
Groupon is Effectively Insolvent - colinprince
http://m.minyanville.com/?guid=34936&catid=4
======
pkaler
The word "effectively" in the title is a weasel word.

Groupon is balance sheet insolvent by definition. Their liabilities are
greater than assets.

Groupon is cash flow solvent by definition. They are able to pay liabilities
NET60.

In Q2-Q4 2010, Groupon had $669mm with a net loss of $398mm. That is a ratio
of about -0.59. In Q1 2011, Groupon had revenue of $644mm with a net loss of
$102mm. That is a ratio of about -0.16.

If you are long Groupon, then you are betting that -0.16 approaches zero and
then turns positive.

The moral of the story is: haters gonna hate.

------
Cherian_Abraham
I found this link ([http://allthingsd.com/20110602/where-did-groupons-billion-
do...](http://allthingsd.com/20110602/where-did-groupons-billion-dollars-go/))
to be a scathing indictment of Groupon, to the level where it could attract
the label "Ponzi Scheme" or the less harsh "Very bad Investment choice".

Seeing that the lion share of the two recent funding rounds were used to pay
back investors, leaving very little on the table to fund their growh (this is
when they are bleeding over 100 million per quarter) sounds unbelievably
stupid or criminally insane.

Its one for the history books boys!

~~~
jpadvo
This was a purchase: the investors _bought part of the company._ When they
signed over a billion dollars, they were not trying to fund operations; they
wanted to become part owners. They know that the vast bulk of the money would
go straight to earlier employees and investors.

This was a risky investment, yes. But it is neither unbelievably stupid nor
criminally insane to make a risky investment. High risk investments can be
quite at home in a well developed portfolio.

Now, if Groupon deceived the investors about where the money was going, that
would quite possibly be a criminal act. Literally. But that almost certainly
didn't happen, or we'd be hearing about it.

~~~
Cherian_Abraham
I cant agree with that. When I invest, I have some expectations as to how that
money should be invested, and for a company that is in desperate need of cash
inflow to sustain its growth, thats where it should go. Period. Not to the
coffers of early investors and employees. No one has any problem with them
cashing out a part of their equity. This however (almost 400 million went to
an early investor couple!) was a careless and completely selfish act to line
one's pockets.

And now, they are ready for the next round, and only this time, its the public
who stand to get scammed.

~~~
michael_dorfman
_When I invest, I have some expectations as to how that money should be
invested_

More than that, you have a prospectus (or term sheet) that will specify those
kinds of things. In this case, the Series G investors knew exactly where the
money was going, and they were ok with that.

As for the public getting scammed, the SEC has a metric buttload of
regulations aimed at seeing that that doesn't happen.

~~~
Cherian_Abraham
I am not worried about the Investors who led the G round being scammed out of
anything. They knew what they were getting in to. I was pointing out how
irresponsible this move was, on the part of the Groupon team to allow this to
happen. One one side, you have a company bleeding money aching for growth and
spending over 200 million just in Ads and over 320 million in salaries to
their 8000 sales staff. And you choose to cash out instead of plowing it in to
maybe eking out a better profit margin than last year? They are not even
trying, for Christ's sake!

And I dont have to look that far back to see how effective the SEC has been,
with their metric ton buttload of regulations. You dont live in the US, do
you?

------
wccrawford
They're trading that temporary debt for hypergrowth, as the article says.

"For the remainder of the year they had $669 million in revenue (simply
staggering), but had a net loss attributable to Groupon of $398 million. This
year, Q1 results showed revenue growth continuing to soar, with revenues of
$644 million, but a net loss attributable to Groupon of $102 million."

So the time periods were different, but the revenues were the same. They went
from losing $400mil to only losing $100mil... That sounds to me like they are
getting close to being profitable again... And in a very short timeframe.

As for it being like a Ponzi scheme, it's not. Ponzi relied on lying to the
investors and telling them the money came from good investments. It wasn't
sustainable, and nothing could fix it. Groupon is sustainable and hasn't lied
(that I know of) to their investors, new or old. It doesn't even need fixing
as it looks like it's already on the fast-track to profit, based on the
numbers provided.

~~~
3am
I'm glad you said this. I gave up on a reply yesterday to the initial story
for lack of time, but basically it said "anyone that thinks that Groupon is
like a Ponzi scheme doesn't understand how a Ponzi scheme works".

You can say all you want about their lack of differentiation from competitors,
there huge debt levels, their dicey use of the series G funding, and what
appears to be a poorly scaling business model.

You can intend to short them, sell puts.... whatever. But stop calling them a
Ponzi scheme. It's an insult to them, it's hyperbolic, and it's ignorant.

