

The Fall of Groupon: Is the Daily-Deals Site Running Out of Cash? - nbj914
http://www.theatlantic.com/technology/archive/2011/08/the-fall-of-groupon-is-the-daily-deals-site-running-out-of-cash/243863/

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ForrestN
The competition for most outlandish criticism of Groupon is getting really
boring. All of these articles ignore the same basic facts.

Groupon is spending a huge amount on customer acquisition. They've stated
numerous times that this is a short-term competitive play, to try to create as
much of an advantage as possible to counteract the dozens of clones by
building up their brand awareness and subscriber list. The idea that they are
a ponzi scheme or the next Madoff because they are choosing a fast-growth
strategy is absurd. I might disagree that this is a smarter strategy than
growing more slowly, but this doesn't prove that they're insolvent or
something. Existing customers don't stop spending after one purchase, so the
idea that they have to spend on acquisition in order to make money to cover
operating costs is nonsense. They have total control over how much they spend
on customer acquisition, and at a certain point will have to slow down. Again,
you can disagree with their strategy, but there's no scam here.

Likewise, there is no evidence that any majority of businesses who work with
Groupon, or customers who purchase Groupons, are overwhelmingly dissatisfied
with the value they get. Tons of business still agree to run groupons every
day, including businesses that have run groupons many times. Obviously, it's
not a great experience for everyone, and I'm not even arguing that in the long
term this model will do well. But to say that Groupon doesn't do anything or
provides no value just isn't backed up by any credible evidence, at least
that's been present in all these threads.

Boston is not Groupon's oldest or largest market. And the numbers in that
article are to be expected, and aren't really "troubling" as the BI article's
source states. Groupon is spending money to acquire more subscribers because
the initial trove of low-hanging fruit has already been acquired. They're
trying to keep a big market from rival companies, so they're going after
people who are more difficult to acquire (and obviously therefor less likely
to spend). Anyone who expects these more difficult acquisitions to spend the
same amount per user as people who found their way to Groupon more easily is
ridiculous.

I'm not arguing that Groupon isn't overvalued, or that their model doesn't
have problems. But the arguments that Groupon is a scam or not a real business
or that they're going to have to close up shop any day now range from
unsophisticated to dishonest.

~~~
r00fus
None of this "land grab" reasoning answers my concern I raised earlier (
<http://news.ycombinator.com/item?id=2870094> )... how is Groupon going to
defend their landgrab? There are NO BARRIERS in this market, as far as anyone
can explain to me.

I'd love to hear any reasonable argument as to how Groupon will defend it's
ground. It's not like the big boys (Google: Offers, Amazon: LivingSocial) are
ignoring the space either.

~~~
sunchild
I can tell you for sure: no one I've ever met is remotely loyal to Groupon.
Groupon is viewed as, at best, a deal – at worst, an off-target annoyance.

There are no meaningful barriers to entry. Margins will tend to zero in the
face of competition. Users have no lasting connection to Groupon's web
presence. Every new model propose by Groupon further erodes its original
appeal: false scarcity. Meanwhile, there's a war for customer acquisition,
with spending up to $40 per user, when it should be closer to $2.50.

Anyone who gave this market a serious look saw these issues coming a thousand
miles away.

------
mikeryan
Well its a good thing $810M of their $946M round paid out the founders and
early investors. Now no one but the late round VC's and the 5000 employees get
stuck holding the bag if this thing implodes.

This is the problem with those early payouts (I don't mind these in theory but
this case was egregious). There's not a lot of incentive anymore for the
people running the company to do anything but what they're currently doing.
They've already had their exit.

~~~
maukdaddy
100% correct and it really makes me wonder what the late round VCs were
thinking. The only I can come up with is pure greed - willing to take an
enormous risk for future IPO (above and beyond typical VC risk)

~~~
joe_the_user
Well, If we're wildly speculating, we could also imagine kick-backs and money
laundering.

