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Try to digest the Groupon story (shortlogic.tumblr.com)
372 points by jagira on June 3, 2011 | hide | past | web | favorite | 165 comments



Everyone remembers the Pets.com IPO for example, but no one remembers that it was Merrill Lynch that underwrote it and made most of the profit on the deal.

The problem is the market and VC environment that allows things like these to go down, not that there are unprofitable companies. Those have always existed. But there was a time when people didn't buy into them because they were unprofitable. The way things work now is just wrong and dangerous. But it's been 10+ years since the last dotcom bust, so I guess people will be people and start falling for it again. A fool and his money and all that.


If you weren't around for the last dot-com bubble burst here's the simplest explanation for what happened then and what seems to be happening now:

Pump and dump.


I agree. I can't see any investor with half a brain buying any company with a P/E of 2,147 (LinkedIn)


I can see an investor with half a brain buying a company with a P/E of 2147 - heck, some newer companies with lots of potential have negative P/E. What you need to make up for it is a really nice growth story.

Now, LinkedIn has an okay growth story, don't get me wrong. The problem is it's just not good enough. Let's do some back-of-the-envelope comparisons. Consider a relatively low-risk investment: an intermediate-term corporate bond fund. You can get about 4% yield these days. At the current market cap of $7.4 billion, that's earnings of roughly $300 million a year. That's roughly in line with LinkedIn's revenue, but they also need to pay for things like engineers and server farms.

In other words, you're going to need a heck of an earnings growth story just to break even against a safe investment - and LinkedIn is nowhere near as safe as a corporate bond fund.


That's why I prefer to look at PEG instead of P/E. It shows you the price-to-earnings relative to the earnings growth. Quite handy.


It's always a big red flashing warning sign to me when investors who've stood by a company from the beginning take a major cash-out _before_ an IPO. Nobody can argue they didn't know an IPO was coming soon.

If you don't believe you'll make more money from an IPO than a private investment, then what does that say about your faith in the company's future profitability?


In case anyone didn't notice, this blog post is by DHH.


That's interesting given that Jason Fried (his partner at 37signals) was a board member of Groupon and is now an advisor to the company.


According to the payout statements Jason was also one of the folks who took money out in the last funding round to the tune of 500k (which seems like a pittance all things considered).


I wonder how much of a ding this will make in his credibility among bootstrapped entrepreneurs in general. It's hard to talk down something and have your thumb in the pie at the same time.


Some facts here before things get a bit out of control:

The S-1 speaks for itself.

Back in mid-late 2009 Andrew Mason asked me to be on the Groupon board of directors. He wanted my opinions and advice on product development, design, copywriting, software development, and user experience. Andrew (and Brad and Eric) know where I stand on building bootstrapped, profitable businesses. I still stand there. I wasn't asked to be on the board to give them financial advice.

I agreed to be on the board. I like Andrew a lot and I was very happy to help him. I had never been on a board before so I saw it as a great learning experience for me as well.

Groupon compensated me for my involvement with options.

A few months ago when Groupon took a big round, I was asked if I would like to sell some of my shares. I said yes. That sale is listed in the S-1. I still have more shares. I don't see any problem morally or ethically with selling shares that I was granted as part of my involvement with the board. I owned something, someone offered to buy it, and I sold it.

I was asked to leave the board of directors in January of 2011. I serve as an advisor now. Whenever Andrew asks me for product, design, or writing advice, I'm happy to help.

I've never invested my own money in Groupon or any other private company. It's not that I wouldn't invest in a private company, it's that I haven't.

Those are the simple facts.

As for my credibility, I don't see how any of this is relevant. You can make up your own mind about that. I believe today what I've always believed - net profits rule, bootstrapping is the way to start a business, and spending less than you earn is the only way to have a healthy relationship with money.

As for DHH's opinions, they are his own. I may or may not share them, but we're both grown ups and we respect each other no matter what.


Hi; I don't know you or Mr. Mason, and wasn't intending to imply that you were doing anything immoral or unethical. Hell, if I had the opportunities and circumstances that Mr. Mason has (for example), I might chart the same path.

I was just speculating that these developments may have a nonzero impact on your brand, PR, image, etc. You've talked a lot about the 'bootstrap vs. VC' topic; insofar as people perceive that topic to be dichotomous and you as being "all-in" on one side of it, any involvement with the other side may create some cognitive dissonance.

Maybe I shouldn't speculate about people's personal brands and such (something I can't say I do often anyway), just so I don't rouse any sleeping bears, as it were. :-)


Did you ever feel compelled to voice your opinion after you saw the data that indicated Groupon was spending more than they earned? Why did they ask you to leave the board?

Thanks for sharing what you have. It's been said before, but I'll say it again: HN is a remarkable place when intelligent people are having open conversations about the news that directly involves their own business.


I was never shy about my opinion. A good board is made up of people with differing opinions. The worst boards are made up of rubber stamps.

And of course a board is made up of people with different strengths and experiences. My experience is not in massive growth, rapid growth, acquisitions, companies with thousands of people, etc. There were and are people on the board that are very experienced in those matters.

My experience is in product design and development. My advice on those matters was my main contribution to the board and the company. I continue to advise, when asked, on product design.


>I continue to advise, when asked, on product design.

How often is that?


Jason, since you are here - may be its a good idea to tell the crowd why you decided to sell some of your shares of Groupon,

as some papers seem to indicate


That's Jason's business and not yours. I can't even believe such a thing needs to be verbalized. You're coming across like a tabloid journalist. Essentially you're trying to manufacture a controversy here out of an OpEd that: (1) Jason's business partner wrote on his own private time and (2) hasn't been endorsed by Jason's company.