~~~
bcrescimanno
I disagree. The heart of a ponzi scheme is continually securing new
investments to pay out earlier investors--which is exactly how Groupon has
operated up to this point. They're not alone in this concept; it's becoming
increasingly common in the tech industry.

The only argument to say that they're not a ponzi scheme is that there's
_actually_ a legitimate business with revenue associated with it. It's a
somewhat compelling argument--but I'd personally contend that the business, in
this case, has really been nothing more than a front for the scheme (at least,
historically speaking--though unlikely, Groupon may yet prove out to become a
profitable business). No one has made a dime of profit off of the business
that is Groupon--yet several early investors and the founder have made an
absolute killing based on the "ponzi" side of things.

Dress it up however you want, people have made money hand-over-fist operating
a de facto ponzi scheme; having a "real" business along with it has shielded
them from the ire of the law.

~~~
3am
"The only argument to say that they're not a ponzi scheme is that there's
actually a legitimate business with revenue associated with it."

That isn't a minor point. There is a big different between stupid investors
with full information and a Ponzi scheme. It is not an abstract argument. The
first is common, the second will land you in prison.

~~~
bcrescimanno
If the purpose of a business is to generate profit for its owners (investors),
then the only business Groupon has successfully operated to this point has
been a ponzi scheme.

Just because it's common doesn't mean it's not a ponzi scheme. It's just a
ponzi scheme in a pretty dress. I'd be willing to go further and say it's just
as bad because if you read their S1 and their made up accounting "principles,"
they're actually attempting to deliberately mislead people into thinking the
business is in a much better state than it really is.

Again, it may be possible to transform Groupon into a legitimate business
going forward; however, to this point, it's been anything but that.

~~~
rayiner
You're basically saying that any business that doesn't generate profits from
day 1 is a ponzi scheme. This is a ridiculous position to take.

~~~
bcrescimanno
Really? That's what you concluded from reading my comments? I'm almost tempted
to call "troll" and not respond; but against my better judgment, I'll bite.

Any business that does not generate profit is NOT a ponzi scheme and I did not
even begin to imply that was the case. Any business which pays out dividends
to their investors based ONLY on money secured from later investors is
operating a de facto ponzi scheme.

[edit] It's fine for early business to operate at a loss; it's not ok for an
early business to funnel money to early investors while still operating at a
loss.

------
Macsenour
Don't roll your eyes, but this is exactly what Reagan did to the Russians.
Basically, spend more and faster than the other guy until he cries uncle.

Groupon is raising money, spending like crazy to be the top dog. When the
other "coupon" companies can't keep up, Groupon will buy them, retaining their
#1 position. Once all of the others are gone or reduced to a tiny size,
they'll go back to a sustainable model. This explains why they have a focus on
hyper growth.

What do you think?

~~~
petercooper
Perhaps. It took Amazon 6 years to turn a profit, and a mere $5m on $1bn
revenue at that.

~~~
spullara
Totally true. At least one year in there it looks like they lost almost $1.5B:
[http://www.wolframalpha.com/input/?i=amazon+profit+from+1994...](http://www.wolframalpha.com/input/?i=amazon+profit+from+1994+to+2010)

------
tzs
To save people having to fight with that sites asshole design, here's the
text:

I'll start by tipping my hat to Andrew Mason. He caught social mood just
right, creating a coupon/local/flashmob hybrid business model at the perfect
time, and has created the fastest-growing company on a revenue basis in
American history. That being said, it's operating like a Ponzi scheme that
needs constant infusions of cash to stay afloat as it's hemorrhaging money.

We'll start by looking at the balance sheet, which is typically a waste of
time for hypergrowth companies. However, for Groupon there are all kinds of
red flags. They have $290 million in current assets ($208 million in cash) and
$520 million in current liabilities -- current assets minus current
liabilities puts them $230 million in the hole. This wouldn't be a problem
except for the fact that they're wildly unprofitable, which we'll get to in a
moment. 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. Not exactly the best merchant
experience. Oh, and by comparison, LinkedIn (LNKD) has current assets well in
excess of current liabilities, and isn't losing money.

The income statement is even worse. In Q1 of last year they had net income of
$8.5 million on $44.2 million in revenue, for a profit margin of nearly 20%.
Not bad! At some point around that time, they decided to abandon a profitable
growth strategy and went for the hypergrowth revenue strategy. For the
remainder of the year they had $669 million in revenue (simply staggering),
but had a net loss attributable to Groupon of $398 million. This year, Q1
results showed revenue growth continuing to soar, with revenues of $644
million, but a net loss attributable to Groupon of $102 million.