I know nothing of Groupon's financing. I know Digital Sky was a large, late
investor in Facebook. And they are controlled by a Russian oligarch.

Wealthy criminals are sometimes willing to invest in unprofitable businesses
to launder money, buy influence and hope that a bigger fool will follow them.

~~~
lnxkrnl
If Yuri Milner is the Russian mafia money man. He is f*cked. Most of his
investments are going to implode in a double dip recession, and bring down the
rest of Silicon Valley elites.

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chlee
If the owners didn't take ~700 million of the table from the last rounds of
founding, groupon would be in a better financial situation than they are
today.

~~~
iwwr
If they didn't, they may not have had a second chance.

~~~
felipemnoa
Which underscores one of the main problems. If the founders didn't think they
were going to have a second chance, why should anybody else?

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pbreit
This article is kind of a yawner. No new information and not exactly the
magazine I would go to for this topic. I don't really understand the final
paragraph which suggests a $6b exit might have been favorable to a $10-25b
exit.

Groupon-hate is tired. More interesting is a bull case:
<http://news.ycombinator.org/item?id=2904187>

------
RexRollman
I just don't see how Groupon, as it currently operates, is going to make
money. And I wonder how well its IPO is going to go, now that they have had to
admit that they are losing money.

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craigmc
Ultimately for Groupon if these articles begin to intensify in frequency and
ambition (wait for the first one to use bankruptcy in its title), then they
stand a fairly good chance of becoming a self-fulfilling prophecy.

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mkr-hn
Groupon has a huge mailing list and a lot of demographic data. A company like
Pepsi or Home Depot could pay $0.10 per e-mail to send a coupon out to 10
million people. That's $1m, and there are enough companies with that in their
marketing budget to make it viable. What matters is whether or not Groupon
realizes what they have.

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jprobert
The business model of Groupon is eerily similar to that of the US. Use current
cash/bonds to fund payables and hope that it doesn't get out of control. For
the US it already has but at least the US can raise the debt ceiling and print
more money... something that Groupon can not do.

~~~
r00fus
The analogy also fails because the USG has weaponry (spending more than
everyone else in the world combined) and Groupon does not.

------
ig1
The problem with all of these analysises is that they focus on rather
meaningless things. Lots of companies operate with bigger debt than assets, as
long you have incoming cash you can just get a bridging loan against it.

What profitability comes down to is what the lifetime value of a user (in this
case we have two types of users, consumers and providers) is and the cost of
acquiring a user.

Nothing else really matters, focusing on the accounting of how a company is
handling raising money or managing it's cashflow isn't really that relevant in
the long term. Sure it adds risk that the company might have cashflow problems
in the short term, but it's the price you pay for agressive growth and
presumably the investors are happy with it.

People seem to forget that you could have said the same thing about Amazon, in
the early days it was losing money hand over fist because it was using
investor money to subsidize product sales. Amazon gambled on the high LTV of
customers and it paid off hugely for them.

~~~
yuvadam
Let's stop with the Amazon analogy. Yes, Groupon, like early-day-Amazon, is
bleeding cash on customer acquisition. It ends there.

Amazon was building a retail infrastructure and they succeeded in providing
value to their customers.

Groupon is busy spending truckloads of cash on luring businesses into their
pyramid scheme, while founders and early-stage VCs are cashing in.

Pray tell how either customers or businesses are benefiting from Groupons. Is
Groupon providing them with some service that I cannot duplicate tomorrow? Are
they building some secret infrastructure that no one knows about? Follow the
money, and you will see that no such thing exists.

Groupon is a fraud, and it's time we call it the way it is.

~~~
ig1
I'd like to see you build a global local salesforce tomorrow. Groupon's
infrastructure isn't technological but rather operational and human resource
based, something which is actually much harder to duplicate than technology.

It's likely the reason that Google wanted to buy them isn't for daily deals,
but the fact that they've got a huge salesforce with expertise in selling to
local businesses.

