

Where Did Groupon’s Billion Dollars (Series G) Go? - jsm386
http://allthingsd.com/20110602/where-did-groupons-billion-dollars-go/

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run4yourlives
Legal Pyramid Scheme, nothing more.

The founders and early stage investors build something semi-viable, then spend
all their efforts on marketing. Some of helps to grow the product, but most to
convince bigger investors to buy them out and assume the risk.

Why on earth would investors do this, you ask? Well, because they know that
given the marketing, there will be other investors that will allow them to
exit.

Repeat until IPO, then ride the wave until the explosion. Time it right you
make a fortune.

Unfortunately, a minimum of effort goes into creating a lasting product with a
proper valuation, so the moment that most investors realize that they aren't
going to make their money back, ka-boom.

Dot bomb all over again. Groupon is not a billion dollar company.

~~~
ig1
Groupon is on target for revenues in the $4 billion region this year (it was
$2.6 billion last year).

That's more than the combined revenue of Facebook, Twitter and Linkedin last
year (which were around $2.5 billion).

Groupon is a huge revenue machine, like it or not they are clearly a billion
dollar company in an enormous untapped market.

~~~
jpastika
Revenue can be a very misleading measurement of success. I agree that $4
billion in revenue is very impressive, especially considering the rate of
Groupon's revenue growth, but overall losses and no profit plans any time
soon, leaves me disappointed. What impresses me more is a company generating
$10 million in revenue with $7 million in profit. Will Groupon eventually make
money...maybe, but I'm not sure it will happen any time soon nor with their
current business model. Groupon has two very valuable assets that I believe
will eventually be used as the reasoning for an acquisition by Amazon or
Google: 1) a large and growing list of consumers and 2) their buying habits.

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fingerprinter
When people saw Groupon, Twitter and Facebook taking those huge rounds did
everyone think they were going to invest back in the business? I'm pretty sure
most thought that founders and early investors were taking money off the
table.

Though, the degree to which Groupon did is amazing. I can't believe any
investor would have agreed to those terms. In the Groupon case as well, with
3000+ employees (which is, frankly insane), I don't know how anyone looking at
the numbers, the terms, the business and the structure would have agreed to
invest. Marketing be damned, unless someone blows this up it won't make money.

I'll never understand why they turned down $6B from Google.

~~~
akronim

        with 3000+ employees (which is, frankly insane)
    

Keep in mind that's not 3000 developers, I believe it's mostly people calling
out to set up deals, so basically a massive call centre.

~~~
alex1
Actually, they have 7,107 employees.

From the SEC S-1 filing[1]:

 _We grew from 37 employees as of June 30, 2009 to 7,107 employees as of March
31, 2011._

[1]
[http://www.sec.gov/Archives/edgar/data/1490281/0001047469110...](http://www.sec.gov/Archives/edgar/data/1490281/000104746911005613/a2203913zs-1.htm)

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pbreit
It is completely insane how much investor money went to founders and not the
company in both the G round and the previous round. How could investors agree
to that? Kudos to Mason & Co. for getting out while the going was good.

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far33d
Wow. Eric and Elizabeth Lefkosky turned a $1m angel investment (according to
crunchbase) into $380m cash in 4 years.

~~~
maxdemarzi
I remember reading a pretty nasty article about Eric Lefkosky.

"InnerWorkings goes to great lengths to obscure its ownership and control by a
chap named Eric P. Lefkofsky who has a history of busting investors after
promising to radically transform bricks-and-mortar industries. He seems to
identify with Dr. Seuss's huckster: he called his last business Starbelly.com,
a venture that rapidly went into bankruptcy and provoked fraud suits by
investors alleging that Starbelly's software was never what Lefkofsky
promised. "

[http://notablecalls1.blogspot.com/2007/01/inner-workings-
of-...](http://notablecalls1.blogspot.com/2007/01/inner-workings-of-
innerworkings.html)

~~~
alanfalcon
That huckster could have been seen as providing a public service. Or, well,
earning a fortune with the public service as a side benefit.

In other words, seems like this comparison is giving the huckster a bad rap!

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jdp23
One of the differences between now and the last dot com bubble is that these
days, founders and early stage investors get their big paybacks before the IPO
so have even more incentive to pump up unsustainable business models.

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ojbyrne
Interesting to see Jason Fried (presumably the one from 37 signals) in the
stock sale list.

~~~
staunch
Yes, it is the one from 37 signals. He was on their board now an advisor.

It looks like he already made $557,721 by selling some stock during Series G.
I think that left him with 414,690 shares worth at least $6.5 million and
probably a multiple of that by the time he can sell them. I could be reading
this incorrectly though.

He might end up making more off a dozen board meetings than 10 years of hard
work at 37 signals. It's a crazy world.

~~~
smokinn
Whatever individual 37 Signals people's actual thoughts about VCs and
valuations, don't believe that it's necessarily what they write in their blog.
Their blog is not an informal discussion medium. They make it out to to be but
it isn't. It's marketing. 37 Signals have a vested interest in creating an
enemy and drama because that brings them exposure and sales.

~~~
jasonfried
You're giving us too much credit.