As if business partners can't have differing opinions about the business practices of other companies. If Jason's and DHH's opinions are indeed different, which I'm not convinced they are. Sheesh.


Why would that matter? He was asked, and he said yes. These were options paid to him for his involvement on the board, not money invested by him.

If you did some work for someone, and they paid you with stock instead of cash, wouldn't you feel like converting that to cash the first chance you get?


NO. if i would have a successful company like 37signals and enough money - i would keep the additional startups as long as possible, since there is not much to loose

especially would keep the shares of the "hottest" and "fastest growing" startup groupon


What if he needed the liquidity?

There are all sorts of reasons to sell stock at a particular time that have nothing to do with cashing out on a company one believes will flame out.


he could have other startups to cash out on then , instead of groupon,


sounds like you're just a hater.


Hi Jason,

I cannot wonder thinking..if you were a board member, you had a duty of care to know all affairs of the company (within reason), especially under good corporate governance. If as DHH is implying that Groupon is misleading potential investors with CSOI (ok, they may have used this metric after you left - but I am just trying to make a point here), and if you believed this is incorrect, then you would still have a duty to point out as a board member, even if your responsibility is purely on product design. I thought this is how it works on large boards. Is this not the case in the USA?

I have made the assumption here that if DHH saw it, so would you! Of course, I could be completely wrong with this assumption.

I have only been on the board of small companies, so do not have any experience of how large companies split responsibilities.

Would be interesting to know your thoughts on this subject - this is not meant as a complain of any sort, just trying to understand how large corporates behaves with corporate governance.


I believe today what I've always believed - net profits rule, bootstrapping is the way to start a business, and spending less than you earn is the only way to have a healthy relationship with money.

Don't you also have a rule about not growing beyond a certain number of employees?


No we don't have a rule about not growing beyond a certain number of employees. We believe in keeping things as small as possible. Currently for us that's a bit under 30, but if as small as possible means 40, then we'll be at 40. We are opposed to hiring more people than we need.


Need to do what? I've never quite understood 37sig's vision besides being comfortable and profitable (and I assume I'm not the only one).


Need to run the business, design and develop our existing and future products, maintain and improve our infrastructure, and serve our customers at the highest standards we're capable of.

Plus balance all that with maintaining the type of culture and environment we all want to work in, for, and towards.

For us it's about balance. Rapid growth is not balance. Not having enough people to serve our customers is not balance. Not improving our products frequently enough is not balance.

Balance is a moving target. Sometimes we're in better balance than other times. But the goal there is to try to strike the right balance as often as possible.

I hope that helps shed a bit more light on what we need to do. Have a nice weekend.


What does this have to do with Groupon's valuation? It seems like Jason got baited into setting the record straight on his involvement with Groupon and is now being chased around the thread about 37signals. 37signals and Groupon are, obviously, very different businesses.


Jason is a pop icon in the tech world and was obviously asked to be on the Groupon board because of his work w/ 37sig and Rework, etc. I think asking questions on whether his corporate philosophy is consistent with his recent actions is totally on point, although certainly there is no obligation on his part to answer them.

Also, from the back of Jason's book, "Pick a fight." That's actually what this whole thread is about. DHH has been on a campaign to pick a fight with what he considers overvalued companies.


If you're interested in how Fried contributed to Groupon's operational management strategy, you should ask questions about Groupon. Unfortunately, the answers to those questions will probably be boring, because he just said that was never his role.

If you're interested in how 37signals is operated, you should start a separate thread about 37signals.

Groupon and 37signals are very interesting contrasting Chicago tech companies and would make an excellent comparative study, but Fried's involvement with both companies doesn't really set up the "consistency" narrative you're (maybe inadvertently) creating.


I'm not asking him questions about how he manages, I'm asking him what his philosophy is. Very different. 37signals has often been seen as being on the anti-large company bandwagon, and obviously Jason and DHH co-wrote a book together called Rework in which they share all of their wisdom, including things like "You don’t need to staff up."

Jason responded that his philosophy is "balance." That's all well and good, but is that consistent with his involvement in Groupon? That's how this originally came up.

Certainly he has been very gracious to respond at all, and I think he's convinced me (and hopefully others) that there is no necessary inconsistency in preferring balance for one's own company and rapid growth for another -- or simply acknowledging that even if one doesn't gel with another philosophy on rapid growth that one can still provide valuable advice on design, etc.

Is that consistent with his philosophy as stated in Rework? I'm still not sure...


I agree that it was gracious for him to respond, which is why I'm skeeved out by the "consistency" questions. The line between benign question and passive-aggressive accusation is 1 px solid #fefefe.

And I have a thing about us accidentally chasing primary actors in the tech community off of HN by acting like... you know... us.


Totally understand. It's hard not to pick a fight with people (DHH and Fried both) who stand by a "pick a fight" mantra -- but I'm trying my hardest to be nice regardless! I swear!


I agree…and I assure you I was solidly on the left side of that line. Thus, my best attempts at a "hey — peace, man" impression.


as some papers seem to indicate - the guy sold some part of his Groupon shares during or before IPO,

so it fits his filosphy well - seems like he wants to get out of it slowly and profitably ..


Maybe I'm just not understanding something here, but aren't people on the boards of directors of companies supposed to be committed to the success of that company, not simply providing advice? Sounds like you were never very committed.


