
What really happened at LivingSocial? - speric
http://finance.fortune.cnn.com/2013/02/21/what-really-happened-at-livingsocial/
======
pg
This comes on top of an article a few days ago that (to people in the business
at least) was almost as preposterous, in which their ranking criterion for VC
funds was number of acquisitions. [http://www.privco.com/top-20-venture-
capital-firms-with-the-...](http://www.privco.com/top-20-venture-capital-
firms-with-the-most-private-tech-company-exits-in-2012)

~~~
damoncali
I once was peripherally involved in a large commercial real estate deal in a
major city. The press (a major paper- I forget which one, specifically, but
you'd recognize it) reported the value of the deal _without including the
debt, which was most of the financing_. It is hard to be more wrong about
financial matters than that, but that is the state of financial journalism.

------
onetimecomment
privco's sales people e-mailed the address on my company's domain and offered
research services. when we declined, four days later an article ran on privco
(an 'exclusive') reporting that we refused comment on something we had never
seen which was an article full of made-up dire horseshit. so I was left
explaining to my employees why this company was out to get us and no, I wasn't
misleading them about our finances.

we do not have the resources to sue. wish livingsocial and the other companies
targeted by these pieces of shit would. it's all a giant scam.

what hurts the most is the pubs that parrot the 'research', like cnn did this
time around, which gives it credibility.

edit: a16z and google pay them for their research. sad.
<http://www.privco.com/testimonials>

~~~
tptacek
It's like the shareholder lawsuit shakedown, only targeting private companies.

~~~
jrs235
I wonder if they have short bets (in systems like InTrade or similar shadow
trading systems) on the companies they drag through the dirt.

~~~
bitcartel
Probably not. First, if you search InTrade you won't find anything related to
LivingSocial. Second, it's not legal for anybody in the US to bet via
InTrade[1], and Privco is a US company with it's founder Sam Hamadeh based in
New York[2].

[1] [http://dealbook.nytimes.com/2012/11/26/after-regulatory-
sanc...](http://dealbook.nytimes.com/2012/11/26/after-regulatory-sanction-
intrade-closes-to-u-s-investors/)

[2] <http://en.wikipedia.org/wiki/Sam_Hamadeh>

------
funkbot
Parts of the PrivCo report might not be accurate, but I don't trust a word Tim
O'Shaughnessy says. We were told long ago that we'd be profitable by now, and
then there was a round of layoffs. Is he under any obligation to be truthful
about any of this? It's an internal email within a private company. Take
anything he says with a grain of salt.

He doesn't mention the allegation that LivingSocial owes more to merchants
right now than they have on hand. As others here have mentioned, that's going
to hurt the quality of deals they're able to put together at a time when they
need to be building confidence with customers and merchants.

He also doesn't mention the threat of more closures and layoffs. From a
business perspective, it makes _no sense_ to pay high salaries to college
educated 20-somethings to do customer support from expensive downtown DC loft
office space, but he never mentioned that in any of the all-hands meetings
when he said we would be profitable soon.

The constant theme in communication from management at LivingSocial is always
"don't listen to what others are saying about us; they don't know the full
picture." I wonder how much longer they can keep that up.

If they do go under, there will be a massive rush on all the talent that will
suddenly become available. The brain drain is already beginning. A number of
very talented engineers (not just Chad Fowler) have already left. They've been
diplomatic about it, but the fact is that they saw better opportunities
elsewhere. Anybody who says that the tenuousness of LivingSocial's continuing
existence isn't at least a _small_ factor has a bridge to sell you.

