Groupon stock sinks to new low, investors sue(chicagobusiness.com)
chicagobusiness.com
Groupon stock sinks to new low, investors sue
http://www.chicagobusiness.com/article/20120404/NEWS08/120409912/groupon-stock-sinks-to-new-low
136 comments
I see why some already jumped off that boat. Started pretty good but, it could do better.
Please. As if anyone with half a brain couldn't see this ponzi scheme on the blowup train of doom. Who are these magical investors?
Goldman Sachs - for starters. They set up the deal - and let their "muppet" clients get their eyes ripped out. Business as usual for them.
This is not surprising to me - I did say that they were going to "ladder" the price and pocket a huge chunk of money - then watch everyone else get screwed.
== Sources ==
My previous comments on Groupon: http://news.ycombinator.com/item?id=3139614
Groupon Chooses Goldman Sachs & Morgan Stanley as the underwriters for their IPO: http://www.bloomberg.com/news/2011-04-15/groupon-said-to-cho...
Goldman calls their clients "Muppets": http://www.nytimes.com/2012/03/14/opinion/why-i-am-leaving-g...
This is not surprising to me - I did say that they were going to "ladder" the price and pocket a huge chunk of money - then watch everyone else get screwed.
== Sources ==
My previous comments on Groupon: http://news.ycombinator.com/item?id=3139614
Groupon Chooses Goldman Sachs & Morgan Stanley as the underwriters for their IPO: http://www.bloomberg.com/news/2011-04-15/groupon-said-to-cho...
Goldman calls their clients "Muppets": http://www.nytimes.com/2012/03/14/opinion/why-i-am-leaving-g...
It's not a ponzi scheme.
Simply stating it is not a ponzi scheme doesn't advance the conversation in a meaningful way in my opinion.
It's really just semantics at this point. There is a lot of evidence here that suggests systematic misleading (if not out-right defrauding) of investors. So you while you are technically correct, I think what Groupon has done is in the spirit of Ponzi even if it is executed differently. What's happened here is more than just a bad business plan executed honestly producing poor results. Just because we don't have the exact word for it doesn't make it any more ethical.
It's really just semantics at this point. There is a lot of evidence here that suggests systematic misleading (if not out-right defrauding) of investors. So you while you are technically correct, I think what Groupon has done is in the spirit of Ponzi even if it is executed differently. What's happened here is more than just a bad business plan executed honestly producing poor results. Just because we don't have the exact word for it doesn't make it any more ethical.
Jason, your gut instinct is correct. Groupon is a Ponzi scheme in every way: last customer in gets no money out. I feel sorry for that Mom & Pop pizza that paid $1,000 to run a Groupon deal, and expecting $300 back in 60 days, only to see Groupon go belly up and get nothing but a letter that says "Please send your creditor claim to the bankruptcy trustee listed below".
It's not a ponzi scheme.
Groupon only pays out about 45% of gross bookings. Ponzis generally pay out closer to 100%. Once it brings sales and marketing to a reasonable level it should be wildly profitable.
Groupon only pays out about 45% of gross bookings. Ponzis generally pay out closer to 100%. Once it brings sales and marketing to a reasonable level it should be wildly profitable.
It is when you need new sales to pay for the cost of maintaining existing client base: 1) client #1 pays you, but you have to give him back half at a future date, 2) while his money sits in your account, you spend it on operating costs, 3) get new client money in order to pay client #1 back.
It is that money sitting in the account that gives Groupon the cash flow it needs to hire more sales people to grow the revenues further, but remember always that a % of that must be returned to the customer at a future date. Where it falls apart is when your new sales can no longer replenish the client account (no it does not sit in a trust or escrow, but in company's general operating account).
So what happens when Groupon declares Bankruptcy? All that money sitting in the account is gone, customers get NOTHING back. Yes, this is indeed a Ponzi scheme because the last customers in get nothing, even though they are owed the %.
It is that money sitting in the account that gives Groupon the cash flow it needs to hire more sales people to grow the revenues further, but remember always that a % of that must be returned to the customer at a future date. Where it falls apart is when your new sales can no longer replenish the client account (no it does not sit in a trust or escrow, but in company's general operating account).
So what happens when Groupon declares Bankruptcy? All that money sitting in the account is gone, customers get NOTHING back. Yes, this is indeed a Ponzi scheme because the last customers in get nothing, even though they are owed the %.
