- "66% of Groupon deals are profitable for the seller, and 40% of businesses would not use Groupon again, according to a Rice University study."
"optically, Groupon revenues look high — which they use to raise a financing round at a high valuation."
- Let's assume every investor that put money in just missed this obvious cost or doesn't care, article still leaves out one of the most compelling parts of their financial model - the minimum 10%+ breakage that Groupon splits that is PURE gravy.
"most Groupon local merchants . . . have no margin to spare or wiggle room in their operating costs."
- The author misses the entire point of Groupon. Restaurants, spas, etc have fixed costs on food, rent, staff etc - filling in gaps to cover dead zone times w/groupon manages and mitigates those costs.
Their opportunity to improve on the above point is spelled out by their VP “If we can eliminate 10 percent of perishability, we can change the dynamics for small business owners,” he says. Small businesses would become more like airlines, matching supply against demand to maximize revenues."
ref breakage - http://www.quora.com/Groupon-IPO-S-1-Filing-June-2011/What-i...
ref perishability -
One concern the article seemed to overlook is the fact that Groupon's business model has a near zero barrier to entry - as demonstrated by the entry of so many Groupon clones into the picture of late. Given this and the fact that for many businesses (with exception of spas and restaurants) the 75% cut in revenue may in fact be unsustainable, won't this turn into a race to the bottom as to who offers the most advantageous cut back to the local merchant?
"Try Grup-on! Like Groupon, only we split 40-60!"
I think a possible competitive strategy is much more highly targeted mailings - instead of approaching advertisers saying "we have 170,000 subscribers in your city", go with "we have 15,000 females in the 30-45 year old age bracket who earn over $85k" or "we've got 22,000 working mothers of 3-7 year old children", or perhaps "we've got 8,000 people who dine out 3 or more times a week in your zipcode". (I have no idea if Groupon are collecting and/or using detailed demographic data about their subscribers...)
While the coupon part of the Groupon might be allowed to expire, the merchants will have to eventually pay the states for all unused groupons.
they were never Groupon revenues in any meaningful sense of the word. But, optically, Groupon revenues look high — which they use to raise a financing round at a high valuation.
The idea that investors aren't able to fundamentally understand that 50% of revenue walks out of the door is just insane. I've raised a bit of money in my life and never once did I run across an investor who wasn't far better at understanding my own financial statements than I was.
It's not so much commentary on the article itself, but it shows a supreme lack of understanding of how the whole fundraising process really works. Surely Jose already knows that?
1. Sometimes one invests in a company because it has a sound business model and you know that it will have long term value.
2. Other times you invest because the company is hot and rising and you plan to get your money out of the company before the party comes to an end (if you know a stock is going to rise, you might as well buy it and take profits as it goes up.) It can be very profitable for those in at the beginning, not so much for those left holding the relatively worthless bag.
The fact that the original founders are taking hundreds of millions of dollars out of groupon before the IPO reinforces many people's fears that Groupon is this second type of investment.
"An investment operation is one which, upon thorough analysis, promises safety of principal and an adequate return. Operations not meeting these requirements are speculative."
-Ben Graham, from chapter 1 of The Intelligent Investor
In this post, you define non-savvy investors out of existence.
I'm not concerned with the true definition of an investor but all this redefining won't change the point that by looking hot and looking good one can get people to toss one capital.
Since Groupon's investment and revenue strategies are known to all, this would be closer to a pyramid scheme than a Ponzi scheme.
Side-note: Fascinating to read how the "Magic 8-Ball" model of Pyramid Schemes works: http://en.wikipedia.org/wiki/Pyramid_Scheme#The_.22Eight-Bal...
How is Groupon like that?
It's easier to blame the participants in a pyramid scheme than in a Ponzi scheme?
Now that this stuff is becoming so common, I guess the approaches of "find the bigger fool" and "have your alibi in hand" are being honed to science...
Except from another S-1 analysis earlier today (http://m.minyanville.com/?guid=34936&catid=4), they're taking more like 60 days to pay back merchants.
"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."
So does that mean a collapse will come quicker or slower when it finally happens?