Of course I want them to succeed - that's why I offered to help them with product design. I wouldn't spend my time helping someone if I didn't want them to succeed.


I didn't say you didn't want them to succeed, I said it doesn't seem like you were very committed to seeing them succeed. Those are two very different things. I want all sorts of things to succeed that I am not committed to at all.


Please stop trolling. I want HN to remain a place where influential people come and talk about the story behind the story. Having an inquisition about inconsequential aspects of Jason's board membership doesn't help that.

It sounds like Jason helped the company with the things he was best at (product design) and didn't have much involvement with every other aspect. His not wanting to be involved in every aspect may be part of the reason he became an advisor eventually.


The bigger concern is why you'd choose to get involved with the Lightbank guys knowing their record in Chicago. They led past companies to bankruptcy. They pumped up InnerWorkings and watched its value tank after enriching themselves. It's just disappointing that you'd let them use your good name to build value in another underperforming company.


"I wasn't asked to be on the board to give them financial advice."

thats a deep sentence


> As for DHH's opinions, they are his own. I may or may not share them, but we're both grown ups and we respect each other no matter what.

I've got some bad news for you, friend.


As long as DHH was not part of the GroupOn advisory panel, he is free to air his opinion. Also based on his tweets, he was expecting them to show a profit but was shocked to find that they were losing money. It's fine to change your opinion based on the hard numbers.


I was talking about Mr. Fried, not @dhh.


But then these opinions are by DHH and not Fried. And based on what I know about DHH from his online persona, I don't think he will not air his opinions just because Jason was part of advisory panel of a company.


I didn't say DHH should or should not do anything. I was (perhaps too obliquely) thinking aloud about how the image of Mr. Fried (esp. re: VC vs. bootstrapping) meshes with his work with Groupon and their strategies, totally unrelated to whatever opinions or remarks either he or DHH make about Groupon.


My opinions remain the same. I'm for bootstrapping, slow and steady growth, keeping your company as small as possible. Every day that goes by reinforces my belief in those basic ideas.

None of that means I can't help someone who runs a company with a different model. I don't see how the two are related. I run my company one way, other people run their companies their way. If someone I respect asks for my help, and I want to help them, and I'm able to help them, I'll help them.

I get hundreds of emails a year from people who ask for my help. I help as many as I reasonably can. Sometimes it's an email. Sometimes it's a phone call. Sometimes it's office hours. Sometimes it's giving a talk or giving my feedback on their products, companies, or designs.

The Groupon experience was a very unique experience. I've never been presented with an experience like that before, so I got involved. It was a fantastic learning experience for me. I continue to help when asked. I wish everyone there nothing but the best.

My approach, in general, is to learn about what I don't understand before rejecting what I don't understand. I don't always live up to that ideal, but I try.


All that seems great. I'll pick one nit before walking away from this steaming heap I've apparently provoked:

> I don't see how the two are related.

The simplest of affiliations can be taken by many as endorsement. That's only a problem (or, a "problem") if one's public persona is an asset and there's a perception of conflict or contradiction.

Anyway, I unfortunately speculated in abstract terms publicly, instead of saving it for the coffee shop. I apologize for any resulting grief.


its not a shock though.. as I understand it Groupon wants to eliminate competition by making it so costly to get customers that others give up ti than can address rest of the inefficiencies and make profits at a slower revenue growth rate.


Jason mentioned that he didn't agree with everything Groupon was doing. Besides, I see 37signals as just favoring bootstrapping and not some hardcore anti venture capital crusaders.


I didn't see that at first or second glance, but that does explain why this blog post reads like DHH's Twitter feed from yesterday. ;)


no obvious rss feed for it, but if you look at the source, you can see that http://shortlogic.tumblr.com/rss will work, only 29 subscribers so far according to google reader, probably partially because it's a PITA to find the link


I was wondering about that myself, I was thinking wow, this guy is really channeling dhh from yesterday.


Pardon my ignorance but how often do insiders get their stakes cashed out after funding rounds like this, as opposed to using the money for operations or growing the business?

My lack of knowledge about corporate finance and the part of that blog post that refers to cashouts is making me see Groupon as more of a DrKoop.com or Webvan than it may be. But nevertheless I can't see how struturing a funding deal like that benefits anyone other than the insiders who got in early enough?


As others have noted, it's become much more common. Partly because IPOs have become so uncommon, and the majority of large investments are private equity rather than public offerings. If they have no hope of a near-term IPO (because there was no IPO market for a while), founders can get frustrated locking up their time, effort, money, etc. into a company and start looking for acquisitions. If the investors don't want to see an early acquisition, and want the company to keep growing, the founders and investors may agree on an exit, or partial cash-out, for the founders that allows the company to keep growing.

It's not much different from the IPOs during the dotcom bubble: It makes the founders rich, and possibly pays off early investors, and transfers more ownership to the buyer (in the IPO case, the public is the buyer, in the private equity case, it is a VC or investment bank or conglomerate of the former).

In this case, it confirms for me that Groupon was built to flip. If it accidentally becomes a profitable company that lasts, I'll probably be as surprised as the founders (who, as you note, have already mostly cashed out; sure, they'll make more from the IPO, because I'm sure they still have some stock, but they locked in winnings already, and are mostly gambling with other peoples money from now on).


I find that groupon using most of its funding from last round to payout people questionable.