Perhaps not, but the only way it's a sound investment is if you exit quickly by finding another sucker that is willing to take a risk it doesn't come crashing down before he can exit. Everyone agrees there is no long term business model there, certainly not at that valuation.
But no, not a ponzi scheme at all.
But no, not a ponzi scheme at all.
[deleted]
Who would have imagined that groupon had a future? It worked on the novelty effect and it was doomed to fail.
On the other hand, Chicago business is full of bugs. Ghostery block 13 (!) calls to different websites such as: Quantcast, 24/7 real media, Outbrain etc... I won't visit this website again. I wish I was warned of that before hand not when I go to the website, I value my privacy more than going there.
On the other hand, Chicago business is full of bugs. Ghostery block 13 (!) calls to different websites such as: Quantcast, 24/7 real media, Outbrain etc... I won't visit this website again. I wish I was warned of that before hand not when I go to the website, I value my privacy more than going there.
It worked on the novelty effect and it was doomed to fail.
A little premature to write an obituary of a company that finished 2011 with 1.6B in revenue.
A little premature to write an obituary of a company that finished 2011 with 1.6B in revenue.
This argument always blows my mind. Who cares about revenue? Profit is what counts. If you make 10 trillion, but have to spend 10 trillion and 1, you're failing.
Web-based companies have to make a profit too. Why do people forget this?
Web-based companies have to make a profit too. Why do people forget this?
Saying "who cares about revenue?" is just as faulty as stating "who cares about profit?"(which I never stated).
Not following you here. Care to elaborate?
I'd invest my money in a company who makes 200,000 in revenue with 100,000 in profits much faster than one who makes 200,000,000,000,000 in revenue with 0 in profits.
To me, this seems so basic, and I'm certainly not very well versed in business. Am I missing something?
I'd invest my money in a company who makes 200,000 in revenue with 100,000 in profits much faster than one who makes 200,000,000,000,000 in revenue with 0 in profits.
To me, this seems so basic, and I'm certainly not very well versed in business. Am I missing something?
1.6B in revenue is pretty meaningless if you're not even making a profit. They are simply really good at losing a lot of money.
Revenues are generally as important or more than profits for a company at Groupon's stage (ie, young, high growth). Since its primary expenses are sales and marketing, it's easy to envision how such a growth machine could become wildly profitable (hence the $9.4b market value).
It seems like imagination is about all they are running on. I would accept the idea that growth could be more important for some companies at an early stage. However, I don't think it's applicable to groupon's situation.
However, I don't think it's applicable to groupon's situation
That is debatable. Consider this: Amazon started off just selling books, today they are gunning for Walmart. At the time, people raised similar objections and Amazon took heat for years for remaining unprofitable. No one is complaining today.
Similarly, I see Groupon's deals business as just one product. There are signs from their recent aquisitions that they might diversify with new products targeted at the same small businesses(such as credit card processing).
Now, just because it all ended well for Amazon doesn't mean the same will happen for Groupon. I am just pointing out that it is not a foreign strategy to prefer growth over profitability for many years after the IPO.
That is debatable. Consider this: Amazon started off just selling books, today they are gunning for Walmart. At the time, people raised similar objections and Amazon took heat for years for remaining unprofitable. No one is complaining today.
Similarly, I see Groupon's deals business as just one product. There are signs from their recent aquisitions that they might diversify with new products targeted at the same small businesses(such as credit card processing).
Now, just because it all ended well for Amazon doesn't mean the same will happen for Groupon. I am just pointing out that it is not a foreign strategy to prefer growth over profitability for many years after the IPO.
Was Amazon playing the same accounting tricks? Cashing out early investors/founders pre-ipo? I see a line between ponzi and strategy, Amazon is on one side and Groupon is on another in my mind.
Not when that company's popularity has leveled off and still finished last year with a $370M loss.
http://biz.yahoo.com/e/120330/grpn10-k.html
http://www.google.com/trends/?q=groupon&ctab=0&geo=a...
http://biz.yahoo.com/e/120330/grpn10-k.html
http://www.google.com/trends/?q=groupon&ctab=0&geo=a...
Welcome to the stock market.
Not if it's unlikely to turn that revenue into actual profits.
If I give 1B to my friends company for a service, and he gives me 1B for a service I provide, do we both have 1B in revenue?
Groupon didn't make its money by swapping money between a couple of friends.
