

Why Groupon is Worth $25 Billion - jamesjyu
http://stevecheney.posterous.com/why-groupon-is-worth-25-billion-dollars

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raganwald
I have trouble with these sorts of arguments. Hopefully I'm not putting up a
strawman, but this is what I read:

    
    
      1. There's a massive opportunity for *X*.
      2. Nobody is doing X, including business *Y*.
      3. Y is well-positioned to transition (or "pivot") to X if it chooses.
      4. ...
      5. Profit.
    

Even though I might agree with points 1, 2, and 3, there are a lot of moving
parts and uncertainties between steps 3 and 5, what the fictional Reginald
Jeeves calls "imponderables." I think that investing in a company on the basis
of what it might do if a new market pans out is sound reasoning when making a
VC investment. If you make ten such investments, perhaps one or two of them
will pan out and you will make enough of a killing on them to pay for the
others.

However, I do not think this is sound reasoning when picking stocks in the
public market. I think you have enough trouble just trying to figure out if a
public company can succeed doing the business they're currently trying to do,
much less a whole new business they haven't tried yet.

~~~
joe_the_user
Actually, this is first Pro-Groupon argument I found remotely convincing.

The point isn't so much that it shows Group _will_ succeed, merely that it
makes an argument that they _could_ succeed. A Ponzi or pyramid scheme
inherently _cannot succeed_. If an enterprise is Ponzi scheme, the smartness
of the management, the prowess of the employees, the enterprises' momentum and
everything else does not matter. But if an enterprise is _not_ a Ponzi scheme,
you _can_ start looking at these factors.

Groupon may or may not succeed like Amazon. But _if_ there _is_ a massive
opportunity "out there", this means it is not completely irrational for
investors to give them rooting around in this market until they succeed or
convincing fail.

~~~
raganwald
I'm prepared to agree that the post makes an enthusiastic case for points 1, 2
and 3 with respect to Groupon :-)

And I think that the expression "Ponzi Scheme" is ridiculous, and you don't
need this essay to know that Groupon are not paying dividends to public
shareholders with money they raise selling stock to other shareholders.

~~~
johnrob
The Ponzi moniker is somewhat relevant in the sense that existing investors
(angels and VCs) could cash out to the next series of investors (public
market) before the company turns a profit.

~~~
raganwald
A Ponzi Scheme rests on misrepresenting new investments as income for existing
investors. To date, I have seen no evidence of misrepresentation.

Cashing out before the next round invests is not a pyramid or Ponzi scheme,
it's exactly what happens when you buy a public stock for $100 and sell for
$200: Somebody else is willing to pay $200 and you sell your shares to them.

The fact that this happens before they make a profit and before they go public
is irrelevant, that speaks to the mindset of the people buying the stock for
$200, not to those selling for $200. Now if they _lied_ about being profitable
and were merely using invested funds to generate fictitious revenue that turns
into fictitious dividends, you might have something.

During the last bubble, there were cases where investors put a bunch of money
into a company and then demanded that it spend a bunch of that money on
another company in their portfolio, effectively creating fictitious revenues.
I'd go along with calling those deals "Ponzi Schemes." But this one? Not a
Ponzi Scheme, just people who are willing to make a bet on Groupon's success.

p.s. <http://en.wikipedia.org/wiki/Ponzi_scheme> is instructive. Especially
the description of "similar schemes" and the word "bubble." (I am not making
any claim about Groupon stock being or being part of a bubble).

~~~
johnrob
I agree. I was almost going to make a similar argument a few days ago, but
ultimately decided not to because the masses have effectively redefined what
that term means. At this point, "Ponzi Scheme" has become a general term for
financial sketchiness.

The challenge becomes how to how to denounce the Ponzi term without also
denying the presence of financial engineering. Your argument does this as well
as possible IMO.

When a pundit claims that Groupon is a Ponzi scheme, he really means "Groupon
is raising money and using the money to buy more revenue at more than face
value". We don't really have a classification for what this is, and the
proposed scheme seems somewhat scam-ish, so the Ponzi term is being used.

I'm not claiming that Groupon is simply raising money and buying revenue. But
I do believe that's what the pundits mean to say when they call Groupon a
Ponzi scheme.