Local business ad spend in the US alone is a $100bn dollar market, only a tiny
percentage of which is spent online at the moment, but the only way to reach
this audience is direct sales. And that's something that google doesn't have
the people infrastructure for.

~~~
jerf
"I'd like to see you build a global local salesforce tomorrow."

I don't need to build a global local salesforce for Groupon to be in serious
trouble. Hundreds of people can build local salesforces in their own area, and
the aggregate will cause Groupon trouble.

It's a bit of a different criticism that what most people are making, but I'm
not seeing a big advantage to Groupon centralizing vs. hundreds of fast-moving
much smaller competitors. There's hardly any economies of scale to speak of,
the market in question is effectively made of people who have minimal "brand
loyalty" pretty much by definition, even if every other criticism made is
false I still have a hard time seeing an outcome in which Groupon actually own
the national local market, precisely because "national local market" is
basically an oxymoron. Even if they don't collapse under their weight, they'll
still be pecked to death by hundreds of hungry budgies.

~~~
ig1
Marketing has significant economies of scale, a nationwide marketing campaign
tends to cost a lot less per customer acquired than a local one.

It's very possible to own the national local market, good examples of this are
Craigslist and (historical college-period) Facebook.

~~~
jerf
Most people badly misunderstand economies of scale. It doesn't mean that
things just keep getting cheaper and cheaper and cheaper the bigger you get.
Generally you get the most per thing benefit at the bottom, and as you scale
up the gain levels off. A company may make 50 million things a year but not
actually get any significant per thing savings over what they could get at 1
million things per year.

Sure, there are marketing economies of scale. But they don't scale
indefinitely, and by the time you're advertising to a state or at _most_ a
region of this country, you've captured them all, or as close to all as makes
no difference. I don't see a huge win for Groupon here.

Craigslist owns its market at this point solely because nobody will beat its
price, and as for Facebook's _permanent_ dominance (because that's the topic
at hand, not a transient dominance, Groupon already has that but they won't be
profitably unless they can continue that dominance for quite a while), call me
again in three years, OK? Let's see where G+, Facebook, and probably at least
one other competitor by then stand.

~~~
ig1
I disagree on both accounts, even in manufacturing scaling has it's limits.
Being able to mass produce can't infinitely reduce costs, sooner of later
you'll hit a barrier (cost of natural or human resource) which can't be
reduced.

Secondly no-one has permanent dominance in anything, how many market leaders
from 100 years ago are still leaders today ? - it's purely a case of how long
you can hold dominance for.

~~~
jerf
You disagree with both points, then reiterate them? Read moar, plz.

~~~
ig1
I misread your comment

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fleitz
"Groupon must spend to grow, but must continue growing to cover its
operational expenditures"

I believe some of Charles Ponzi's companies also suffered from these kinds of
structural problems, luckily Ponzi like Mason was able to exit his position in
the company through follow on investors before the issues started to seriously
affect the valuation of the company.

~~~
freshhawk
It really stretches the term to call this a "Catch 22". Since it hardly fits
that metaphor and "Ponzi Scheme" matches that definition exactly.

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veyron
Did groupon start in chicago or boston. The article says boston, but I thought
it was chicago ...

~~~
pbreit
Groupon is based in Chicago and Chicago was indeed its first market. Boston,
it's second market, gets cited frequently because Groupon itself spotlights it
as an example market, possibly because it's a broader proxy than Chicago would
be.

------
dreww
it's increasingly clear that groupon is essentially a ponzi scheme with some
graphic design. can't wait for the post mortem documentary a la "the smartest
guys in the room".

~~~
pbreit
Groupon's cash flow is just like any other business: it buys merchandise
(coupons) from vendors (on a net 60 basis), marks it up and sells it to
consumers. How is that a ponzi scheme? I think you might be confused since
many news outlets are making it sound like today's Groupon buyer's are funding
yesterday's vendors in some sort of mischievous way. But that's how all
businesses work.