Making a bil in revenue by the way of your example versus Groupon's way have very different risks associated with it.
Making a bil in revenue by the way of your example versus Groupon's way have very different risks associated with it.
A little premature to write an obituary of a company that finished 2011 with 1.6B in revenue.
Revenue != profit. You could generate a trillion in revenue. What's left after the bills are paid is what counts.
Revenue != profit. You could generate a trillion in revenue. What's left after the bills are paid is what counts.
Amazon was unprofitable for years after IPO.
If your argument that profits right now are the only thing that matter, then you'd be hating on amazon for the same reason you're hating on groupon. And if Amazon listened to folks like you and went for immediate profitability, they'd likely not have the growth they did.
The real argument anti-groupon folks should be making is that in the long term, they don't see profitability. Too much emphasis is being put on their present unprofitability.
If your argument that profits right now are the only thing that matter, then you'd be hating on amazon for the same reason you're hating on groupon. And if Amazon listened to folks like you and went for immediate profitability, they'd likely not have the growth they did.
The real argument anti-groupon folks should be making is that in the long term, they don't see profitability. Too much emphasis is being put on their present unprofitability.
Part of Groupon's problem is that it did not actually book 1.6billion in revenue under generally accepted accounting principles (GAAP). It booked 1.6billion under Groupon's magical accounting practices (MAP).
Under GAAP, money which is contractually owed to a third party at the time of collection is not booked as revenue. Under Groupon's accounting practices, it is. This allows them to inflate revenue while downstating their liabilities. This is why the SEC is investigating them for fraud.
Under GAAP, money which is contractually owed to a third party at the time of collection is not booked as revenue. Under Groupon's accounting practices, it is. This allows them to inflate revenue while downstating their liabilities. This is why the SEC is investigating them for fraud.
False. Groupon's 2011 GAAP revenues were $1.6b. The number you are referring to is "Gross Billings" which were $4b in 2011.
http://www.sec.gov/Archives/edgar/data/1490281/0001445305120...
http://www.sec.gov/Archives/edgar/data/1490281/0001445305120...
Sorry, my point was that Google's revenue numbers were not prepared according to GAAP.
The "Gross Billings" numbers include the total amount of deals "sold", including the merchants' portions. The smaller "revenues" number front-loads income that should be recorded over time i.e., by including items that should be recorded in reserves or liabilities until such items are resolved.
For example, Groupon treats as revenue all of Groupon's theoretical portion of a sale, including any amounts that it knows will have to refund and amounts that it estimates that it will have to refund. However, such items are not revenue, either b/c Groupon knows it will be refunding such items (and thus has no claim to the money), or because it expects that it may have to. Such items are supposed to be tracked in a separate account. The separate account is balanced out by a reserve account (a liability) which is removed from the books when the risk of refund has passed.
The "Gross Billings" numbers include the total amount of deals "sold", including the merchants' portions. The smaller "revenues" number front-loads income that should be recorded over time i.e., by including items that should be recorded in reserves or liabilities until such items are resolved.
For example, Groupon treats as revenue all of Groupon's theoretical portion of a sale, including any amounts that it knows will have to refund and amounts that it estimates that it will have to refund. However, such items are not revenue, either b/c Groupon knows it will be refunding such items (and thus has no claim to the money), or because it expects that it may have to. Such items are supposed to be tracked in a separate account. The separate account is balanced out by a reserve account (a liability) which is removed from the books when the risk of refund has passed.
That's not really what you said previously. You wrote "money which is contractually owed to a third party at the time of collection is not booked as revenue. Under Groupon's accounting practices, it is" and made no mention of refunds. Further, Groupon actually does reduce revenues by the reserves held to cover refunds (hence the recent revenue reduction to account for higher than expected refunding).
Further, the SEC hasn't actually kicked off a formal investigation and if it does, it will be for financial control and accounting deficiencies, not fraud.
Further, the SEC hasn't actually kicked off a formal investigation and if it does, it will be for financial control and accounting deficiencies, not fraud.
My answers are contextual; the refunds weren't relevant to the other post I made. In Groupon's case, it does both: it includes money contractually owed to a third party in its revenue, and it fails to reduce revenues by the reserves to cover refunds. Simply having a reserves liability is not sufficient; under GAAP it is supposed to segregate out the portion of revenues potentially subject to refunds which Groupon does not do.