They lost $49 million in Q3, $313 million in Q4, and $102 million in Q1, with
revenue leaping from $185 million to $396 million to $644 million, so it's
incredibly difficult to have any idea what Q2 will look like let alone what
the business will look like 6-12 months from now. That being said, the most
likely reason why they're going public now is because they desperately need
the cash, plain and simple.

There are all kinds of questions about the business. How can they possibly
sustain this kind of revenue growth? Can they get costs under control? What
about merchant and customer fatigue? How about deep-pocketed and savvy
competition, either doing exactly what they're doing (LivingSocial) or coming
to the table with a ton of customer data, i.e., Facebook and Google (GOOG)?
The Daily Deal I got offered today was for a restaurant 30 miles away: how
does that make sense either for the customer or merchant? How can you possible
build a sustainable business by going from 0 to 8,000 employees in two years?
Why did the COO and CTO both leave the company in late March, barely two
months ago? How do you value a business that could do $3 billion in revenue
this year but might not be able to keep the lights on in 12 months?

Most concerning of all, however, might be how their most recent capital raises
have been handled. Their Series F and G capital raises, which occurred in
April and December of 2010, raised a combined $1.08 billion. Of that $1.08
billion, $150 million went to the company for working capital purposes. The
other $930 million? Paid back to founders and early backers by buying their
shares from them.

So a company that owes $230 million more than it has, and appears to be
burning through $100 million or more a quarter, is using money raised from
later investors to pay back early investors? Sounds vaguely familiar. I'm not
accusing Groupon of doing anything illegal or unethical. Ponzi, Enron, and
Madoff all swindled their investors by misleading them about the financial
health of their enterprises. As Minyanville's Todd Harrison likes to say, "The
only difference between intervention and manipulation is communication."
Groupon is telling you exactly what they are in their filing forms and by
their actions. Invest at your own risk.

~~~
narrator
What is it with everything being described as a Ponzi scheme these days?
Groupon, Bitcoin, Subprime MBSs, Social Security, etc.

~~~
anonymoushn
At least 2 of those things are actually Ponzi schemes, sir.

I'm not sure what an unknown lady or gentleman thinks is wrong with this, but
I wish he or she would tell me. These things (subprime MBS and Social
Security) are Ponzi schemes in the sense that they are paying out more to
participants than the participants put in, and not providing anything of value
or performing any investment by which to make that process sustainable. In the
case of subprime MBS this action is obscured by the fact that some
participants have collected "promises" on the parts of borrowers who cannot
possibly meet their obligations. Social Security is much more straightforward,
however.

~~~
guelo
Calling Social Security a ponzy scheme is just partisan propaganda. Since 1983
workers have been putting in way more than is being paid out in anticipation
of the retiring baby boomers. The trust fund is invested in Treasury
securities backed by the full faith and credit of United States, some of the
safest investment in the world unless Republicans manage to raid the fund to
finance more tax cuts for the rich.

~~~
OstiaAntica
The SS surplus was spent by Congress, and replaced with non-marketable IOUs
managed by Treasury (not securities!), literally kept in a file cabinet in
West Virginia. There are no assets in the "trust fund" and there is no legal
requirement for the government to pay anything on its Social Security
promises.

~~~
chopsueyar
Do you have a link for the West Virginia portion of your comment?

------
seanc
"Listen, here's the thing. If you can't spot the sucker in the first half hour
at the table, then you are the sucker." - Rounders

------
code_duck
So, after they stop investing in expansion and reach a stable level, what is
the realistic value of Groupon? Or does nobody really know enough to
speculate?

~~~
ChuckMcM
Well Amazon is a high volume relatively low margin business which is valued at
a bit over two times revenue. So if they stablize out at a revenue of $4 -
$6B/yr it might make sense to value them at $8 - $12B.

~~~
chopsueyar
What with all of Groupon's intellectual property, infrastructure, and
goodwill?

------
philipkimmey
I was very young during the dot com boom, but this sounds awfully familiar.
Someone (PG?) described the approach of the era as burning investment to
create revenue, profits be damned, then looking for a huge IPO.

Presumably Groupon has actual plans for becoming profitable, but big IPOs of
companies with dubious fundamentals does sound like a description of a bubble
to me. (Linkedin's stock was briefly over $100 - crazy!)

------
MarkMc
The balance sheet my not give an accurate picture of the value of a business.

Google was willing to pay $6 billion more than the book value of the business.
Google aren't that stupid - I'm guessing that Groupon owns billions of dollars
worth of intangible assets which are not listed on their balance sheet. (The
biggest such asset is probably their email list).

------
chailatte
I doubt Groupon will bankrupt any of hacker news readers' portfolio; I bet
most of them are licking their chops to short this thing (just like they are
shorting LinkedIn).

Effectively, all these IPO/overvaluation bubbles are meant to steal from
(mostly public) pensions of older investors. So the next time you see your
uncle or grandpa, buy them a nice bottle of wine! They're paying for your
startup (while losing their retirement money), don't you know.