People won't jump ship all at once, but this is going to be a huge problem for
recruitment. Salespeople and customer support staff are a dime a dozen. No
news there. But anybody talented enough to be a developer at LivingSocial (and
the talent is considerable) would have to be quite desperate to come on board
at this time. HN readers know that the caliber of developer they need can
choose where they work. Would you sign on in this environment?

~~~
bruceb
" From a business perspective, it makes no sense to pay high salaries to
college educated 20-somethings to do customer support from expensive downtown
DC loft office space"

So true and the same comment I was going to make. I was in the Seattle office
and thought the same thing 2 years ago.

------
PrivCoTeam
PrivCo has absolutely NO short positions in any private company we cover.
These are PRIVATE companies and with rare exception do not trade. Nor do we
earn any fees from private companies we cover (and we do NOT accept paid
advertising, unless you count a the standard Google links).

We have no agenda other than to try and publish facts, and what LivingSocial
announced yesterday immediately struck us as misleading and fishy based on
everything we knew about the company and it's dire financials. The press
release and memo to employees (imagine you are one of those trusting
hardworking employees, or a local daily deals merchant they owe money to
"soon") - over $300 Million worth actually, but have only $76 million - made
it seem as if the company was doing so well financially that their happy
investors who had invested at a $5.7 Billion valuation wanted to double down
on their investments and bet even bigger. NOTHING WAS FURTHER FROM THE TRUTH.
The company was NOT doing fine, lost over $400 Million last year, was running
low on cash, and had to take a massive valuation haircut and grant all sorts
of special preferences in order to get this last lifeline of cash.

Their financials can't be papered over...and they verified to the penny as
public Amazon.com owns 31% now of the company. Look them up...if you know
anything about finance or accounting you will reach the same conclusions as
PrivCo did. LivingSocial will soon require mass layoffs, and will be insolvent
or sold for pennies on the dollar by the end of this year is our prediction.
(And we hope we're wrong, and don't make a dime either way, as we don't want
to see 4,000 trusting employees lose their jobs).

But the numbers don't lie and we stick by our prediction.

The PrivCo Team www.privco.com

~~~
btilly
Nobody is debating whether LivingSocial has a world of problems.

We're debating the veracity of all of the non-public details that made your
report interesting. Well, in theory we are. Only one side of the debate seems
to have showed up.

~~~
PrivCoTeam
CNN/Fortune story just updated again to say insiders confirm that LivingSocial
was down to JUST $28M IN CASH in February right before taking yesterday's
financing.

Do the math: looking at their 2012 financials on PrivCo:
[http://www.privco.com/livingsocial-receives-
emergency-110m-c...](http://www.privco.com/livingsocial-receives-
emergency-110m-cash-infusion-from-existing-investors-to-avoid-bankruptcy)

That is, LivingSocial's operating expenses are about $1.4 Billion/year
(Revenue + Operating loss = about $1.4 Billion they spend a year). That's $120
Million a month of expenses. $4 million a day. MEANING NEW FORTUNE/CNN UPDATE
to their story confirms LIVINGSOCIAL WAS DOWN TO JUST 7 DAYS OF CASH! How is
that NOT the very definition of a "distressed financing" situation? Correct
the record CNN and Fortune - shame on you - and admit when you're wrong - (and
by the way they just deleted this posting from the article comments).
LivingSocial was down to a dangerously low level of cash just as PrivCo's
sources confirmed, only a week, maybe 2, left, before paychecks would start
bouncing and the whole house of cards came down. This is the very definition
of a "distressed financing."

~~~
btilly
Take out the $600 million non-cash "goodwill" item they wrote down, and you've
got $800 million per year operating expenses. That ups them to nearly 2 weeks.

But they have been trying to get profitable. So they have been cutting
expenses and adding revenue. This deal would not be possible without that.
Therefore they likely are not losing money as fast as in 2012. So a month or
more of runway is perfectly believable.

Next, expenses and revenue tend to come in on different schedules. If that is
cash right after you've paid employees, and you have revenue booked but not
realized yet, you're in a much better position than if those two are reversed.
That could easily add another month.

The result? I suspect CEO's claim of "several months" is possible, but likely
optimistic. However I would be shocked if your "7 days" is in the right
ballpark. But there is an easy way to check. If you're right, they should have
run through this investment inside of 2 months, 3 months tops.

------
socalnate1
This in particular makes PrivCo look stupid:

"Two of the three investors listed on the PrivCo site as participating in the
round didn't participate, and one isn't even an investor in the company."

------
tptacek
LivingSocial's response is extremely damning of "PrivCo".

~~~
eduardordm
What I do not understand is: what does an 'investor' expects 'injecting' 110
million dollars on a bankrupt business?

There is nothing livingsocial can do to revert its current trajectory. It's
not about the company, but the very core of its business model does not work,
not one but dozen of similar companies failed early, are livingsocial and
groupon trying to run some sort of ponzi scheme on desperate investors and
employees?