Also, as to the SEC investigation, it could potentially be for both, as fraud would relate to the numbers in the 10-K filing and other filings with the SEC, in addition to financial and accounting deficiencies. SEC investigations are not criminal investigations--the SEC does not have to lay out "charges" prior to beginning its investigation.
Also, as to the SEC investigation, it could potentially be for both, as fraud would relate to the numbers in the 10-K filing and other filings with the SEC, in addition to financial and accounting deficiencies. SEC investigations are not criminal investigations--the SEC does not have to lay out "charges" prior to beginning its investigation.
> it includes money contractually owed to a third party in its revenue, and it fails to reduce revenues by the reserves to cover refunds
This is simply false. Not only does it net out reserves from revenue, it even nets them out from gross billings:
"Gross billings. This metric represents the gross amounts collected from customers for Groupons sold, excluding any applicable taxes and net of estimated refunds. We consider this metric to be an important indicator of our growth and business performance as it is a proxy for the dollar volume of transactions through our marketplace, net of tax and reserves."
All I said was that the SEC had not begun a formal investigation, which is fact. And I stand by my contention that "fraud" is probably the wrong description.
This is simply false. Not only does it net out reserves from revenue, it even nets them out from gross billings:
"Gross billings. This metric represents the gross amounts collected from customers for Groupons sold, excluding any applicable taxes and net of estimated refunds. We consider this metric to be an important indicator of our growth and business performance as it is a proxy for the dollar volume of transactions through our marketplace, net of tax and reserves."
All I said was that the SEC had not begun a formal investigation, which is fact. And I stand by my contention that "fraud" is probably the wrong description.
Right. What Groupon did is as if PayPal recorded the entire amount of each transaction as revenue, rather than just PayPal's fee slice. It's kind of technically true since Groupon/PayPal does take possession of the money, but it's not revenue in any meaningful sense.
The writing was also poor. The second paragraph starts saying "The first two lawsuits were filed..." without having given any context either in the headline or the first paragraph. The HN headline was better than the one at the site itself.
In theory, every "bargain" mechanism is doomed to failure as companies learn how to game it, returns diminish, and consumers fall out of favor with it.
How do companies game Groupon standing at the checkout taking the customers money and giving the company 20% of the invoice amount?
They should be going after the SEC for allowing this company to IPO in the first place. Going public used to be a privilege, now it seems too easy.
Since SOX successful tech companies have been avoiding going public for as long as possible (ie Google, Facebook).
I wonder if there was some pressure from investment bankers who want to encourage more IPOs as well as government types who want the law to seen as a success.
I wonder if there was some pressure from investment bankers who want to encourage more IPOs as well as government types who want the law to seen as a success.
Per the new JOBS act, it's about to get easier.
GRPN was a always a short sellers dream come true. Next up, ZNGA.
Why do you say Zynga? It was my understanding that their financials are a good bit more stable, even if they are Facebook-dependent.
Zynga's business model is like any other gaming publisher (such as EA, Blizzard, etc.). To succeed in gaming you MUST have a pipeline of games that continue revenue growth. If you cannot create your own, then you must acquire indie developers (OMGPOP recently). In time Zynga stock will be no different than any other gaming publisher stock. Look at Blizzard: other than Diablo, Starcraft and WoW, it has created nothing in the last 4 years beyond sequels. Homegrown innovation is nearly impossible.
Rovio was in the business for 5 years before Angry Birds, and I doubt they'll have another hit like Angry Birds ever again.
Id fell apart when it couldn't come up with something better than the Doom franchise.
OMGPOP was very smart to sell out to Zynga, because there is no way it would have come up with something even close to Draw Something in another 5 years.
Unlike rock stars and pop singers, creating a string of gaming hits is so much harder because it requires the perfect storm of so many variables each and every time, whereas a single person like Adele, Amy Winehouse, etc. can rely on their genius alone to create a hit.
Rovio was in the business for 5 years before Angry Birds, and I doubt they'll have another hit like Angry Birds ever again.
Id fell apart when it couldn't come up with something better than the Doom franchise.
OMGPOP was very smart to sell out to Zynga, because there is no way it would have come up with something even close to Draw Something in another 5 years.
Unlike rock stars and pop singers, creating a string of gaming hits is so much harder because it requires the perfect storm of so many variables each and every time, whereas a single person like Adele, Amy Winehouse, etc. can rely on their genius alone to create a hit.