~~~
dreww
if groupon is losing money on every customer, adding more customers actually
exacerbates the cash flow problem, and every time those customers buy a deal,
groupon goes farther in the hole. they use the cash to pay their oldest debts
but eventually there will be a reckoning.

it's unfathomable to me that it would be an attractive investment.

~~~
webwright
For how many years did Amazon lose money on every customer? Land grabs WORK.
I'm not convinced that it will here, or that Groupon is a good investment at
its current valuation... But the idea that a retail voucher business can't be
self-sustaining seems kinda silly. Groupon has 42% gross margins in 2011 q1 (
_UP_ 6% from the previous quarter).

~~~
chromatic
_For how many years did Amazon lose money on every customer?_

Fewer than most people think. Consider the financial model of a (successful)
grocery store ostensibly losing a penny on each transaction. If you're clever,
you can make plenty of money by arranging your contract terms carefully.

~~~
webwright
6 years is the answer to my rhetorical question, if you're curious. Groupon is
less than halfway to that point, and has much higher gross margins than Amazon
did at the time (and about 2x what Amazon has right now).

------
Hisoka
I hope they can do an IPO, and short it, along with Demand Media. You gotta
invest in what you know.

~~~
jsm386
Demand Media was a great short...until the borrow cost went through the roof
(same problem with LinkedIn). Did not want to cover that but didn't have much
of a choice. This was before options were available on DMD.

------
tedjdziuba
In a federal prison somewhere, Andy Fastow mutters "...amateurs".

~~~
arethuza
Groupon actually reminds me more of Value America:

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

------
sinzone
Andrew Mason will not fail. Look at people behind companies not just at the
box. Or you may follow the Michael Dell path when Steve just came back at
Apple and Dell said: "Shut down the company and give the money left back to
the shareholder. You don't have chances to succeed". 1998 circa.

------
mostlycarbon
I remember this happening 5 years ago, but instead of a bunch of salesmen
frantically searching for businesses to pitch couponing to, it was mortgage
brokers pitching exotic loans to home buyers.

I'll go out on a limb and guess that most of Groupon's sales team consists of
ex-mortgage brokers and washed-up real estate agents.

------
byrneseyeview
I wrote a little about this:

 _Another way to respond to this critique: Groupon could have theoretically
solved this problem by adopting faster payment plans for merchants. That would
make theirs a worse business with lower cash flow, but it would help their PR
(and perhaps their valuation). It’s counterintuitive that Groupon could make
their business worse but make their valuation better—it depends on whether
their share price is, at the margin, determined by the skeptics or the
believers._

( <http://www.digital-dd.com/hp-immaterial-usability-users/> )

~~~
ghshephard
I don't understand, from Blodget: ". "As of June 30, Groupon had $680 million
in current liabilities -- bills the company has to pay,".... "Meanwhile,
Groupon only had $376 million of current assets with which to pay them." "

If they pay their merchants faster, where would they get the money?

I just checked at Wikipedia, and,

"A Ponzi scheme is a fraudulent investment operation that pays returns to
separate investors, not from any actual profit earned by the organization, but
from their own money or money paid by subsequent investors. "

It kind of sounds like existing merchants "Daily Deals" are being paid by new
merchants. Because this isn't really an "investment" per se, I guess it's not
illegal - but right about now I'd be a little cautious if I were a small
business engaging with group on - at least determine what level of protection
I have.

~~~
pbreit
Calling this a ponzi scheme is a mistake. If you consider coupons merchandise
and Groupon getting net 60 day terms it's just like any other retailer.

~~~
sp332
No, paying off earlier investors with later investor's money is a Ponzi
scheme.

~~~
pbreit
Are you referring to the last funding round where a portion of the financing
went to shareholders? That's not uncommon and I'm not really sure where you
would draw the line. There's a buyer and seller on every stock transaction.