~~~
untog
It's reasonably obvious that the investor does not agree with your assertion
that "the very core of its business model does not work". You can't state
something like that as inarguable fact.

I don't doubt for a second that LivingSocial is experimenting with it's
models, innovating and trying new stuff. It might not work out, but the
investor clearly has enough confidence that it will to invest more cash.

~~~
eduardordm
They are doing it for so long and so many other companies have failed, in many
other countries, that I'm starting to think that will never work.

But really, this is just a completely arguable point of view, sorry if it came
out a bit despotic.

------
thepumpkin1979
Off-topic: Don't get me wrong, I'm on the side of whoever is telling the truth
here, however, this CNN report/posting seems to be right on time in favor of
Living Social, how does that work? do the PR department just email CNN and ask
them "Hey, can you make a blog post quoting an internal mail to dimiss the
lies PrivCo said early today?" No sarcasm here, does it really work that way
or is just my imagination?

~~~
sharkweek
I work in the PR space -- most of the time it comes down to relationships and
resource. Having the email address and even the slightest of personal
relationships with influential journalists can work wonders in times like
this.

A lot of times these writers are on the hunt for sources for their articles,
and making yourself available to answer questions or give quotes, whether
you're the founder or someone in the PR/Marketing dept, will go a long way
down the road when you're looking for coverage on a new feature or want to
clarify some bad press.

------
j45
What happened is in the end it didn't appear to have a repeatable and scalable
business model.

Edit: For the record, I read the article, I forwarded it to colleagues
interested in the space, and the only thing worthy of it for me was my comment
-- don't start one of these without a business model.

All this PR commentary about misunderstandings about finances, funding all
ties back to one thing -- they don't make money. Companies that make money
don't hide it, and have a hard time hiding it.

Whether a PrivCo is funding them or not -- my original point stands.

This place for me is about learning to create a real business and not the lame
bantering about distractions from this one requirement of any successful
startup.

~~~
enraged_camel
Not sure why you are getting down-voted, since what you say is unquestionably
true.

I hope the whole "daily deals" fad dies soon, along with all the shitty
companies (LivingSocial, GroupOn, etc.) that promote it. There is nothing more
frustrating than getting consumers in the mindset of "I want to try it, but
I'm going to wait until a daily deal comes along."

~~~
larrik
He's getting downvoted because he is commenting on the headline, and not the
article. The article has absolutely nothing to do with how LivingSocial got to
where they are, and everything to do with the investment that was just
anounced. "What happened" is strictly referring to the details of that
investment.

A cursory glance at the original article makes it obvious that his comment is
irrelevant. It's just pithy snark against a company already dealing with false
"news" reporting.

~~~
j45
For the record, I read the article. I forwarded it to colleagues interested in
the space, and the only thing worthy of it for me was my comment -- don't
start one of these without a business model.

How did it apply to the article? Everything they did, didn't ultimately find a
sustainable and repeatable business model. Instead theres all this perceived
market validation of "oh look, investors say we're valuable", instead of
market validation that's sustainable and repeatable.

I don't know anyone there and mean no one ill will, but without this, it
certainly makes people wonder how making businesses lose money with deals for
people who never come back is something you want to repeat, or how it can
educate customers to become better customers (and pay full price).

I appreciate your judgement of me to be "pithy", but it's not. Snarks annoy me
just as much. You can jump to the conclusions that you want but it's often
fair to ask what someone meant instead of deciding what I meant in your
positive and constructive open-mindedness.

This place for me is about learning to create a real business and not the lame
bantering about distractions from this one requirement of any successful
startup.

------
ebbv
What I don't get is this; how does Living Social do ~$500mm in revenue and
still fail to be in the black? It's not like they have any physical
merchandise. All their expenses should be personnel, servers and bandwidth
right? How are they bleeding through over $500mm in a year then? All the
employees are overpaid? Paying too much for servers?

~~~
lawdawg
They count it as revenue _before_ paying the merchant. Their true revenue is
probably much lower than $500mm.

~~~
ebbv
Ahhhh, ok. That seems like shady accounting to me, then. Calling any money
"revenue" before the merchants get their share.

~~~
jordo37
That's not shady accounting, revenue is the income a company receives before
handling any expenses, which in this case would include payment of merchants.
This is why revenue is called the top-line - it represents the first number on
any balance sheet before you subtract anything away.