> Id fell apart when it couldn't come up with something better than the Doom franchise.
Except for, you know... Quake.
On your other point. The difference between Zynga and EA is that Zynga's games have a huge turnover rate and a very low percentage of paying customers. EA's games -- at least most of their games -- have 100% paying customers and have a large returning customer rate year after year (Madden 11, Madden 12, Madden 13, Fifa 11, Fifa 12...).
So in other words, Zynga's business model is completely different than EA's.
Except for, you know... Quake.
On your other point. The difference between Zynga and EA is that Zynga's games have a huge turnover rate and a very low percentage of paying customers. EA's games -- at least most of their games -- have 100% paying customers and have a large returning customer rate year after year (Madden 11, Madden 12, Madden 13, Fifa 11, Fifa 12...).
So in other words, Zynga's business model is completely different than EA's.
I can appreciate this insight on Zynga, but I'd like to offer another perspective:
First off, have you seen the way Blizzard's stock performed during 2008? It was one of the few that continued to grow...
Rovio has more than just Angry Birds direct sales, it has a TON of merchandising opportunities with the characters (think Pixar). Plus they have a huge base of users that is excited to see what's next.
I'd also contend the rock stars analogy is backward - It is FAR more risky to assume a sole person can continue re-inventing themselves over a entire career. Granted, it's hard for game publishers, but at least there's a team and a more defined process for the innovation.
First off, have you seen the way Blizzard's stock performed during 2008? It was one of the few that continued to grow...
Rovio has more than just Angry Birds direct sales, it has a TON of merchandising opportunities with the characters (think Pixar). Plus they have a huge base of users that is excited to see what's next.
I'd also contend the rock stars analogy is backward - It is FAR more risky to assume a sole person can continue re-inventing themselves over a entire career. Granted, it's hard for game publishers, but at least there's a team and a more defined process for the innovation.
Yes, it was, and that's why it is nearly impossible to short. I've been paying 30-40% annualised to borrow the stock for shorting and the rate spiked to nearly 60% recently. Being short is more expensive that most people think.
Why not just buy puts on it?
They are extremely expensive reflecting the cost of borrowing the stock. If the weren't you could buy the stock, lend it out and then buy a put and sell call to make a 'synthetic short' and pocket a risk free profit. No free lunches.
Puts are expensive because the cost of borrowing? You are mixing two different instruments.
Borrowing occurs when you short NOT when you buy puts. Puts are expensive because of the stock's volatility (and exercise price). The higher the volatility, the more expensive the option (call/put) is. Just check the math of the Black-Scholes options pricing model.
Borrowing occurs when you short NOT when you buy puts. Puts are expensive because of the stock's volatility (and exercise price). The higher the volatility, the more expensive the option (call/put) is. Just check the math of the Black-Scholes options pricing model.
Thank you for the follow-up, sorry if too many questions, but one more.
If I hold the general consensus opinion here that Groupon is heading to insolvency, and let's say it will be insolvent by January 2013, is it cheaper then to attempt to acquire Groupon stock to short it on margin than to buy a January 2013 put, even if your margin is running at 60%?
If I hold the general consensus opinion here that Groupon is heading to insolvency, and let's say it will be insolvent by January 2013, is it cheaper then to attempt to acquire Groupon stock to short it on margin than to buy a January 2013 put, even if your margin is running at 60%?
You can buy a Jan 13 $10 put for $2.05 so you have an upside of $7.95, just under 4:1 payoff in the event of a proper bankruptcy. That's not a lot so you can see a fair chance of disaster is already priced in.
As a casual investor the option probably wins because you can sleep easier at night knowing that if GroupOn announce a cure for cancer you are only losing the $2.
As a casual investor the option probably wins because you can sleep easier at night knowing that if GroupOn announce a cure for cancer you are only losing the $2.
Thank you, I was able to easily grok what you are saying, I was never thinking of it before in terms of 4:1 payoff, but that makes sense.
As a Silicon Valley native currently living in Chicago, I've always found it disappointing that Groupon is the poster child of innovation and entrepreneurship in Chicago. They seem to lack a solid business plan and have a history of deliberately misleading investors and businesses. Far more impressive companies, such as 37signals or GrubHub, are based here that deserve that kind of attention instead.
