
Try to digest the Groupon story - jagira
http://shortlogic.tumblr.com/post/6142108636/groupon-ipo-pass-on-this-deal
======
kprobst
Everyone remembers the Pets.com IPO for example, but no one remembers that it
was Merrill Lynch that underwrote it and made most of the profit on the deal.

The problem is the market and VC environment that allows things like these to
go down, not that there are unprofitable companies. Those have always existed.
But there was a time when people didn't buy into them _because_ they were
unprofitable. The way things work now is just wrong and dangerous. But it's
been 10+ years since the last dotcom bust, so I guess people will be people
and start falling for it again. A fool and his money and all that.

~~~
firefoxman1
I agree. I can't see any investor with half a brain buying any company with a
P/E of 2,147 (LinkedIn)

~~~
fennecfoxen
I _can_ see an investor with half a brain buying a company with a P/E of 2147
- heck, some newer companies with lots of potential have negative P/E. What
you need to make up for it is a really nice growth story.

Now, LinkedIn has an okay growth story, don't get me wrong. The problem is
it's just not good enough. Let's do some back-of-the-envelope comparisons.
Consider a relatively low-risk investment: an intermediate-term corporate bond
fund. You can get about 4% yield these days. At the current market cap of $7.4
billion, that's earnings of roughly $300 million a year. That's _roughly_ in
line with LinkedIn's revenue, but they also need to pay for things like
engineers and server farms.

In other words, you're going to need a heck of an earnings growth story just
to break even against a __safe __investment - and LinkedIn is nowhere near as
safe as a corporate bond fund.

~~~
firefoxman1
That's why I prefer to look at PEG instead of P/E. It shows you the price-to-
earnings relative to the earnings growth. Quite handy.

------
nanoanderson
It's always a big red flashing warning sign to me when investors who've stood
by a company from the beginning take a major cash-out _before_ an IPO. Nobody
can argue they didn't know an IPO was coming soon.

If you don't believe you'll make more money from an IPO than a private
investment, then what does that say about your faith in the company's future
profitability?

------
starnix17
In case anyone didn't notice, this blog post is by DHH.

~~~
stevenj
That's interesting given that Jason Fried (his partner at 37signals) was a
board member of Groupon and is now an advisor to the company.

~~~
mikeryan
According to the payout statements Jason was also one of the folks who took
money out in the last funding round to the tune of 500k (which seems like a
pittance all things considered).

~~~
cemerick
I wonder how much of a ding this will make in his credibility among
bootstrapped entrepreneurs in general. It's hard to talk down something and
have your thumb in the pie at the same time.

~~~
jasonfried
Some facts here before things get a bit out of control:

The S-1 speaks for itself.

Back in mid-late 2009 Andrew Mason asked me to be on the Groupon board of
directors. He wanted my opinions and advice on product development, design,
copywriting, software development, and user experience. Andrew (and Brad and
Eric) know where I stand on building bootstrapped, profitable businesses. I
still stand there. I wasn't asked to be on the board to give them financial
advice.

I agreed to be on the board. I like Andrew a lot and I was very happy to help
him. I had never been on a board before so I saw it as a great learning
experience for me as well.

Groupon compensated me for my involvement with options.

A few months ago when Groupon took a big round, I was asked if I would like to
sell some of my shares. I said yes. That sale is listed in the S-1. I still
have more shares. I don't see any problem morally or ethically with selling
shares that I was granted as part of my involvement with the board. I owned
something, someone offered to buy it, and I sold it.

I was asked to leave the board of directors in January of 2011. I serve as an
advisor now. Whenever Andrew asks me for product, design, or writing advice,
I'm happy to help.

I've never invested my own money in Groupon or any other private company. It's
not that I wouldn't invest in a private company, it's that I haven't.

Those are the simple facts.

As for my credibility, I don't see how any of this is relevant. You can make
up your own mind about that. I believe today what I've always believed - net
profits rule, bootstrapping is the way to start a business, and spending less
than you earn is the only way to have a healthy relationship with money.

As for DHH's opinions, they are his own. I may or may not share them, but
we're both grown ups and we respect each other no matter what.

~~~
jbenz
Did you ever feel compelled to voice your opinion after you saw the data that
indicated Groupon was spending more than they earned? Why did they ask you to
leave the board?