------
dailyrorschach
Well now the story is updated. Quoted below:

UPDATE: Just got off the phone with Hamadeh, who is standing by his original
report. He says O'Shaughnessy is misleading his own employees, and that
classifying the round as "equity" is a technicality given all of the debt-like
provisions PrivCo continues to believe were attached. He also says that PrivCo
spoke with a LivingSocial spokesman prior to publishing, and sent him a draft
of the report with a request for any needed corrections. When nothing came
back four hours later, PrivCo published. As you might imagine, now I've got a
new call into LivingSocial.

~~~
tptacek
This is exactly what I would do if I was an evil publication: make a
prediction as to the trendlines of a business, write up a report full of false
evidence, send a draft to the target and then declare it was the target's
responsibility, not mine, to ensure that my report was correct.

What's different after this followup is that now CNN/Fortune is suspect too,
because repeating this verbatim is unethical.

~~~
dailyrorschach
I don't have a firm opinion on the matter yet. I was initially suspicious of
the initial report as I had never heard of them (PrivCo). However, I do work
in advertising/PR and if someone submitted a claim like this to a spokesperson
within four hours, we would at least say there are considerable and factual
errors with your report, etc. This of course may have happened.

My interest in following this story is personal as I live in DC and have many
friends still employed at the company.

I'd disagree that CNN is being unethical here, their story/angle is about the
process and getting to the bottom of the PrivCo report.

~~~
tptacek
FOUR HOURS. That's how much time _they_ claim to have given LivingSocial
before running the report. Horsewhip these clowns off the stage now.

It's actually even worse if underlying trend they're "reporting" on is true,
because they've poisoned the well.

~~~
dailyrorschach
PrivCo looks even worse now with this additional update to CNN's story:

"I don't think the real story here is the details of the financing," Hamadeh
[PrivCo CEO] said. "It's what's going to happen to the little guys, all of the
merchants who are really the company's unsecured creditors, if LivingSocial
goes bankrupt... You'll see that we were right in six or nine months."

~~~
damoncali
I think that's exactly right - this wouldn't be a story if PrivCo wasn't
_mostly_ right about the big picture. The big picture is one of impending doom
at LS, and yes, if that comes to bear, the little guys will get nothing.

Sure, they come off as slimy (and maybe they are - I have no idea). But the
details matter less than the overall story here.

~~~
tptacek
That's what PrivCo would say to defend what's happened. Like you, they'd be
careful to couch the defense in terms of ideas that are hard to falsify. Of
course, they got to this point in the conversation by reporting a series of
material falsehoods; their initial specificity is what scored them a seat at
the table. But let's ignore that they have no credibility anymore and instead
entertain our own biases about what's happened.

It is especially easy to pull this off when the topic is a company we don't
like.

~~~
damoncali
I can't say I disagree. They displayed some pretty aggressive, and possibly
unethical tactics here. But honestly, I don't much care about their account
(as it seems to be inaccurate). I do care about LivingSocial's account, which
is interesting to me, and paints pretty much the same picture.

~~~
tptacek
That is the audience sentiment PrivCo is counting on.

~~~
damoncali
They're counting on me wanting to see the truth and thinking that they're
scammy and unreliable? Seems like an odd strategy.

~~~
tptacek
Do you really feel like your perspective on LivingSocial's core business is
underrepresented, and that continually reminding us of how little regard you
have for it is a contribution?

Because I actually do think that the untrustworthiness of this report, and,
more importantly, the implications of that untrustworthiness _is_
underrepresented and _is_ worth talking about more. Whereas a chin-wagging
circle of commentary about how unsustainable daily-deals sites are does not
seem particularly valuable.

 _(This comment reads meaner than I intend it to be.)_

~~~
damoncali
Fair point. The dishonesty is simple to me: open and shut. It's in the state
filings. PrivCo at best got pretty bad information and published it without
verifying it, and at worst made a bunch of stuff up to drive traffic. Not much
to discuss there - it's bad.

LivingSocial's business, though, changes over time, and is worth discussing
from time to time. Down rounds are always interesting to me. The decreasing
margin in the deals business is interesting to me. That LS still apparently
plans an IPO, in the face of a fairly brutal down round is interesting to me.
That they think they can be worth $1B is interesting. (As is the current
valuation when you read between the lines). The sliding liquidation preference
is whole discussion unto itself. But yes, it's a pretty well trodden topic
when reduced to "LS's business model is flawed". So I'm guilty there.

------
mikek
> our major competitor's market cap is now $3.9B

He can't say "Groupon?" Seriously?

