
Groupon is a straight-up Ponzi scheme - jeffreymcmanus
http://www.knewton.com/blog/knewton/from-jose/2011/06/03/groupon-is-a-straight-up-ponzi-scheme/
======
aresant
"The local merchants will have to stop using Groupon en masse not long after
they first start experimenting with it. "

\- "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://blogs.pitch.com/fatcity/2010/10/do_restaurants_get_a_...](http://blogs.pitch.com/fatcity/2010/10/do_restaurants_get_a_good_deal.php)

"optically, Groupon revenues look high — which they use to raise a financing
round at a high valuation."

\- Let's assume every investor that put money in just missed this obvious cost
or doesn't care, article still leaves out one of the most compelling parts of
their financial model - the minimum 10%+ breakage that Groupon splits that is
PURE gravy.

"most Groupon local merchants . . . have no margin to spare or wiggle room in
their operating costs."

\- The author misses the entire point of Groupon. Restaurants, spas, etc have
fixed costs on food, rent, staff etc - filling in gaps to cover dead zone
times w/groupon manages and mitigates those costs.

Their opportunity to improve on the above point is spelled out by their VP “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."

ref breakage - [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)

ref perishability - [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)

~~~
alsocasey
I want to thank you for your insights regarding breakage and perishability - I
had never considered this aspect of the Groupon model (having simply concluded
that the reasons so many spas and restaurants were represented was due to
their relatively higher margins compared to retail stores), but, particularly
for restaurants, this would seem a great boon.

One concern the article seemed to overlook is the fact that Groupon's business
model has a near zero barrier to entry - as demonstrated by the entry of so
many Groupon clones into the picture of late. Given this and the fact that for
many businesses (with exception of spas and restaurants) the 75% cut in
revenue may in fact be unsustainable, won't this turn into a race to the
bottom as to who offers the most advantageous cut back to the local merchant?

"Try Grup-on! Like Groupon, only we split 40-60!"

".........................................30-70!"

".........................................20-80!"

etc.

~~~
bigiain
I suspect there is a reasonable barrier to entry - in that the large number of
engaged mailing list subscribers required has a big first mover advantage.
Nobody is going to want to be signed up to dozens of different daily deal
mailing lists, so with Groupon already having a ton of subscribers they get a
much better pitch to the advertisers.

I think a possible competitive strategy is much more highly targeted mailings
- instead of approaching advertisers saying "we have 170,000 subscribers in
your city", go with "we have 15,000 females in the 30-45 year old age bracket
who earn over $85k" or "we've got 22,000 working mothers of 3-7 year old
children", or perhaps "we've got 8,000 people who dine out 3 or more times a
week in your zipcode". (I have no idea if Groupon are collecting and/or using
detailed demographic data about their subscribers...)

------
enjo
I love quotes like this:

 _they were never Groupon revenues in any meaningful sense of the word. But,
optically, Groupon revenues look high — which they use to raise a financing
round at a high valuation._

The idea that investors aren't able to fundamentally understand that 50% of
revenue walks out of the door is just insane. I've raised a bit of money in my
life and never once did I run across an investor who wasn't far better at
understanding my own financial statements than I was.

It's not so much commentary on the article itself, but it shows a supreme lack
of understanding of how the whole fundraising process really works. Surely
Jose already knows that?

~~~
imjustatechguy
There are at least two types of investments.

1\. Sometimes one invests in a company because it has a sound business model
and you know that it will have long term value.

2\. Other times you invest because the company is hot and rising and you plan
to get your money out of the company before the party comes to an end (if you
know a stock is going to rise, you might as well buy it and take profits as it
goes up.) It can be very profitable for those in at the beginning, not so much
for those left holding the relatively worthless bag.

The fact that the original founders are taking hundreds of millions of dollars
out of groupon before the IPO reinforces many people's fears that Groupon is
this second type of investment.

~~~
stevenj
In my opinion, the second type is not investing. It's speculating.

"An investment operation is one which, upon thorough analysis, promises safety
of principal and an adequate return. Operations not meeting these requirements
are speculative."

-Ben Graham, from chapter 1 of _The Intelligent Investor_

~~~
joe_the_user
Uh, in your parent post you essentially claim all investors are savvy.

In this post, you define non-savvy investors out of existence.

I'm not concerned with the true definition of an investor but all this
redefining won't change the point that by looking hot and looking good one can
get people to toss one capital.

------
collision
This is a technicality, but there's a difference between a Ponzi scheme and a
pyramid scheme. A Ponzi scheme needs an information asymmetry: investors don't
know that their money is being used to pay off previous investors. A pyramid
scheme is open about the way it works and the pyramid nature, but people
invest anyway.

Since Groupon's investment and revenue strategies are known to all, this would
be closer to a pyramid scheme than a Ponzi scheme.

~~~
stretchwithme
I thought a pyramid is multi-level marketing. I get n people to pay me
something while they each get n people and so on until there aren't any other
people entering the scheme.