Thanks for sharing what you have. It's been said before, but I'll say it
again: HN is a remarkable place when intelligent people are having open
conversations about the news that directly involves their own business.

~~~
jasonfried
I was never shy about my opinion. A good board is made up of people with
differing opinions. The worst boards are made up of rubber stamps.

And of course a board is made up of people with different strengths and
experiences. My experience is not in massive growth, rapid growth,
acquisitions, companies with thousands of people, etc. There were and are
people on the board that are very experienced in those matters.

My experience is in product design and development. My advice on those matters
was my main contribution to the board and the company. I continue to advise,
when asked, on product design.

~~~
eurohacker
Jason, since you are here - may be its a good idea to tell the crowd why you
decided to sell some of your shares of Groupon,

as some papers seem to indicate

~~~
catch23
Why would that matter? He was asked, and he said yes. These were options paid
to him for his involvement on the board, not money invested by him.

If you did some work for someone, and they paid you with stock instead of
cash, wouldn't you feel like converting that to cash the first chance you get?

~~~
eurohacker
NO. if i would have a successful company like 37signals and enough money - i
would keep the additional startups as long as possible, since there is not
much to loose

especially would keep the shares of the "hottest" and "fastest growing"
startup groupon

~~~
rayiner
What if he needed the liquidity?

There are all sorts of reasons to sell stock at a particular time that have
nothing to do with cashing out on a company one believes will flame out.

~~~
eurohacker
he could have other startups to cash out on then , instead of groupon,

~~~
catch23
sounds like you're just a hater.

------
ben1040
Pardon my ignorance but how often do insiders get their stakes cashed out
after funding rounds like this, as opposed to using the money for operations
or growing the business?

My lack of knowledge about corporate finance and the part of that blog post
that refers to cashouts is making me see Groupon as more of a DrKoop.com or
Webvan than it may be. But nevertheless I can't see how struturing a funding
deal like that benefits anyone other than the insiders who got in early
enough?

~~~
raganwald
The IPO makes investors very, very, very rich. The Groupon executives have
built something that is going to make the investors and the bankers very,
very, very rich. Why shouldn't they be rewarded for creating all this value?

I am not being sarcastic. That's how business works: If I can make you a lot
of money, you need to share some of that with me, or I'll go make someone else
a lot of money.

The Groupon deal is a business built to flip to the public. The structure
benefits the insiders, but it benefits the VCs who cashed them out invested in
the last round even more, and it will benefit the bankers. And that's why they
can get away with getting rich right away: Because they're making a lot of
other people rich.

~~~
Lambent_Cactus
Making some people very rich is not the same thing as creating value.

If Groupon investors get rich at the expense of retail investors, that's bad.
If the Groupon founders get rich at the expense of retail investors and later
venture investors, that's also bad. In fact it's worse, because they have more
information about the business than the investors do. The closer you are to
the center of the business, the more you are implicated if it turns out to be
a giant pump-and-dump scheme. The founders are the rotten core of that scheme.

~~~
raganwald
I disagree that the founders somehow have a higher and nobler responsibility
to retail investors than VCs. The VCs are the professionals, they sit on the
board and direct its activities.

These ideas about the difference between management and bankers made sense
when IBM or US Steel went to the public markets to raise money in the old
days, but where Tech Startups are concerned I am skeptical that founders are
pulling the wool over the VC's eyes.

But I suspect we're quibbling over who gets the lion's share of the tar and
feathers :-)

UPDATE: But yes, I agree about the word "value."

~~~
Lambent_Cactus
Yes, 'rotten core' was a bit strong. :P I don't know anything about Groupon's
specific case, and it's certainly true that in many cases the VC's will be the
more experienced and better informed, and therefore more culpable party.
Comity!

------
ChuckFrank
False valuation and poor accounting and financial transparency affects us all.
We should do everything we can to discourage these type of shenanigans. A much
better proposition would be to build companies that people want, and are
willing to pay for, and then raise money based upon the future possibilities
of those creations. Raising too much money is just as bad for us, and for
Groupon, as raising too little money. Why? because any mis-allocation of
capital will lead to market instability, which will lead to inefficiencies.
Companies, Societies, Empires, rise and fall based upon these simple tenets.

------
alain94040
My main concern is: how do I tell my 401k and mutual funds to stay away from
Groupon?

I'm a smart investor, I'm strongly deciding to not touch Groupon with a
thousand feet pole. But I'm pretty sure bankers in NYC will do it for me. What
can I do?