I can understand founders wanting to cash out a portion of their equity before going public. However, when you are raising money say 10 million to fund growth etc, what % is considered reasonable to pay founders before it raises red flags to investors?


"In this case, it confirms for me that Groupon was built to flip"

If it was built to flip wouldn't they have accepted Google's offer?


The founders would have accepted Google's offer, absent that cash-out. The investors behind them gave them a no-lose way to continue growing, while still cashing out and becoming pretty damned rich.


The IPO makes investors very, very, very rich. The Groupon executives have built something that is going to make the investors and the bankers very, very, very rich. Why shouldn't they be rewarded for creating all this value?

I am not being sarcastic. That's how business works: If I can make you a lot of money, you need to share some of that with me, or I'll go make someone else a lot of money.

The Groupon deal is a business built to flip to the public. The structure benefits the insiders, but it benefits the VCs who cashed them out invested in the last round even more, and it will benefit the bankers. And that's why they can get away with getting rich right away: Because they're making a lot of other people rich.


Making some people very rich is not the same thing as creating value.

If Groupon investors get rich at the expense of retail investors, that's bad. If the Groupon founders get rich at the expense of retail investors and later venture investors, that's also bad. In fact it's worse, because they have more information about the business than the investors do. The closer you are to the center of the business, the more you are implicated if it turns out to be a giant pump-and-dump scheme. The founders are the rotten core of that scheme.


I disagree that the founders somehow have a higher and nobler responsibility to retail investors than VCs. The VCs are the professionals, they sit on the board and direct its activities.

These ideas about the difference between management and bankers made sense when IBM or US Steel went to the public markets to raise money in the old days, but where Tech Startups are concerned I am skeptical that founders are pulling the wool over the VC's eyes.

But I suspect we're quibbling over who gets the lion's share of the tar and feathers :-)

UPDATE: But yes, I agree about the word "value."


Yes, 'rotten core' was a bit strong. :P I don't know anything about Groupon's specific case, and it's certainly true that in many cases the VC's will be the more experienced and better informed, and therefore more culpable party. Comity!


That is also what a Ponzi scheme is also, except a Ponzi scheme is losing money hand-over-fist in a hidden way. With a Ponzi scheme, the piling on of new investors covers up the losses... for a while.

Hmmmm, that sounds almost exactly like Groupon. While their losses are pretty well known, they are waving their hands (accounting gimmicks) and saying "That's not a loss. Honest."


A ponzi scheme is, by definition, zero sum. And it is, by definition, opaque. New investors pay-out old investors. This was a buy-out of early shareholders. If you expand buy-outs to be considered a "ponzi scheme" than so is anything where somebody buys an asset from somebody else aided by a broker.

When the payout is a dividend, both the new and old investors feel that their principle is remains and they could cash-out at will.

What you have with Groupon was certainly bad PR to people like yourself and thousands of others who are tuned-in to this sort of news. But it most certainly was nothing like a Ponzi scheme.

First, it's not zero-sum. The "machine" of Groupon produces $1.x dollars in value for every $1 of capital.

Second, the new investors knew when they invested that many of the shares they were buying were being held by existing shareholders and did not come from the company's pool. They knew that to acquire the share of the company they wanted to hold, they'd have to buy-out these earlier investors and that it would of course be at a premium to their initial investment.

Finally, the early investors knew that they were being bought-out, that they were selling their shares to a 3rd party.


Genuine question for raganwald: you consistently capitalize it as GroupOn, even though the press and the company itself capitalize it as Groupon.

I know you're a careful, deliberate and consistent writer, so this is clearly intentional.

Any particular reason why?


Oh!

My mind thought "Group Buying On _____," but now that you say it's actually "Group>o<n," I guess they mean "Group Coupon."


It's intended to be a portmanteau of Group + Coupon, pronounced \ˈgrüˌpän

I've had an affinity for portmanteaus ever since I was 10, when I saw "portmanteau" in Through the Looking Glass and thought Lewis Carrol was talking about me. So I tend to be irrationally defensive of them.


That's one of the funniest things I've ever read on HN


Is that why your user name is an abbreviation of portmanteau?


No, my first name is actually "Portman".


That makes for a nice coincidence then!


Or is simply the underlying reason why he thought Carrol was talking about him.


>> "how often do insiders get their stakes cashed out"

While this used to be the exception, it is starting to become the norm. The technical term is "secondary".

Fred Wilson has been doing a great job chronicling the rise of these transactions for almost 2 years. (He calls them "DST-style" investments.)

http://www.avc.com/a_vc/2011/02/some-thoughts-on-public-and-...

http://www.avc.com/a_vc/2009/04/a-second-market-is-emerging....

http://www.avc.com/a_vc/2010/08/angel-liquidity.html

http://www.avc.com/a_vc/2009/09/founder-liquidity.html


Its greater fool investing. The last round probably had a lot of "We're going to IPO in a year" which means that last round is expecting to get their payday on an IPO and, frankly, future company performance be damned.

I'm not as skeptical as some on Groupon's future I think they still have a vast amount of room to grow. But this lack of a focus on fundamentals is how bubbles get made.


False valuation and poor accounting and financial transparency affects us all. We should do everything we can to discourage these type of shenanigans. A much better proposition would be to build companies that people want, and are willing to pay for, and then raise money based upon the future possibilities of those creations. Raising too much money is just as bad for us, and for Groupon, as raising too little money. Why? because any mis-allocation of capital will lead to market instability, which will lead to inefficiencies. Companies, Societies, Empires, rise and fall based upon these simple tenets.