How is Groupon like that?

~~~
ThomPete
With multi level marketing you are actually selling a product. A straight out
pyramid scheme you don't sell anything or at least it's not necessary.

------
joezydeco
_" In fact, Groupon immediately remits half of those “revenues” back to the
local merchant — they were never Groupon revenues in any meaningful sense of
the word. But, optically, Groupon revenues look high — which they use to raise
a financing round at a high valuation."_

Except from another S-1 analysis earlier today
([http://m.minyanville.com/?guid=34936&catid=4](http://m.minyanville.com/?guid=34936&catid=4)),
they're taking more like 60 days to pay back merchants.

 _"Another concerning part of their current liabilities is that $290 million
of it is "accrued merchant payables" -- in the US they take up to 60 days to
repay merchants. So that $290 million is merchants who have rendered services
waiting to get repaid by Groupon."_

So does that mean a collapse will come quicker or slower when it finally
happens?

------
mikecane
How hard would it be for Groupon to switch their model from targeting local
merchants to spraying discounts from national brands? For instance, instead of
Fred's Deli Grouponing cat food for ten cents a can and eating that loss,
Friskies does targeted geographic campaigns like that to get rid of dated
inventory they know are at local merchants? That'd be more efficient and
effective than a weekly printed flyer coupon, no?. Other than doing that,
given the large amounts of money I've seen reported being extracted from
Groupon, it does smell like a pyramid.

------
mattmaroon
This is very poorly written. My favorite line:

"Except that all that Groupon revenue is unprofitable so more and more Groupon
revenue is actually bad."

Umm, no. Groupon isn't selling something below marginal cost. They're
unprofitable due to fixed costs (advertising, sales force, etc.). Their
revenue has almost zero associated marginal cost and is actually quite good
and in fact is what they're banking on.

I don't think he really understands what "Ponzi Scheme" means either. Groupon
doesn't depend on newer people to pay off older people. What he's trying to
say is that it perhaps isn't sustainable, but that's not the same as a Ponzi
Scheme.

~~~
mscarborough
I believe that the author was referring to "Groupon Revenue" for the
merchants, not Groupon itself.

------
geophile
This is a good, clear explanation of Groupon's business model. I think one of
the following must be true: 1) Groupon does not realize the Ponzi-like nature
of their business, and this led them to turn down Google's offer. 2) They do
realize it, but common sense was outweighed by hubris -- they thought they
could keep it going until the IPO, or maybe the next offer from Google. 3)
They're really, really smart and are working on plan B. That would be one hell
of a pivot.

I'm betting on #2.

~~~
iandanforth
Excuse my ignorance but at what stage in an acquisition do you have to open
your books to the acquirer? Any chance that they didn't want to give google
this opportunity?

~~~
redthrowaway
Google would have reviewed their books and could easily see how shady it was,
but likely didn't care. Look at Youtube and how long Google bankrolled them
before they hit profitability. Adding Groupon to their portfolio and
integrating it with existing and upcoming products would have been a big win
for them.

I'm guessing what others have said is right: Groupon management figured they
could get more value by pushing for an IPO. They're likely right, although I
can't see Groupon surviving long afterwords. If Google had bought them, then
it had a chance to be a long term company. Now, it's an excellent investment
for the founder and early investors, and the public will get screwed.

~~~
clobber
To my knowledge, YouTube only breaks even.

~~~
lsc
add to that, the primary cost of youtube is probably bandwidth; and I believe
Google probably pays less for bandwidth than anyone else; Google is uniquely
suited to make the YouTube model work. On the other hand, the big cost for
groupon seems to be salespeople. Unless google can replace flesh and blood
salespeople with something automated, that wouldn't be nearly as good of a
fit. Google doesn't have cheaper fleshy sales people than anyone else.

edit: on the other hand, what if google was buying the fleshy sales people?
what if that is what they wanted? I mean, groupon is doing okay at penetrating
the small local business market in a way that google isn't.

~~~
redthrowaway
If there's one thing Google has shown disdain for, it's fleshy people who
aren't coding. See: customer service.

------
amorphid
Calling Groupon a ponzi or pyramid scheme is missing the point. All
investments are like that. You buy a stock at X in the hopes that you can sell
it for more than X.

For Groupon, you would want to look st two things. First, how much money do
they make on a deal minus what they spend to get the deal done? Second,
how.many deals can they sell?

If a deal makes $5000 and costs $500, you'd want to sell as many as you can.
Since all of their deals require a person to complete the sale, and there is a
lot of demand for deals, they hire a ton of people to sell a lot of deals.

As long as they can raise enough investment until their cash flow catches up,
they are good to go, assuming demand for Groupon deals stays strong of course.

------
tantalor
Inflammatory headline... "Groupon is not sustainable" might be more accurate.

------
gfodor
Unlike the other tech IPOs, this _is_ a dot-com, and I worry they are going to
take the good companies down with them.

------
medius
I think Groupon's rapid growth was mostly due to fear from competition. They
wanted to expand as rapidly as possible because everyone was having their own
Groupon-like deals. If something grows so much out of fear (and, of course,
greed), you don't learn from your mistakes. You don't have time and patience
to change course and fix what's broken. So Groupon has built a very vulnerable
system that can collapse just as fast as it was built.

I believe that the concept of social buying is great, but its complexity
deserves more respect than it has been given. There has to be a balance
between the amount of money merchants are willing to risk to introduce
themselves to new people, number of those people becoming repeat customers,
how much long term boost does the merchant get from those repeat customers,
etc. It takes time to find out what is working and what is not.

------
rriepe
Just a friendly reminder to all the bloggers out there: You _can_ be sued for
these kinds of statements.