I very much doubt the legitimacy of this story, but I was in a barbershop a few weeks ago, where the owner told me about one of the Groupon executives who was in the shop earlier. He was saying we shouldn't expect Groupon to be around in 10 years because the company's plan is to collect as much cash as possible, fire everybody, and shut down, keeping the money for the investors. While I doubt a Groupon executive would have actually said that in a barbershop, I can believe that actually was their long-term plan, but if things keep up at their current rate, I'm not sure if Groupon will even last that long.
I very much doubt the legitimacy of this story, but I was in a barbershop a few weeks ago, where the owner told me about one of the Groupon executives who was in the shop earlier. He was saying we shouldn't expect Groupon to be around in 10 years because the company's plan is to collect as much cash as possible, fire everybody, and shut down, keeping the money for the investors. While I doubt a Groupon executive would have actually said that in a barbershop, I can believe that actually was their long-term plan, but if things keep up at their current rate, I'm not sure if Groupon will even last that long.
> I was in a barbershop a few weeks ago, where the owner told me about one of the Groupon executives who was in the shop earlier
Great source!
Great source!
I don't know why this was downmodded. It's trenchant. Nobody on HN seems to like Groupon, but that doesn't make this kind of ridiculous hearsay more valid.
I'd guess it's due to the sarcastic tone. If he had your made your post instead I think it would be faring better.
What really gets me is the barbershop post actually admits that it's very unlikely for the source to be telling the truth, then goes on to give it credit anyway because it agrees with his own speculation.
What really gets me is the barbershop post actually admits that it's very unlikely for the source to be telling the truth, then goes on to give it credit anyway because it agrees with his own speculation.
"He was saying we shouldn't expect Groupon to be around in 10 years because the company's plan is to collect as much cash as possible, fire everybody, and shut down, keeping the money for the investors."
Because the problem isn't the source (the barber). It's the idea that a groupon executive would have said something like this to his barber, physician, plumber etc.
Maybe bragging to his call girl, maybe to a friend when drunk (and was overheard) but it's ridiculous to think someone would say something like this even in jest.
Because the problem isn't the source (the barber). It's the idea that a groupon executive would have said something like this to his barber, physician, plumber etc.
Maybe bragging to his call girl, maybe to a friend when drunk (and was overheard) but it's ridiculous to think someone would say something like this even in jest.
I don't think selectively quoting to omit "I very much doubt the legitimacy of this story" then commenting "Great source!" is adding anything useful to this conversation.
Disagree. The original post was deeply disingenuous.
And the sarcastic remark adds no value, it merely antagonizes the other poster without really explaining what's a wrong with the post, and sets a more combative tone that is not really seen as desirable here. Tone alone can make the difference between a productive discussion and a non-productive debate and HN seems to do a relatively good job at keeping a tone that leads more toward discussions and less toward debate.
I didn't actually say (or mean to imply) I approved of the original post, just that the follow-up comment was of little value. If the best you can manage is to pull a quote out of context and make a snide remark, why post it?
It's not out of context. That's my point. It's innuendo, and a few words of handwaving don't change that.
[deleted]
(Seemingly) explosive growth garners much attention, it's human nature. Tech 'reporters' Techcrunch, VentureBeat, Mashable, etc, like a good story.
Maybe I'm naive, but it seems like there's always been this question mark over their model being non-sustainable, and to those who are aware of 37Signals hold them in much higher esteem.
Maybe I'm naive, but it seems like there's always been this question mark over their model being non-sustainable, and to those who are aware of 37Signals hold them in much higher esteem.
"Far more impressive companies, such as 37signals or GrubHub, are based here that deserve that kind of attention instead."
Every time someone says this, the neck-hairs of every Orbitz employee (current and former) stand up on end and twitch a little.
Every time someone says this, the neck-hairs of every Orbitz employee (current and former) stand up on end and twitch a little.
I don't think that's exactly the same comparison. Orbitz, to me, seems much more corporate and doesn't have the same connection with the developer and startup community that these do. That's not to say Orbitz isn't worthy of attention, merely they don't shove it in our faces like 37signals ;)
No, but it's a good example of a startup that had a solid foundation, good management team, and ramped up into a successful IPO without a 9-figure G round. A lot of other startups have sprung from that event.
It's a shame that a lot of people have forgotten that and mention Groupon and GrubHub like they're the one-and-only models for a startup scene in this city.
It's a shame that a lot of people have forgotten that and mention Groupon and GrubHub like they're the one-and-only models for a startup scene in this city.