~~~
hammock
Dont buy funds invest it yourself. Move your 401k into a self-directed
account.

~~~
joe_bleau
How do you move a 401k to a self-directed account? Can you do it without
quiting your job?

My single biggest gripe with my 401k--a very poor selection of high cost
managed funds.

~~~
hammock
It may depend on your company and how they set up their 401k. For me it was
relatively easy, I just told my company that I want to self-direct the funds -
it was an option they gave me if I set up a brokerage account with the 401K's
bank

------
inkaudio
Another major challenge Groupon face is: They are competing with major
players, companies with considerable more resources. Google, Facebook, Amazon
all have competing products and a very large user base. Google has billions in
profits and Amazon have billions in revenue and hundreds of millions in
profits. Facebook has one of, if not the largest user base in the world. For
Groupon to succeed it will have to be beat Amazon, Google, and Facebook. It's
hard enough to compete against one giant, but having limited resources and
competing against all three will make it too easy to fail. Now more than ever
you have to wonder why they did not sell to Google. Perhaps they are hoping
Microsoft will want to get in game after they IPO and buy them.

~~~
te_chris
Microsoft have made some questionable acquisitions, but there is no way they
would want to come in, post-ipo inflation and sweep them up then (unless of
course they bomb as hard as everyone is predicting). Like FB, Goog, MS too has
millions of users they could turn into customers of Bing Offers. Bet they
won't though. This whole market is one giant race to the bottom.

------
miespanolesmalo
I always wondered how Salesforce became so successful. Their saas is janky
garbage. Their software is everywhere, but they excel at nothing.

Now I know their success is hype and creative accounting.

~~~
lurker19
Adapting a Stroustrup quote: There are two types of CRM/ERP software: the ones
everyone complains about and the ones nobody uses. By all means, please build
a competitor that does not suck. Thousands of small/medium businesses will
make you a billionaire.

------
bproper
And while Groupon argues it will be sustainable once it hits a certain
threshold, its business is actually decaying in older markets like Boston -

[http://www.betabeat.com/2011/06/03/groupons-business-is-
deca...](http://www.betabeat.com/2011/06/03/groupons-business-is-decaying-in-
its-established-markets/)

------
jolan
They need to move on from low margin stuff like food and physical services.

* Copy AppSumo and sell software/webapp services.

* Try to work out deals on high value items like automobiles where there's lots of wiggle room in pricing.

* Talk to Apple. They have high demand and large margins.

Do anything to get rid of thousands of cold calling sales people.

~~~
stevenj
>Do anything to get rid of thousands of cold calling sales people.

If I remember correctly, it sees its sales force as a competitive advantage.

~~~
pdxgene
Thousands of employees, slim (if any) margins... sounds a bit like
Kozmo.com...

------
dbaugh
Whenever a business grows by hiring more and more people it won't scale well
and be massively profitable.. People are expensive. They are always going to
have razor thin margins.

~~~
bad_user
There's always the exception of Amazon, but Amazon has built infrastructure
instead of letting insiders cash-out early.

------
nwjsmith
I'd be interested in hearing Jason Fried's take on this. Isn't he an advisor
for Groupon?

~~~
hvs
If he's an advisor to Groupon, then I'm pretty sure he can't say anything
without violating a slew of SEC rules.

~~~
pchristensen
<http://mixergy.com/jason-fried-sortfolio-interview/>

"Andrew: You’re on the board of directors at Groupon. What have you learned
from working with them?

Jason: Sure. Well, just a clarification. I’m not on the board of directors
anymore.

Andrew: Board of advisors.

Jason: I’m on the advisory board now instead, and that was a smart move by
them.

Andrew: Why?

Jason: My main role there on the board was . . . the reason Andrew Mason asked
me to be on the board was to help them with product ideas and work on product
design and copyrighting and think about products because that’s what I think
I’m good at.

The board of directors isn’t really a place for that, especially at the stage
that Groupon is at right now. They need people with international business
experience. Howard Schultz came on after I left, the CEO of Starbucks. He
knows brand name. He knows big business. He knows that stuff. I don’t know
that stuff. That’s not my role. They need more people like that than people
like me.

By moving over to the advisory board, I’m working with Andrew. I was just
working with him this morning on some stuff around their new Groupon Now
product which is coming out short. Now, I’m doing really what I should be
doing, which is working with Andrew and his team on product design and
thinking about product copyrighting and that kind of stuff. It’s a better
place for me, a better fit for me.

That whole process of being on the board was absolutely fascinating, and I
really enjoyed it. I feel like it was a bit lopsided because I certainly
learned a lot more from them than they learned from me."

------
jrp
If the article is correct (future really bad, tricked public going to invest
on day 1), wouldn't it make sense to invest and sell very soon?

Is something special about an IPO where you have to hold it for some time?