~~~
jeffreymcmanus
You likely have a fundamental misunderstanding of libel law. With libel, truth
is the ultimate defense, and somebody's opinion isn't really libelous as long
as it's presented as opinion. Unless the facts in the post are made up, which
seems unlikely, the writer is fine.

~~~
rriepe
_Groupon smells like a ponzi scheme_? Fine. _Careful, Groupon could turn out
to be a ponzi scheme_? Great.

 _Groupon is straight-up a ponzi scheme_? That's pushing it, and would raise
any lawyer's eyebrow.

The problem here isn't so much about facts and opinions, or even necessarily
the presentation, it's about the term "ponzi scheme" which is very, very
legally charged. Check out the episode of Bullshit! on pyramid and ponzi
schemes-- not so much for the content of the episode, but for the fact that
they _avoided saying "ponzi scheme"_.

Or, imagine this: The New York Times ran this piece, even in the opinion
section. Does it seem like a libel case now? Keep in mind that _libel_ and a
_libel case_ are entirely different. A company could very well bring a case to
court and drain thousands from you in legal fees just to protect their
reputation.

And they'd have a pretty good case too. Yeah, malice probably isn't there, but
they could certainly argue a reckless disregard for whether or not this was
actually true.

~~~
jeffreymcmanus
Anybody can file a libel case, just as anybody can have a libel case laughed
out of court.

The reason why you don't hear about libel cases being prosecuted every day is
that libel is unbelievably difficult to prove.

------
jalada
Bitcoin, Groupon. Everything is a Ponzi scheme.

~~~
imjustatechguy
Other hot companies are clearly NOT Ponzi schemes, such as LinkedIn, Facebook
and Zynga. Everything is not a Ponzi scheme, but some things are.

~~~
heyrhett
I agree with you, but you have to admit, U.S. dollars themselves are a bit of
a Ponzi scheme.

~~~
anonymoushn
While this is nearly true, it acts very slowly, and most people don't know how
U.S. dollars work. Since everyone is robbed of some small value rather than a
small group being robbed of all value, you can't expect people to notice.

Unfortunately most attempts to explain to the general public how U.S. dollars
work contain other assertions that are plainly ridiculous (see
<http://www.youtube.com/watch?v=zXjoAP7jm6Y> or
<http://www.youtube.com/watch?v=_dmPchuXIXQ>), and the more tame treatments of
related issues lack depth (<http://www.youtube.com/watch?v=PTUY16CkS-k>).

------
ncarlson
> Meanwhile, many early-adopting merchants find that the burst in customers
> immediately disappears, and since they can’t perpetually discount 75%, those
> merchants stop using Groupon.

This is the crux of the argument, and no sources are provided. If you're going
to write a persuasive argument based on empirical data, you need to cite your
sources.

------
heyrhett
Isn't the "social proof" for a lot of investors the supposed $6B buyout offer
they rejected from Google, last year? Was Google just way off in their
valuation?

Remember all those stories about how Youtube was just a huge liability, and
they were burning through bandwidth expenses, and it was so stupid for Google
or anyone to buy it?

~~~
imjustatechguy
Being part of Google changes things as (1) Google can finance a money losing
operation for quite some time and (2) Google offers integration into its huge
ecosystem, especially its existing robust advertising network.

Thus Google brought a lot to the table in such acquisition which would
increase Groupon's value.

~~~
raganwald
This is the most insightful and concise thing I've read about the Google
proposal so far. Google offering B$6 doesn't mean Groupon is worth B$6 on its
own, it means it's worth B$6 _to Google_.

Google is not Warren Buffet investing in the hope of a passive but safe return
on investment. Google was betting that Google + Groupon was worth more than
Google + B$6.

~~~
veyron
You mean

Google - B$6 + Groupon > Google

or

Google - B$6 + Groupon > Google - B$6 + investing in other ideas or companies

~~~
raganwald
I wrote something along those lines originally, but it seemed simpler to leave
the details out. I trusted HN readers to fill in the rest :-)

------
marcamillion
How many more of these 'Groupon is a Ponzi' articles are we going to see
before the trend dies down ?

------
Luyt
_"let us briefly examine the tulip mania that is Groupon."_

Yesterday I equated the bitcoins craze to tulip mania [1]. I wonder whether
the author of this blogging read that on HN, and thought he could use that for
Groupon, too. He also linked to the WikiPedia article, like I did.

[1] <http://news.ycombinator.com/item?id=2612858>