I have a hard time thinking of Orbitz as a startup since it is/was a joint venture by the airlines.
> He was saying we shouldn't expect Groupon to be around in 10 years because the company's plan is to collect as much cash as possible, fire everybody, and shut down, keeping the money for the investors.
Every bubble produces these, but usually the money is kept for the management-investors only. SCMR and Zhone from the tech bubble executed that plan spectacularly.
Every bubble produces these, but usually the money is kept for the management-investors only. SCMR and Zhone from the tech bubble executed that plan spectacularly.
Groupon is the typical Chicago-based startup. After experiencing enough sleazy startups in the mold of Groupon, I decided I've had enough with Chicago. That type of business plan is typical of many Chicago startups.
The same investors behind Groupon are funding many other startups. They've got plenty more ponzi startups waiting in the wings.
The same investors behind Groupon are funding many other startups. They've got plenty more ponzi startups waiting in the wings.
I'm not agreeing nor disagreeing with you, since Groupon is the only startup I know from Chicago, but Chicago has this same problem with politicians. Pump-'n-Dump. 1 in 5 Illinois state politicians have seen jail time in the past 100 years.[1]
I can't honestly put anything down to words that could describe why, or if it's just coincidence. Just an odd trend.
[1]http://articles.marketwatch.com/2011-12-07/economy/30779893_...
I can't honestly put anything down to words that could describe why, or if it's just coincidence. Just an odd trend.
[1]http://articles.marketwatch.com/2011-12-07/economy/30779893_...
Created just to post this? Wow.
Anyways...so...would you say the following are all sleazy: braintree, orbitz, threadless (aka skinnycorp), 37signals
Those are the next startups i think about when i think chicago.
Anyways...so...would you say the following are all sleazy: braintree, orbitz, threadless (aka skinnycorp), 37signals
Those are the next startups i think about when i think chicago.
I should clarify. It is more the mentality of quick cash at any cost. This style of business can work in some work under some circumstances.
Orbitz does some cool stuff, but it isn't a startup. It was a spinoff from various megacorps.
37signals manages to work within the Chicago paradigm. However, they are run more like a small business than a high-growth startup.
Grubhub would be more a Chicago success story.
Orbitz does some cool stuff, but it isn't a startup. It was a spinoff from various megacorps.
37signals manages to work within the Chicago paradigm. However, they are run more like a small business than a high-growth startup.
Grubhub would be more a Chicago success story.
[deleted]
The plan might be the most rational one I've heard regarding Groupon. Not the most moral strategy, but it's one that seems to factor in their vague value proposition.
I might disagree with you on that. I am not a GroupOn FAN but if that was their real intention, they would have sold the company to Google long back for $6 bn.
[deleted]
Who would guess that there could be an integrity issue with a company that tried to invent new accounting rules where marketing costs don't appear on the balance sheet? You'd have a crystal ball or a brain to see this coming.
Marketing costs are not supposed to appear on balance sheet.
I don't really watch this company but if I remember correctly, their way of doing accounting was to show all received money from customers as income instead of liabilities since they were collecting half of it on behalf of vendors.
They were simply inflating their revenue but it's not like it matters, because profit (loss) would be always the same regardless.
I don't really watch this company but if I remember correctly, their way of doing accounting was to show all received money from customers as income instead of liabilities since they were collecting half of it on behalf of vendors.
They were simply inflating their revenue but it's not like it matters, because profit (loss) would be always the same regardless.
[deleted]
You mean the income statement, which tracks money in and out. The balance sheet is used to track assets, liabilities, and equity.
People I know who currently work for Groupon say that the culture there is falling apart. To get the numbers investors expect the sales people need to reach unrealistic sales numbers. Management is grasping at straws, trying every trick in the book to not let the whole thing fall apart. The Groupon model is simply not sustainable, it was a onetime gimmick.
As someone who lives in Chicago, I am worried about its failure and with that the future of the tech scene in Chicago.
As someone who lives in Chicago, I am worried about its failure and with that the future of the tech scene in Chicago.
Groupon is a large part of the tech scene here in Chicago, contributing a lot to the scene.
But they're not our sole pillar any more. I think we all know that pillar is going to come crashing down in the near future, and we're ready.
Groupon helped propel us to where we are, and we're standing on our own now. In my opinion, the future of tech in Chicago will not solely depend on Groupon's activity.