~~~
raganwald
Groupon is absolutely buying revenues. I read somewhere that $1.00 of revenue
costs them $1.43. Given estimates as high as B$4 for 2011 revenues, if
investors will value the company at B$15, it is clear that each dollar of
revenue is worth $3.75 to investors.

Groupon's financing strategy exploits the difference between what an investor
will pay for a dollar of revenue--$3.75--and what it costs to earn a dollar of
revenue--$1.43.

Let's say they have a dollar of revenue in hand. They can sell $3.75 of stock
based on that dollar of revenue. At $1.43 per, they can buy $2.62 more
revenue. Which they can use to raise $9.82 from investors. Which buys $6.87 in
revenues. Which they can use to raise $25.76, and so on and so forth, until
they exhaust the market's capacity for buying Groupon stock or everyone tries
to cash out at once.

Of course, this is not necessarily a bad thing. If a dollar of revenue is
actually a dollar of recurring revenue, it could be worth much more than
$3.75. It all depends... How much churn do they have? How much competition
will they have? It costs $1.43 to get the first dollar of revenue. How much
does it cost them to get a second dollar from an existing merchant?

I don't know the answer to any of these questions. If it turns out that these
revenue dollars are not recurring and the participants in the business know
this but are disguising the situation from investors and misleading them into
thinking that these dollars are just like regular business revenue dollars...

If that were the case, maybe one day people would be on HN claiming that such-
and-such a company is a "Groupon Scheme." But if it turns out that they have
been spending $1.43 to buy a growing revenue stream, investors might end up
looking exceptionally smart.

------
meterplech
It's a pleasure to see someone take the stand and go against the rash of blog
posts and articles against Groupon.

The main point of this article is that Groupon has value in connecting the
online and offline world. Even if people use Yelp to decide on a restaurant,
or search Google to figure out where it is- those companies never get profits
from that because the restaurant never knows what sent the customer.

Groupon is able to monetize the online to offline sale by clearly letting the
business see that Groupon brought in a customer.

He also says that while the daily deal structure might be risky/dead they can
easily pivot to other online to offline connections like instant deals to your
phone while walking by a restaurant.

Personally, while I think that monetizing the online to offline transaction
could be a huge business opportunity I don't know if I am willing to risk
money on watching Groupon make the pivot. If daily deal as a model is
crumbling (which many people have blogged about), then you are betting a whole
lot that the database of merchants and customers can be leveraged in a new
business model.

~~~
cletus
> It's a pleasure to see someone take the stand and go against the rash of
> blog posts and articles against Groupon.

Just because an argument is contrarian or counterintuitive doesn't make it
right.

~~~
rmobin
I don't think he implied that. And I agree with his sentiment - for those of
us who haven't made up our minds on Groupon, it's nice to see a view from the
other side.

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Uhhrrr
That the possible market for Groupon is big is without dispute. The reason
people aren't sure about its prospects is that their reach still pales next to
that of Google, Amazon, eBay, Yahoo, etc., and they're still not doing
anything that can't be copied.

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m104
Read the whole article, but wanted to stop after the second paragraph. Choice
quotation:

"The real innovation Groupon brought ... was their ability to profit off of
closing the attribution loop in online-to-offline commerce. And this is a huge
land grab that others had completely missed."

That's funny, because I thought that Groupon showed just the opposite of that.
How exactly has Groupon proved that there's a _profitable_ business in hooking
up customers and businesses with slash-and-burn deals? Even taking half of the
revenue, Groupon is bleeding money and admits that it is going to have to
invest even more to keep up the growth curve.