~~~
officemonkey
Never define yourself by the competition.

~~~
Macsenour
But didn't he? I mean, quoting their cap number, it's obvious who he is
talking about, so why not just say the name?

~~~
danielweber
They are in a space where mind-share is really important.

(I think that mind-share being important is a sign you are in a risky
business, but that's neither here nor there.)

~~~
Macsenour
But to his own employees? I understand in a public PR, but his letter was
internal.

~~~
officemonkey
You train like you fight.

------
PrivCoTeam
Fortune just reported that insider's confirm LivingSocial was down to JUST
$28M IN CASH in February right before taking yesterday's financing? If my math
is right, looking at their 2012 financials on PrivCo:
[http://www.privco.com/livingsocial-receives-
emergency-110m-c...](http://www.privco.com/livingsocial-receives-
emergency-110m-cash-infusion-from-existing-investors-to-avoid-bankruptcy)

Their operating expenses are about $1.4 Billion/year (Revenue + Operating loss
= about $1.4 Billion they spend a year). That's $120 Million a month. $4
million a day. THEY WERE DOWN TO JUST 7 DAYS OF CASH! How is that NOT the very
definition of a "distressed financing" situation? T

hey were down to a dangerously low level of cash and regardless of the
financing terms or structured as technically debt or technically equity, that
yes this was a distressed financing situation.

~~~
jhg23
In LivingSocial's Operating loss for 2012 was a 1 time write down of goodwill
(about $600 million), which is a non cash expense, so should not be included
in calculation of operating expenses.

------
crag
IMHO PrivCo's report appears to be a good ole-fashioned hatchet-job. The real
question is who is PrivCo working for? Or are they just trying to generate
press with down news?

------
mixedbit
I think the main problem with this business model is that it is not really
beneficial for large number of advertisers. I heard so many times about local
businesses that were screwed by Groupon, because they offered too many deals
at too low prices (often below costs) and most people who bought deals did not
return later. Groupon seemed not to care about providing a service that is
really beneficial to advertisers, instead they concentrated on short term
grow.

A lot of successful innovation today is about eliminating middlemen. Local
deals companies do just the opposite. They are a new middleman that tries to
cut a large percentage from local businesses income. I don't think this is
sustainable.

------
graycat
Did PrivCo or some related business entities have a short position in
LivingSocial when the PrivCo statement was made on LivingSocial?

Well, not in any simple sense since apparently LivingSocial is not public yet.
But a short position on a related company?

~~~
jbail
Can you have a short position in a privately held company? I don't think so,
but maybe there's a financial vehicle for that.

~~~
graycat
Right. Sorry about leaving out the last paragraph. But one might try being
short on a related public company, say, GroupOn.

~~~
bitcartel
That boat has long sailed. Anybody who wanted to short Groupon would have done
it more than a year ago, when the stock was trading around $20-$25.

------
joeco
If you believed the Privco report when you first read it, I have a bridge you
may be interested in.

~~~
damoncali
The LS version is not much prettier.

------
ImprovedSilence
Fisrt time I've heard of privco, but just one look at their site screams 1998
scammy website. Ya know, the kind with bold lettering, a sticky caps lock, and
looks kinda like those chain emails your grandma keeps forwarding....

------
jinushaun
The more damning evidence is Chad Fowler's recent departure from LS to
Wunderkinder.

------
jpdoctor
Oh for chrissake: Just release the funding docs and term sheet.

The letter was full of possible half-truths(eg: 'There is no "4x liquidation
preference"' does not preclude 3x or 5x or any other number besides 4), so
smart employees should be looking until they see the docs.

~~~
mdc
He says it slides but "gets nowhere near 4x". That's clear enough to preclude
5x.

~~~
microtherion
Maybe it slides right from 3x to 5x ?-)

~~~
jpdoctor
Or never gets lower than 6x, as another example.