~~~
raganwald
That's a great idea and a lot of people are going to do exactly that. However,
think about this: It's a bubble, it will pop, but we don't know when it will
pop.

Imagine you want to invest a million dollars and sell when you have doubled
your investment. The sooner and cheaper you can buy the stock, the greater
your chance to double your million dollars. The longer you wait, the higher
the chance that you will be one of the suckers whose investment makes other
people rich.

The safest strategy is to buy at the offering price and sell as soon as the
stock reaches your target for selling (double in our example). You pay the
least and get out the soonest, before the collapse. With every passing minute,
the price of the stock rises but the probability of the bubble popping before
it reaches your target also rises.

So how do you buy at the offering price? By having a cosy relationship with
the investment bank leading the issue, that's how. Do you have a cosy
relationship with the investment bank leading the issue? If not, you are
playing a game rigged to make other people rich at your expense.

Of course, if you like the fundamentals and plan to buy and hold, that's a
different matter. But if you're playing the speculation game, you ought to
know that the casino is rigged and that you are not in the business, you are
the business.

~~~
SandB0x
So what you're saying is it's a game of chicken?

~~~
raganwald
It's a game of Jenga with gold pieces. If you get a piece out, you win your
piece. If the tower collapses, everyone still playing loses their money.

And as you can see, the insiders, VCs, and their customers get to play first
and leave the game before you get a chance to pull a piece out.

UPDATE: Man, I'm pessimistic today! Don't forget the converse side of the
coin: The game may be rigged, but still you might have a good bet to make!

------
aresant
I count 3 negative Groupon articles on the front page this AM.

A quick Google news search finds similarly uniform negative sentiment in the
general web.

Brings to mind Warren Buffet's famous quote about investing - "The time to get
interested is when no one else is. You can’t buy what is popular and do well."

~~~
chrisaycock
That Warren Buffet quote doesn't mean you should buy a company that everyone
hates. Buffet meant to go after "un-sexy" businesses (like railroads and
insurance) and forgo "hot" fields (like technology or media).

The negativity surrounding Groupon isn't that they're boring; the negativity
is that they're over-hyped.

~~~
aresant
I disagree.

This reminds me of the pre-Google IPO arguments.

It became popular in the press to pot-shot Google in the days leading up to
their IPO.

Their revenue model was too tied to search.

Their IPO structure wasn't sound.

Their biggest growth was behind them.

Groupon is no Google today, but they do have a visionary founder, an
incredible brand, insane revenue growth, and address a real problem for
merchants and consumers.

~~~
jessedhillon
> _I disagree._

Based on nostalgic feelings about the 2000s?

Warren Buffet and his daughter wrote a whole book on how to go over a
company's P&L statements line-by-line and determine whether or not it's a
value. Groupon fails that test. That quote is about buying companies that are
doing better than the market thinks they are -- and his methodology is a way
to find and prove those cases _on paper_. Not with hunches.

Can you back this sentiment up with anything more than vague comparisons to
Google?

~~~
aresant
If you're actually asking:

"Groupon is no Google today, but they do have a visionary founder, an
incredible brand, insane revenue growth, and address a real problem for
merchants and consumers."

or see my comments here:

<http://news.ycombinator.com/item?id=2618080>

and here:

<http://news.ycombinator.com/item?id=2613546>

------
gaius
People are only supposed to get rich _after_ the IPO, and even then, only on
paper, for the first few years.