I get that Groupon is popular, sure, but they'd be even _more_ popular if they
didn't take 50% of the coupon revenue. Of course, they'd be out of business
sooner, as well. The "naysayers", like myself, are pointing out that Groupon
(willfully or otherwise) hasn't found a balance that allows them to grow and
actually turn a profit. What they have done is grow their userbase at an
astonishing rate by raising and spending huge chunks of cash. That's not a
business, that's a party. And parties, while fun to attend, are a bitch to
clean up.

~~~
mgkimsal
_Even taking half of the revenue, Groupon is bleeding money and admits that it
is going to have to invest even more to keep up the growth curve._

I live in a moderately large regional area - Raleigh/Durham - close to a
million people in the metro area. I've gone to groupon.com several times, and
each time it doesn't seem to remember me - I end up putting my email in again
each time, and then I'm shown a few 'deals', but nothing to suggest they're
'daily' (maybe they are, but I can't easily tell).

When I hear 'daily deal site', I'm sort of expecting to get emails daily with
a deal. I've given my email address. I _want_ these things. If they can't make
that happen in a metro area with nearly a million people, and having a large
org (8,000 people?!) I just don't get how this will survive long term, other
than perhaps by name recognition (it's a damn catchy name).

------
mgkimsal
_The same can be said for services like Yelp. Yelp might drive people to
restaurants, but it doesn’t benefit Yelp if merchants don’t attribute the new
customer to Yelp. And how would they know? It’s not like you walk in the door
and tell the restaurant owner you just located them on your iPhone via Yelp’s
app. Foursquare hasn’t solved this either, despite having 250K merchants
signed up and literally inventing the act of announcing your presence to the
world. Both are great companies solving problems, but only Groupon has closed
this attribution loop._

Hrm... maybe because most service companies that care ask how you found out
about them in the first place? Well, most should. The fact that most companies
don't try to determine that source _when they're serving you_ (restaurants,
haircuts, pet spas, printers, etc) is more an indication of really not
understanding business and marketing in the first place. Outsourcing some of
that - in this case, to groupon - may be a short term win, but you've just
handed over your customer relations to a third party who has no real incentive
to get those customers _back to you_ any time soon.

Small service businesses need a strong CRM process. I don't think groupon is
it, although it could morph in to that.

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mwbiz
So the $25B number is entirely made up then? There seems to be nothing in the
article to justify this number.

~~~
georgemcbay
One thing that _was_ in the article is this...

"The real innovation Groupon brought to the table wasn't in advertising deals
per se, it was their ability to profit off of closing the attribution loop in
online-to-offline commerce."

To paraphrase Inigo Montoya, I'm not sure that "p" word means what he thinks
it means.

------
lotusleaf1987
They have a list of some ~60,000 merchants, email addresses in the tens of
millions, no patents or 'moat', and they're trying to sell a dollar for fifty
cents and make a profit. Also, how do you scale when you have 8,000 employees?
That's a huge fixed cost. And these aren't huge barriers to entry for your
competition--Twitter/Facebook/any website with an audience can basically do
this.

I don't see how their model is sustainable and the entire premise of their
success seems wrested on Groupon succeeding at things they haven't
demonstrated yet.

Also, I see Groupon as a sales company, not a tech company.

~~~
lurker19
Salespeople are marginal costs, not fixed costs, and that is why they do not
scale. (Unless those salespeople are converting prospects into long-term
renewal sales) Engineering and design is a fixed cost.

------
rkon
Again, if this really is a 'land grab' as he claims, why did they pay out
hundreds of millions to early investors? Why not spend that money grabbing
more land? Assuming he's correct, the returns would be several times greater
if they continued investing rather than issuing huge payouts. It seems like a
huge red flag to me -- a sign that even the earliest investors see Groupon as
a big risk and want to hedge their bets.

~~~
jtbigwoo
Does anybody remember how Yahoo/Google/Ebay handled this? I know their early
investors got rich, but were they cashed out before the IPO?

~~~
btilly
For Google and EBay, they were making money hand over fist (the main problem
they had when Meg Whitman joined was opening envelopes full of cash fast
enough) and growing rapidly. Nobody wanted to cash out.

I don't know what the story was with Amazon.