~~~
dustingetz
quoted from [http://shortlogic.tumblr.com/post/5834390772/right-now-
our-d...](http://shortlogic.tumblr.com/post/5834390772/right-now-our-desk-is-
seeing-something-theyve):

"Right now our desk is seeing something they’ve never seen before. It
currently costs roughly 100% annualized to short LNKD. So put in monthly
terms, if you borrowed $20,000 of LNKD to short, each month you would have to
pay an 8.3% borrowing charge (100% / 12 months = 8.3%) or $1667 per month.
That is absolutely unreal.

Of course this charge amount can change, and it probably would decline if/when
LNKD becomes easier to borrow. But right now is virtually impossible to
borrow, so the charge is off the charts."

~~~
mynameishere
There are no shares to borrow that I can find. The options are so expensive
I'm tempted to buy some shares. You can make 4 percent writing june calls (15
days). Annualize that.

~~~
kwantam
You probably want something to hedge your long position while you write calls
against it, though, or at least limit the downside a bit. After all, you're
betting that the stock will go down.

Go long, buy some out of money puts, and write calls against your long
position, hoping that you get to write enough calls that the cost of the puts
is covered?

------
NY_USA_Hacker
For possibly the most serious concern about GroupOn, the article came close
with its statement:

"The Daily Deal I got offered today was for a restaurant 30 miles away: how
does that make sense either for the customer or merchant?"

but still did not score the points:

The statement is a starkly clear illustration of a big, HUGE fact about
GroupOn's business:

It's heavily just a LOCAL business.

So, even if they are in Chicago, New York City, San Francisco, and parts of
Argentina and Australia doesn't cut much ice in Podunk. Instead, to make it in
Podunk, they just have to be the best in Podunk, and the rest is irrelevant.

For the best 'coupons' in Podunk, customers and merchants in Podunk can go to
a GroupOn competitor in Podunk who can be someone on the bank board and the
school board, a former mayor, and known very well to all the merchants and
most of the customers. This competitor in Podunk can be trusted in Podunk much
more than GroupOn by both the merchants and the customers and, thus, get more
deals and revenue, can have much lower overhead per dollar of revenue, and can
undercut the GroupOn prices.

Such a local competitor has close to a 'geographic natural monopoly': In
Podunk, the local guy can sign up several leading merchants just because they
know him and trust him (and maybe invest with him); then he can get a lot of
local customers signed up because he is well known and has the leading local
merchants signed up. Then the rest of the merchants sign up not to get left
behind. Then all the customers sign up because all the merchants did. Then all
the merchants keep offering deals because all the customers are signed up. And
there is no competition more than 60 miles away.

E.g., maybe the guy in Podunk also runs the popular local shopping center
based on much the same mechanism of a 'geographic local monopoly'.

A Web site for the Podunk competitor? If that is a problem, then HN developers
listen up: Develop a suitable general purpose Web site and lease it to the
competitors in each of Podunk, Peoria, Poughkeepsie, Pleasantville, etc.

For the guy in Podunk, maybe there is another little town, Parsonville, 15
miles away: Okay, the guy in Podunk can use his success to expand to
Parsonville.

More generally, if there are competitors in other surrounding towns, then he
can, one town at a time, use his earnings from his natural monopolies in
Podunk, Parsonville, etc. to undercut the prices in these other towns, buy out
the competitors, raise prices, and repeat. Relevant terminology includes
'predatory marketing practices' and 'roll-up'.

I don't see how GroupOn can be successful for long with their current business
model.

~~~
chopsueyar
I am in complete agreemnet with you.

All of these giant companies trying to serve individuals at the local level
seems a bit complex.

A franchise model for a local operator would be a win-win situation.

The franchisee doesn't have to worry about servers or infrastructure, only
sales and marketing.

I feel this web franchise model can be applied to many online "social"
business models.

~~~
NY_USA_Hacker
E.g., romantic matchmaking? When looking for a mate in Podunk, it's not much
help for the service also to be in Australia! It would be a rare, very 'long'
man who could make good use of that service feature!