My main concern is: how do I tell my 401k and mutual funds to stay away from Groupon?

I'm a smart investor, I'm strongly deciding to not touch Groupon with a thousand feet pole. But I'm pretty sure bankers in NYC will do it for me. What can I do?


Dont buy funds invest it yourself. Move your 401k into a self-directed account.


Which may take some lobbying of your company to add a self directed component to your 401k offering, which as far as I know is a more costly option. (Because you won't be buying their selected funds and they won't be reaping the commissions)


How do you move a 401k to a self-directed account? Can you do it without quiting your job?

My single biggest gripe with my 401k--a very poor selection of high cost managed funds.


It may depend on your company and how they set up their 401k. For me it was relatively easy, I just told my company that I want to self-direct the funds - it was an option they gave me if I set up a brokerage account with the 401K's bank


switch jobs, roll your 401K over into an IRA that you can manage yourself.


Groupon isn't going to make the S&P 500. If you're invested in a wide index fund, you'll be safe.


If you can figure out how much the fund is investing in Groupon, short an equivalent percentage of Groupon.


Another major challenge Groupon face is: They are competing with major players, companies with considerable more resources. Google, Facebook, Amazon all have competing products and a very large user base. Google has billions in profits and Amazon have billions in revenue and hundreds of millions in profits. Facebook has one of, if not the largest user base in the world. For Groupon to succeed it will have to be beat Amazon, Google, and Facebook. It's hard enough to compete against one giant, but having limited resources and competing against all three will make it too easy to fail. Now more than ever you have to wonder why they did not sell to Google. Perhaps they are hoping Microsoft will want to get in game after they IPO and buy them.


Microsoft have made some questionable acquisitions, but there is no way they would want to come in, post-ipo inflation and sweep them up then (unless of course they bomb as hard as everyone is predicting). Like FB, Goog, MS too has millions of users they could turn into customers of Bing Offers. Bet they won't though. This whole market is one giant race to the bottom.


I always wondered how Salesforce became so successful. Their saas is janky garbage. Their software is everywhere, but they excel at nothing.

Now I know their success is hype and creative accounting.


Adapting a Stroustrup quote: There are two types of CRM/ERP software: the ones everyone complains about and the ones nobody uses. By all means, please build a competitor that does not suck. Thousands of small/medium businesses will make you a billionaire.


Don't forget Enterprisy. No one ever got fired for picking SalesForce.


I agree - we tried salesforce at our company and you need a PhD to get anything custom done. Way too bloated for us and way too long of a training period - then add on top of that the custom functionality we needed and it got expensive VERY fast.


And while Groupon argues it will be sustainable once it hits a certain threshold, its business is actually decaying in older markets like Boston -

http://www.betabeat.com/2011/06/03/groupons-business-is-deca...


They need to move on from low margin stuff like food and physical services.

* Copy AppSumo and sell software/webapp services.

* Try to work out deals on high value items like automobiles where there's lots of wiggle room in pricing.

* Talk to Apple. They have high demand and large margins.

Do anything to get rid of thousands of cold calling sales people.


>Do anything to get rid of thousands of cold calling sales people.

If I remember correctly, it sees its sales force as a competitive advantage.


Thousands of employees, slim (if any) margins... sounds a bit like Kozmo.com...


$4 billion in revenue would be much more impressive if it could scale efficiently and without a $430 million loss.


So Groupon is a massive affiliate network scheme built using humans, software and hype.

The lesson for nearly everyone here on HN, is that this market is huge! I'm signing up for Groupon, Living Social, and others, and I plan to just sit back and absorb the marketplace for a couple of months and brainstorm about how to get a piece of the pie!


Agreed. The article says that Groupon has no real moat, so that means this business model is ripe for niche players (ie, be better at, say, furniture or massages than Groupon/LivingSocial)


There's nothing wrong with low margin, look at Wal-Mart. The problem is getting the customers through the door (or in this case through the website).


Whenever a business grows by hiring more and more people it won't scale well and be massively profitable.. People are expensive. They are always going to have razor thin margins.


There's always the exception of Amazon, but Amazon has built infrastructure instead of letting insiders cash-out early.


I'd be interested in hearing Jason Fried's take on this. Isn't he an advisor for Groupon?


If he's an advisor to Groupon, then I'm pretty sure he can't say anything without violating a slew of SEC rules.


http://mixergy.com/jason-fried-sortfolio-interview/

"Andrew: You’re on the board of directors at Groupon. What have you learned from working with them?

Jason: Sure. Well, just a clarification. I’m not on the board of directors anymore.

Andrew: Board of advisors.

Jason: I’m on the advisory board now instead, and that was a smart move by them.

Andrew: Why?

Jason: My main role there on the board was . . . the reason Andrew Mason asked me to be on the board was to help them with product ideas and work on product design and copyrighting and think about products because that’s what I think I’m good at.

The board of directors isn’t really a place for that, especially at the stage that Groupon is at right now. They need people with international business experience. Howard Schultz came on after I left, the CEO of Starbucks. He knows brand name. He knows big business. He knows that stuff. I don’t know that stuff. That’s not my role. They need more people like that than people like me.

By moving over to the advisory board, I’m working with Andrew. I was just working with him this morning on some stuff around their new Groupon Now product which is coming out short. Now, I’m doing really what I should be doing, which is working with Andrew and his team on product design and thinking about product copyrighting and that kind of stuff. It’s a better place for me, a better fit for me.