"Except that all that Groupon revenue is unprofitable so more and more Groupon revenue is actually bad."
Umm, no. Groupon isn't selling something below marginal cost. They're unprofitable due to fixed costs (advertising, sales force, etc.). Their revenue has almost zero associated marginal cost and is actually quite good and in fact is what they're banking on.
I don't think he really understands what "Ponzi Scheme" means either. Groupon doesn't depend on newer people to pay off older people. What he's trying to say is that it perhaps isn't sustainable, but that's not the same as a Ponzi Scheme.
I'm betting on #2.
I'm guessing what others have said is right: Groupon management figured they could get more value by pushing for an IPO. They're likely right, although I can't see Groupon surviving long afterwords. If Google had bought them, then it had a chance to be a long term company. Now, it's an excellent investment for the founder and early investors, and the public will get screwed.
edit: on the other hand, what if google was buying the fleshy sales people? what if that is what they wanted? I mean, groupon is doing okay at penetrating the small local business market in a way that google isn't.
For Groupon, you would want to look st two things. First, how much money do they make on a deal minus what they spend to get the deal done? Second, how.many deals can they sell?
If a deal makes $5000 and costs $500, you'd want to sell as many as you can. Since all of their deals require a person to complete the sale, and there is a lot of demand for deals, they hire a ton of people to sell a lot of deals.
As long as they can raise enough investment until their cash flow catches up, they are good to go, assuming demand for Groupon deals stays strong of course.
I believe that the concept of social buying is great, but its complexity deserves more respect than it has been given. There has to be a balance between the amount of money merchants are willing to risk to introduce themselves to new people, number of those people becoming repeat customers, how much long term boost does the merchant get from those repeat customers, etc. It takes time to find out what is working and what is not.
Groupon is straight-up a ponzi scheme? That's pushing it, and would raise any lawyer's eyebrow.
The problem here isn't so much about facts and opinions, or even necessarily the presentation, it's about the term "ponzi scheme" which is very, very legally charged. Check out the episode of Bullshit! on pyramid and ponzi schemes-- not so much for the content of the episode, but for the fact that they avoided saying "ponzi scheme".
Or, imagine this: The New York Times ran this piece, even in the opinion section. Does it seem like a libel case now? Keep in mind that libel and a libel case are entirely different. A company could very well bring a case to court and drain thousands from you in legal fees just to protect their reputation.
And they'd have a pretty good case too. Yeah, malice probably isn't there, but they could certainly argue a reckless disregard for whether or not this was actually true.
The reason why you don't hear about libel cases being prosecuted every day is that libel is unbelievably difficult to prove.
To quote Zed Shaw: "If they have a blog, speak at conferences, publish papers,
or write books then they are public figures"
Thank Larry Flynt
This actually happens on HN all the time. For example, once one or two people started talking about straw men the entire site decided that anyone saying something they didn't agree with must have been beating up a straw man.
Unfortunately most attempts to explain to the general public how U.S. dollars work contain other assertions that are plainly ridiculous (see http://www.youtube.com/watch?v=zXjoAP7jm6Y or http://www.youtube.com/watch?v=_dmPchuXIXQ), and the more tame treatments of related issues lack depth (http://www.youtube.com/watch?v=PTUY16CkS-k).
This is the crux of the argument, and no sources are provided. If you're going to write a persuasive argument based on empirical data, you need to cite your sources.
Remember all those stories about how Youtube was just a huge liability, and they were burning through bandwidth expenses, and it was so stupid for Google or anyone to buy it?
Thus Google brought a lot to the table in such acquisition which would increase Groupon's value.
Google is not Warren Buffet investing in the hope of a passive but safe return on investment. Google was betting that Google + Groupon was worth more than Google + B$6.
Google - B$6 + Groupon > Google
Google - B$6 + Groupon > Google - B$6 + investing in other ideas or companies
Google still wins because of all they make from Groupon from AdWords.
Yesterday I equated the bitcoins craze to tulip mania . I wonder whether the author of this blogging read that on HN, and thought he could use that for Groupon, too. He also linked to the WikiPedia article, like I did.