Still, VCs are supposed to be grownups who know what they're doing, if they
got screwed it's their own fault.

~~~
raganwald
If everyone who invests in the company plays by these rules, I'm all for it.
Unfortunately, the true narrative is: "Founders and employees are only
supposed to get _actually_ rich a few years after the IPO, however VCs,
Investment Bankers, and their cozy clients can get stinking rich immediately."

If you are willing to make the VCs and other bankers wait a few years, I have
no problem with founders and employees waiting a few years as well.

~~~
raganwald
p.s. _Conjecture_ : if the VCs had to wait for years to cash out, Groupon
would be a very different company with much stronger fundamentals and less
emphasis on flashy growth.

------
firefoxman1
I think it's interesting that this story and the story from 2000 condening
Amazon for losing money every quarter are both top stories on HN today[1].

Whenever history repeats itself you'll always hear people say "But this time
is different!"

The article Joel Spolsky wrote about the "Amazon model" of growth (back in
2000) really explains why some companies grow the way Groupon and Amazon
do[2]. They're in a land grab and they almost have to grow with huge losses
and lots of funding or else they'll lose.

Personally, I'm a fan of what Joel calls the "Ben and Jerry's model" which I
tend to call the Jason Fried model. Unfortunately, Groupon isn't one of those
companies that can expect to win if they aren't growing extremely
aggressively, and taking large losses at first is just part of the Amazon
model.

[1]<http://www.slate.com/id/1004565/>

[2]<http://www.joelonsoftware.com/articles/fog0000000056.html>

------
raldi
I don't know if I agree with this assessment. There's a land rush going on.
They need to grab as much of the market's network effects as they can before
Google Offers and the like manage to get going. This is definitely one of
those extreme first-mover-advantage situations, like online auctions fifteen
years ago.

So to answer the author's question: When will Groupon be profitable? When the
enormous costs of their explosive growth are no longer counting against their
bottom line.

~~~
MrMan
Are there network effects in coupons/deals? You mean building the
relationships with merchants?

~~~
raldi
Of course there are! Consumers want to join the service that has the best (and
most) deals. The service with the most consumers is going to be able to get
the most merchants signed up and get the best deals out of them. It's a
textbook virtuous cycle.

~~~
blrgeek
My experience is consumers join as many daily deal sites as they want to. They
are not loyal to one. The only cost of joining one more is an email a day.

~~~
raldi
You could say the same thing about auction buyers, and yet 99% of the world
sticks with eBay rather than waste time checking a second site.

~~~
blrgeek
Not true - auction buyers have a network effect. More buyers ==> more sellers
==> more buyers. As someone who wants to occasionally buy something 'rare' or
second hand, I would go where the most sellers are when I want to find
something! This itself causes a significant moat. Amazon has finally started
chipping away at the sellers, by providing an even larger pool of proven
buyers.

Local deal sites are by defn focused on many independent local market. Their
key promo channel is email to signed up users, since most people won't go to a
website to look at deals everyday. What's the barrier to entry for another
site - getting the same user signed up?

There will certainly be consolidation, there will be two or three local deals
sites left over. They will certainly not enjoy the margins GroupOn currently
commands.

~~~
raldi
"More buyers ==> more sellers ==> more buyers" ... just like "more bargain
hunters ==> more bargain-offering affiliates ==> more bargain hunters"

------
sedachv
I told you so:

<http://news.ycombinator.com/item?id=2117952>

<http://news.ycombinator.com/item?id=1968491>

With all the experience of the past 12-15 years, I'm convinced that "local" is
a hopeless hole for tech startups.

~~~
Revisor
Why do you think that anything "local" in general is a money/energy drain?

~~~
sedachv
There seems to be two types of "local" web startups: events and businesses.

Event listing sites are a very small market basically trying to take over the
flyer and newspaper advertising. There's no money there. And in the past
couple of years Facebook has stepped in and basically made all other event
sites obsolete, for now.

Business listing sites are trying to tap into the Yellow Pages market. Yellow
Pages were/are huge. This is why people continue trying to get in. The problem
is that unlike physical Yellow Pages, which have a regional monopoly, the
barrier to entry is very low. This leads to fragmentation, and any single
local business directory isn't very valuable. Combine with extremely spotty
coverage and out of date listings, and online directories themselves are
pretty useless. Even Google can't stay on top.

It gets worse because you have to cold-call small businesses to sell to them.
New ones are always starting up and old ones are going out of business. They
also don't want to pay very much money and suck at paying their bills.