That whole process of being on the board was absolutely fascinating, and I really enjoyed it. I feel like it was a bit lopsided because I certainly learned a lot more from them than they learned from me."



If the article is correct (future really bad, tricked public going to invest on day 1), wouldn't it make sense to invest and sell very soon?

Is something special about an IPO where you have to hold it for some time?


That's a great idea and a lot of people are going to do exactly that. However, think about this: It's a bubble, it will pop, but we don't know when it will pop.

Imagine you want to invest a million dollars and sell when you have doubled your investment. The sooner and cheaper you can buy the stock, the greater your chance to double your million dollars. The longer you wait, the higher the chance that you will be one of the suckers whose investment makes other people rich.

The safest strategy is to buy at the offering price and sell as soon as the stock reaches your target for selling (double in our example). You pay the least and get out the soonest, before the collapse. With every passing minute, the price of the stock rises but the probability of the bubble popping before it reaches your target also rises.

So how do you buy at the offering price? By having a cosy relationship with the investment bank leading the issue, that's how. Do you have a cosy relationship with the investment bank leading the issue? If not, you are playing a game rigged to make other people rich at your expense.

Of course, if you like the fundamentals and plan to buy and hold, that's a different matter. But if you're playing the speculation game, you ought to know that the casino is rigged and that you are not in the business, you are the business.


So what you're saying is it's a game of chicken?


It's a game of Jenga with gold pieces. If you get a piece out, you win your piece. If the tower collapses, everyone still playing loses their money.

And as you can see, the insiders, VCs, and their customers get to play first and leave the game before you get a chance to pull a piece out.

UPDATE: Man, I'm pessimistic today! Don't forget the converse side of the coin: The game may be rigged, but still you might have a good bet to make!


Wow, this is the first time since early 2000 I've seen the "greater fool theory" espoused without irony. Maybe it really is a bubble, now.


I count 3 negative Groupon articles on the front page this AM.

A quick Google news search finds similarly uniform negative sentiment in the general web.

Brings to mind Warren Buffet's famous quote about investing - "The time to get interested is when no one else is. You can’t buy what is popular and do well."


That Warren Buffet quote doesn't mean you should buy a company that everyone hates. Buffet meant to go after "un-sexy" businesses (like railroads and insurance) and forgo "hot" fields (like technology or media).

The negativity surrounding Groupon isn't that they're boring; the negativity is that they're over-hyped.


I was just thinking about how Google must be rolling in all that cash Groupon spent on Youtube ads etc. And LivingSocial's. And the other me-too's. Talk about selling pickaxes.


Similarly, think of all the "recruiting 2.0" companies that are sourcing the sales team of Groupon and their ilk.


I disagree.

This reminds me of the pre-Google IPO arguments.

It became popular in the press to pot-shot Google in the days leading up to their IPO.

Their revenue model was too tied to search.

Their IPO structure wasn't sound.

Their biggest growth was behind them.

Groupon is no Google today, but they do have a visionary founder, an incredible brand, insane revenue growth, and address a real problem for merchants and consumers.


> I disagree.

Based on nostalgic feelings about the 2000s?

Warren Buffet and his daughter wrote a whole book on how to go over a company's P&L statements line-by-line and determine whether or not it's a value. Groupon fails that test. That quote is about buying companies that are doing better than the market thinks they are -- and his methodology is a way to find and prove those cases on paper. Not with hunches.

Can you back this sentiment up with anything more than vague comparisons to Google?


If you're actually asking:

"Groupon is no Google today, but they do have a visionary founder, an incredible brand, insane revenue growth, and address a real problem for merchants and consumers."

or see my comments here:

http://news.ycombinator.com/item?id=2618080

and here:

http://news.ycombinator.com/item?id=2613546


Google was profitable. Big difference.


Groupon isn't trying to pretend that they're profitable or that they'll be profitable in the near term. Smart long-term investors will look at their financials and their business model in order to make an educated bet on whether Groupon can successfully transition from astonishing hypergrowth to sustainable profitability -- preferably after the dust kicked up by the IPO clears.


Groupon are trying to pretend they're profitable — that's a major component of the original article here. They even made up a new accounting metric to try to persuade people of this (if you only avoid the pesky sales+marketing spend).


I think this "Adjusted CSOI" nonsense is tantamount to Groupon admitting that they're not profitable.


Google was profitable. And I assume any money they were spending was on architecture/moat not customers. I'm not sure what the economics of the Old Navy deal were yesterday but I assume it was a loss, on the day GRPN announced IPO they were losing money to "look good" it's how their business model works.


" losing money to "look good" it's how their business model works." that's the fundamental problem, their business model is losing money. These types of business models tend to drive poor stock valuations in the long term. See GM for example.


I'm doing very well with my Atmel stock ... just stepped in at the right time ;-)


This is a gross misuse of Warren Buffet's famous quote to say the least. I would highly recommend reading about Warren Buffet's investment strategy -- he never talks about buying into the latest high tech IPO. Investing in hot IPOs (or even hyped IPOs) isn't at all how he made his money. He bought into boring industries that everyone was basically ignoring and then he helped them increase their margins by bringing in very good management that was focused on the long-term bottom line. The management at Groupon is very scary as they are clearly cashing out and are not looking at the long term at all.

Also, if there is general negative sentiment (not just isolated as it is now) about Groupon, there won't be an IPO. It could easily be withdrawn and if it is withdrawn, it likely won't come back if what everyone is saying here on HN is true.


