just because they feel blackmailed into it by the
"if I don't do it, my neighbor will. At least this way I might get something
out of it" situation.

I love selling an alternative, because it sells itself. You're NOT like
Groupon? SOLD!

------
tomasienrbc
All it took for me was for their revenue model to be revealed. Discounts of
50-90% THEN they take 50-90% of what is paid by the customer? Borderline
robbery.

~~~
startupstella
It depends on how the merchant treats a Groupon customer. They may make up for
the customer acquisition cost by offering less (hurtful to them) discounts in
the future. Take this spa for example, they did a follow up for Groupon
customers offering the same 50% deal, but this time they kept Groupon's share:

[http://feefighters.com/blog/who-groupon-benefits-the-
contrac...](http://feefighters.com/blog/who-groupon-benefits-the-contractor-
vs-the-business/)

~~~
tomasienrbc
And I think we can all agree that hurts Groupon in the longterm. So....
doesn't seem like it depends at all, regardless people are trying to avoid
using Groupon.