~~~
smokinn
For what it's worth I think you and 37 Signals probably do believe what you
say in the blog but given how inflammatory it often is it sets of my inner
cynic constantly.

~~~
mattmanser
If you think they do believe it why make the bizarre allegation above in the
first place?

~~~
smokinn
There's a big difference between thinking something is true and thinking
something is probable.

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kanamekun
There is nothing wrong with taking money off of the table. In fact, if you
want to strike it big... it's important to make sure that your management team
is financially secure: [http://learntoduck.com/startups/it-all-changes-when-
the-foun...](http://learntoduck.com/startups/it-all-changes-when-the-founder-
drives-a-porsche)

Andrew Mason was fairly explicit that taking a recent huge round was designed
to "permanently solve the money problem":

(from the article linked below)

“For me, the reason to do this was to solve a binary life problem,” he
explained.

In life, Andrew says, “You either have enough [money] or you don’t.”

“When people came with a lot of money to buy a very small percentage of
Groupon and it was enough to permanently solve the money problem, why would I
not want to do that?

“Now I can focus on making Groupon great.”

[http://blogs.forbes.com/velocity/2010/04/19/groupon-ceo-
andr...](http://blogs.forbes.com/velocity/2010/04/19/groupon-ceo-andrew-mason-
sold-stock-to-dst-to-solve-the-money-problem/)

------
MatthewB
That's insane - a few people got very rich. Seems like they should have
invested that money back into the company if you ask me.

~~~
jamesaguilar
Depends on your goal. If I own half of a maybe-fad company that is currently
worth $1 billion, you can bet I am reducing my exposure to that and converting
a lot of my ownership to other assets if I have the chance.

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9999
Isn't this a fairly common practice? Admittedly, Groupon's enormous employee
base means they're going to burn through the remaining funds faster than an
ordinary startup. Aside from that, this doesn't seem all that outrageous, at
least not outrageous enough for the overall level of indignation in the
comments here (accusations of it being a pyramid scheme, etc.).

~~~
_delirium
I don't think it's that common for equity to be massively cashed out (to the
tune of nearly $1b) _before_ the IPO. Shows a pretty strong lack of confidence
in not only the long-term viability of the business, but even its medium-term
viability, or else the principals would be content with the normal practice of
slowly cashing out with steady monthly post-IPO stock sales. As far as I can
find, Google principals didn't significantly cash out before their IPO.

~~~
jwhite
That's certainly why I'm surprised about it. Don't transactions of this size
have to be okayed by the board of directors? And by series G shouldn't the
original founders and early investors be diluted out of board control? Perhaps
Groupon is special, I'm not familiar with these things.

------
CyberFonic
Agreed it looks totally bat shit insane!

BUT ... other than those who directly benefit, who else would invest in
something that might never pay a decent return on investment ???? To me it
looks like throwing piles of $100 notes on a bonfire, nice flames, lovely
crinkling sound.

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revorad
Contrast this with what a bootstrapped business does with all its money:

 _After the inventory sold, it was a matter of repeating the process. “You
take all the money you make and buy more inventory with it,” Seidle says. “You
continue to do this until either you have enough inventory to cover the number
of incoming orders or you want to eat. I think it was more than 3 years before
I was able to buy a new winter jacket. A growing, bootstrapped business is a
cash devouring machine.”_

From the Sparkfun founder Nathan Seidle's interview -
[http://37signals.com/svn/posts/2896-bootstrapped-
profitable-...](http://37signals.com/svn/posts/2896-bootstrapped-profitable-
proud-sparkfun-/)

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marcamillion
Kinda insane how much Mason seems to being shafted on this one.

He got 10M from the 950M raised. That just seems wrong. Lefkowsky & his wife
got at least $310M.

Wow....talk about being shafted.

~~~
fido
He didn't get shafted; he still owns a very significant portion of the
business. He simply didn't take as much out with this round as others may
have. He will have his payday, and it will make these others seem like chump
change...

~~~
rokhayakebe
How much does Mason own?

~~~
shashashasha
According to this NYTimes article, about 7.7% of the Class A shares and 40% of
the Class B shares: [http://dealbook.nytimes.com/2011/06/02/groupon-c-e-o-to-
make...](http://dealbook.nytimes.com/2011/06/02/groupon-c-e-o-to-
make-575-in-2011/)

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hessenwolf
"Co-founders Eric P. Lefkofsky, Bradley Keywell and Andrew Mason will control
the company even if their ownership stake in Groupon drops below 50%"

Why the hell would I buy into the company and still not own it?

~~~
stewiecat
Google has the same thing. Larry, Sergey, Eric all have shares that carry 10x
the votes of regular Class A shares so they can still exercise control if
their holdings fall below 50%.

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ariels
Makes me sad that insiders cashed out instead of focusing on building the
business.

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theklub
I remember when hacker news had useful information. Its all gossip now.

~~~
ChuckMcM
Except this isn't 'gossip' this is an analysis of the S-1 filing. And a
commentary on the sad state of hucksterism in the technology community.

I like GroupOn's concept but I share the sentiment that some of the folks in
the inner circle are taking advantage.

~~~
InfinityX0
Somewhat counter to the original comment in this thread's tone, this was an
interesting piece in that the OP revealed little to me, but the comment thread
was the most informative thing I've read here in weeks. Incredibly valuable.