Warren invests in what he knows. The fact that he doesn't buy technology stocks is more likely due to the fact that he doesn't know much about technology.

At this year's shareholder's meeting, someone asked him and his business partner, Charlie Munger, which industry they wish they knew more about. Charlie said "technology."


I didn't mean to imply tech IPO -- I did intent to refer to any IPO.

Warren Buffet doesn't invest in IPOs as far as I've read. It makes sense because these are very hyped events that are designed to be the opposite of boring or overlooked.

Investing in IPOs is very much a gamble over which the the investor has no control. It is like buying a lottery ticket in many cases.

Warrren Buffet buys into companies in such a way that he get's control and usually those companies are struggling and need a management overhaul in order to be successful and have a better long-term focus.

I can imagine Groupon crashing and burning and then someone like Warren Buffet or another takeover happening and then its rebuilding. But buying into a hyped IPO before a fall is not at all Warren Buffet's investing strategy.


But this isn't a time when "no one else is" investing in Groupon --- it's a time when a whole lot of major players have, evidently betting on the willingness of a deal-happy general public to buy even more when they can. If they don't, the wolf will be at the door in a hurry.

Which, by the way, is in marked contrast to the kind of negative buzz Google had at the time of their IPO. There were legitimate doubts about the sustainability of their business model, in part because they were deliberately concealing the size of their profits as long as they could to avoid attracting competition. (See Levy, "In the Plex".) But at the time they went public, they were making money, in much larger amounts than anybody outside the company had realized.

As to Groupon: if dhh is reading the balance sheet right, they need the proceeds of the IPO just to keep the company going, unless something very dramatic happens soon. They have only two quarters' worth of cash on hand at the current burn rate. The $750 million from the IPO will extend that by about two years (if the burn rate doesn't go up!). But if you invest, then you're counting on management to pull a not-yet-evident rabbit out of a hat within that time. And you're expecting that from a management team that put most of the roughly $1 billion that they raised off private markets in the last two rounds in their own private pockets (they sold founder shares to the VCs), leaving only $150 million available to the business itself as working capital.

Good luck!


Other Warrent Buffet quotes:

"Rule No.1: Never lose money. Rule No.2: Never forget rule No.1"


You can't buy what isn't profitable and do well either though.

I don't think Buffet advocates turning off your brain completely.


Three articles about Groupon IPO prove it's a popular and interesting topic.


It also seems that Groupon's business provides diminishing returns the more popular it becomes in a certain city - http://bit.ly/iDslVV

At this point in the tech boom, an underwhelming IPO wouldn't be a bad thing.


Please post the full URI and not the bit.ly redirect on HN. This isn't twitter.


People are only supposed to get rich after the IPO, and even then, only on paper, for the first few years.

Still, VCs are supposed to be grownups who know what they're doing, if they got screwed it's their own fault.


If everyone who invests in the company plays by these rules, I'm all for it. Unfortunately, the true narrative is: "Founders and employees are only supposed to get actually rich a few years after the IPO, however VCs, Investment Bankers, and their cozy clients can get stinking rich immediately."

If you are willing to make the VCs and other bankers wait a few years, I have no problem with founders and employees waiting a few years as well.


p.s. Conjecture: if the VCs had to wait for years to cash out, Groupon would be a very different company with much stronger fundamentals and less emphasis on flashy growth.


Usually there is a 6 month waiting period after IPO.


I think it's interesting that this story and the story from 2000 condening Amazon for losing money every quarter are both top stories on HN today[1].

Whenever history repeats itself you'll always hear people say "But this time is different!"

The article Joel Spolsky wrote about the "Amazon model" of growth (back in 2000) really explains why some companies grow the way Groupon and Amazon do[2]. They're in a land grab and they almost have to grow with huge losses and lots of funding or else they'll lose.

Personally, I'm a fan of what Joel calls the "Ben and Jerry's model" which I tend to call the Jason Fried model. Unfortunately, Groupon isn't one of those companies that can expect to win if they aren't growing extremely aggressively, and taking large losses at first is just part of the Amazon model.

[1]http://www.slate.com/id/1004565/

[2]http://www.joelonsoftware.com/articles/fog0000000056.html


I don't know if I agree with this assessment. There's a land rush going on. They need to grab as much of the market's network effects as they can before Google Offers and the like manage to get going. This is definitely one of those extreme first-mover-advantage situations, like online auctions fifteen years ago.

So to answer the author's question: When will Groupon be profitable? When the enormous costs of their explosive growth are no longer counting against their bottom line.


Are there network effects in coupons/deals? You mean building the relationships with merchants?


Of course there are! Consumers want to join the service that has the best (and most) deals. The service with the most consumers is going to be able to get the most merchants signed up and get the best deals out of them. It's a textbook virtuous cycle.


My experience is consumers join as many daily deal sites as they want to. They are not loyal to one. The only cost of joining one more is an email a day.


You could say the same thing about auction buyers, and yet 99% of the world sticks with eBay rather than waste time checking a second site.


Not true - auction buyers have a network effect. More buyers ==> more sellers ==> more buyers. As someone who wants to occasionally buy something 'rare' or second hand, I would go where the most sellers are when I want to find something! This itself causes a significant moat. Amazon has finally started chipping away at the sellers, by providing an even larger pool of proven buyers.

Local deal sites are by defn focused on many independent local market. Their key promo channel is email to signed up users, since most people won't go to a website to look at deals everyday. What's the barrier to entry for another site - getting the same user signed up?