Then there's the effort to drive traffic to the directories (or in some cases
specific businesses listed in them) via AdWords or other advertising. This can
work but is hard to pull off, most who try screw it up.

Don't forget that in addition to Google, Yelp etc. the Yellow Page companies
themselves all have online directories, and massive existing sales forces and
lists of customers. And they are still struggling to turn a profit online.

~~~
Revisor
So if I were to sum it up (talking about the local business part), the problem
consists of:

\- Fragmented and competitive market due to low barriers to entry

\- High-maintenance, low-yield customers

Thank you for your reply and the food for thought.

------
evertonfuller
I've always seen Groupon as a joke. I don't know anyone who has bought
anything from there. Maybe I just hang out with the wrong crowd, but meals at
random sushi bars, spa treatments, karate lessons...? Random...

------
kjames
Why do they need to go public? Are they hoping that more ad buying power is
going to provide them economies of scale? Graphic designers aren't that
expensive to employ are they?

~~~
hvs
They need money. And the investors would like to cash out before the company
runs out of money.

------
jcslzr
Is it possible for Groupon to tell Google I will spend millions on adsense but
I need you to make a fake offer of 6 billion?

------
danvoell
Should they take customer acquisition out of the "fastest growing internet
company ever" title? or just the financial analysis.

Great Write-Up.

I have to imagine the wall in their office with biggest internet failure
magazines is a self fulfilling prophecy.

------
lightoverhead
Completely agree with OP on this comment! I really doubt Groupon's business
model, hardly believe that coupon style business could be a main stream of
profit.

Would like to short this IPO when it comes to the stock market.

~~~
Hisoka
I agree. It's just fundamentals. There's no such thing as a free lunch. No
company can offer 50% coupons again and again, and be profitable, so the
number of repeat merchants will go down, and Groupon will have to continue
spending more to get more dumb merchants.

The customers are all looking for deals, they're not loyal. Plus more and more
will get sick of the deals being targeted towards them.

In the end, Groupon is like a Ponzi scheme in that it will need to trick more
new merchants to join in as old merchants drop out, and it will need to
continue paying a premium to attract more consumers as the existing ones drop
out. Compare that to companies like Amazon, and Google where ppl will never
get tired of shopping online, or searching online.

------
klbarry
Does anyone else think Groupon has been a huge boost to the economy? They've
created 7000 jobs in a few years, without displacing many old ones, and most
of these jobs are low-skill.

~~~
cosgroveb
Most of these jobs are low skill? My understanding is that the majority of the
people at Groupon are in the sales force. Just because it doesn't require a
degree in CS or EE doesn't make a position low-skill. Being an effective
salesperson takes a lot of skill.

------
johnx123
If the suspicion that it's a paid news
[http://rajeshanbiah.blogspot.com/2010/12/groupon-hype-or-
pai...](http://rajeshanbiah.blogspot.com/2010/12/groupon-hype-or-paid-
news.html) they'll have to shut it down when others start following that
strategy.

------
rayiner
This article is full of handwaving.

1) Lot's of businesses run in the red for awhile in order to build up their
market share. Just pointing to losses in the first few years of major
operations isn't particularly compelling.

2) The adjusted CSOI metric isn't as ridiculous as the author makes it seem.
The claim is that their marketing expense is a function of how fast they want
to grow. Presumably once they reach a size they want, they scale back that
expense, and the revenues turn into profit. The Forbes article says: "The
bottom line is that considering the profitability of Groupon without online
marketing expenses is silly; Groupon without marketing expenses is not Groupon
at all." How is Groupon without marketing not Groupon at all? It's an
interesting-sounding statement without any meaning.

~~~
brown9-2
_How is Groupon without marketing not Groupon at all?_

Because Groupon is getting all of their visitors/subscribers through massive
amounts of marketing. Without that marketing, it is not proven that they would
still have so many visitors/subscribers.

~~~
rayiner
Yes, Groupon's userbase might not stick around if they reduce advertising
expenditure to shift into profitability. That is unproven, uncertain, etc.
However, it's quite a leap beyond that to say that the userbase definitely
will leave if groupon doesn't keep up its massive advertising campaign, which
is effectively what the Forbes article says: (Groupon isn't Groupon without
unsustainable advertising).