There will certainly be consolidation, there will be two or three local deals sites left over. They will certainly not enjoy the margins GroupOn currently commands.


"More buyers ==> more sellers ==> more buyers" ... just like "more bargain hunters ==> more bargain-offering affiliates ==> more bargain hunters"


I told you so:

http://news.ycombinator.com/item?id=2117952

http://news.ycombinator.com/item?id=1968491

With all the experience of the past 12-15 years, I'm convinced that "local" is a hopeless hole for tech startups.


Why do you think that anything "local" in general is a money/energy drain?


There seems to be two types of "local" web startups: events and businesses.

Event listing sites are a very small market basically trying to take over the flyer and newspaper advertising. There's no money there. And in the past couple of years Facebook has stepped in and basically made all other event sites obsolete, for now.

Business listing sites are trying to tap into the Yellow Pages market. Yellow Pages were/are huge. This is why people continue trying to get in. The problem is that unlike physical Yellow Pages, which have a regional monopoly, the barrier to entry is very low. This leads to fragmentation, and any single local business directory isn't very valuable. Combine with extremely spotty coverage and out of date listings, and online directories themselves are pretty useless. Even Google can't stay on top.

It gets worse because you have to cold-call small businesses to sell to them. New ones are always starting up and old ones are going out of business. They also don't want to pay very much money and suck at paying their bills.

Then there's the effort to drive traffic to the directories (or in some cases specific businesses listed in them) via AdWords or other advertising. This can work but is hard to pull off, most who try screw it up.

Don't forget that in addition to Google, Yelp etc. the Yellow Page companies themselves all have online directories, and massive existing sales forces and lists of customers. And they are still struggling to turn a profit online.


So if I were to sum it up (talking about the local business part), the problem consists of:

- Fragmented and competitive market due to low barriers to entry

- High-maintenance, low-yield customers

Thank you for your reply and the food for thought.


I've always seen Groupon as a joke. I don't know anyone who has bought anything from there. Maybe I just hang out with the wrong crowd, but meals at random sushi bars, spa treatments, karate lessons...? Random...


Why do they need to go public? Are they hoping that more ad buying power is going to provide them economies of scale? Graphic designers aren't that expensive to employ are they?


They need money. And the investors would like to cash out before the company runs out of money.


The general impression is that the founders sold their shares to a VC fund with the intention of the VC fund returning their capital with an IPO.


Is it possible for Groupon to tell Google I will spend millions on adsense but I need you to make a fake offer of 6 billion?


Should they take customer acquisition out of the "fastest growing internet company ever" title? or just the financial analysis.

Great Write-Up.

I have to imagine the wall in their office with biggest internet failure magazines is a self fulfilling prophecy.


Completely agree with OP on this comment! I really doubt Groupon's business model, hardly believe that coupon style business could be a main stream of profit.

Would like to short this IPO when it comes to the stock market.


I agree. It's just fundamentals. There's no such thing as a free lunch. No company can offer 50% coupons again and again, and be profitable, so the number of repeat merchants will go down, and Groupon will have to continue spending more to get more dumb merchants.

The customers are all looking for deals, they're not loyal. Plus more and more will get sick of the deals being targeted towards them.

In the end, Groupon is like a Ponzi scheme in that it will need to trick more new merchants to join in as old merchants drop out, and it will need to continue paying a premium to attract more consumers as the existing ones drop out. Compare that to companies like Amazon, and Google where ppl will never get tired of shopping online, or searching online.


Does anyone else think Groupon has been a huge boost to the economy? They've created 7000 jobs in a few years, without displacing many old ones, and most of these jobs are low-skill.


Most of these jobs are low skill? My understanding is that the majority of the people at Groupon are in the sales force. Just because it doesn't require a degree in CS or EE doesn't make a position low-skill. Being an effective salesperson takes a lot of skill.


I wouldn't quite say adding 7000 is a "huge boost" to the economy.


Citation? I haven't seen this number and I'm very curious as to how it was derived.


If the suspicion that it's a paid news http://rajeshanbiah.blogspot.com/2010/12/groupon-hype-or-pai... they'll have to shut it down when others start following that strategy.


This article is full of handwaving.

1) Lot's of businesses run in the red for awhile in order to build up their market share. Just pointing to losses in the first few years of major operations isn't particularly compelling.

2) The adjusted CSOI metric isn't as ridiculous as the author makes it seem. The claim is that their marketing expense is a function of how fast they want to grow. Presumably once they reach a size they want, they scale back that expense, and the revenues turn into profit. The Forbes article says: "The bottom line is that considering the profitability of Groupon without online marketing expenses is silly; Groupon without marketing expenses is not Groupon at all." How is Groupon without marketing not Groupon at all? It's an interesting-sounding statement without any meaning.


it seems that his point with CSOI is that despite all the money they've spent, they don't have much customer or user loyalty and at least on some level, their revenue is linked to their marketing expenses. scaling back marketing expense = scaling back revenues.


1) Read down to the bit about Amazon.


How is Groupon without marketing not Groupon at all?

Because Groupon is getting all of their visitors/subscribers through massive amounts of marketing. Without that marketing, it is not proven that they would still have so many visitors/subscribers.


Yes, Groupon's userbase might not stick around if they reduce advertising expenditure to shift into profitability. That is unproven, uncertain, etc. However, it's quite a leap beyond that to say that the userbase definitely will leave if groupon doesn't keep up its massive advertising campaign, which is effectively what the Forbes article says: (Groupon isn't Groupon without unsustainable advertising).




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