But they're not our sole pillar any more. I think we all know that pillar is going to come crashing down in the near future, and we're ready.
Groupon helped propel us to where we are, and we're standing on our own now. In my opinion, the future of tech in Chicago will not solely depend on Groupon's activity.
I chatted with some engineers from BrainTree and I was impressed at their commitment to helping build the tech scene in Chicago.
It's an exciting time.
It's an exciting time.
I, too, live in Chicago, and I don't think this matters one bit. If you think Chicago should live and die by the same rules as Silicon Valley, then that's your first problem. Native mid-westerners live by the philosophy of "Show Me", which is apt for Missouri's slogan. If Groupon, or any other company, can't show real results then let the chips fall where they may. I ran into a few Groupon employees at a bar on the northside a few months ago. They (the man, not the women with him) were bragging about Groupon and the fact that he was in the "sales" dept. at the company. This was before any shit hit the fan. And all I could think about was, "I hope you have other job prospects." I didn't think this because of some hatred toward Groupon, but rather the naivete of making such a statement. So, the fat salesman wandered off with the cute salesgirls. And I wonder what they're life is like now.
My impression from working in their building (at a different company) is that they really don't have that many tech people. From what little one can divine from elevator conversations, it seems like far less than 1/10 have anything even remotely technical in their conversations.
Those that are sent packing when Groupon shuffles off this mortal coil will get snapped up in a hurry. The other 5k+ twenty-something sales force will be much more problematic. If you're under 35, you know at least one person who works there, so it's going to be a real horror show when all those people get tossed out on their collective asses.
Those that are sent packing when Groupon shuffles off this mortal coil will get snapped up in a hurry. The other 5k+ twenty-something sales force will be much more problematic. If you're under 35, you know at least one person who works there, so it's going to be a real horror show when all those people get tossed out on their collective asses.
[deleted]
When your boss is your shareholders, the seat of your pants accounting doesn't really cut it.
I remember hearing about how this company ran, and figuring it was nothing but a giant boiler room sales pit and a gimmick. I am not surprised.
Anecdotally, the first generation of sales rep have nothing but depressing things to say about this entire market segment now. The first year sales numbers were gangbusters, until their clients called back complaining, swearing never to do another Groupon deal, ever again.
It's not just Groupon, this entire business model is unsustainable: asking a retailer to discount his products for a fee in the hopes that he will attract new "local deal" customers willing to pay full retail next time, when the ONLY reason these customers came in the first place was because of the discount.
It's not just Groupon, this entire business model is unsustainable: asking a retailer to discount his products for a fee in the hopes that he will attract new "local deal" customers willing to pay full retail next time, when the ONLY reason these customers came in the first place was because of the discount.
Not only that, but I suspect that people who are loyal to businesses and like interacting with local business owners are less likely to use sites like groupon, because they know that the businesses often get screwed, and because they don't want to be thought of as bargain-shoppers.
A friend sent me a Groupon for a local bakery. It was something ridiculous like $20 worth of food for $10. Since I had heard about the bad relationships between businesses and Groupon, and since I actually like this little store, I declined to get the Groupon. I'd rather pay full price to support a local business!
There's nothing ridiculous about using sales as a customer acquisition strategy. What is unsustainable about GroupOn, etc. is the requirement for extreme discounting that crushes the retailer.
Two more problems with the model:
1) Groupon taks a large cut on top of the big discount. It used to be that GroupOn wanted a 50% discount and then 50% of the revenue. This is like running a 75% off sale.
2) The customers are poorly-qualified leads. All we know is that they are local and like a good deal. That doesn't give the retailer much indication that they would be a good customer (and I think we have seen that they aren't).
1) Groupon taks a large cut on top of the big discount. It used to be that GroupOn wanted a 50% discount and then 50% of the revenue. This is like running a 75% off sale.
2) The customers are poorly-qualified leads. All we know is that they are local and like a good deal. That doesn't give the retailer much indication that they would be a good customer (and I think we have seen that they aren't).
I'm guessing that some of the "new customers" that Groupon delivers are customers you don't want.
I remember my girlfriend many years ago working in a restaurant that offered a ‘kids eat free’ deal one night a week. People would come in with their kids and their neighbors’ kids, order one burger and let the restaurant feed a bunch of kids for nothing. Obviously the restaurant needed to put some terms around the deal, which they later did, but some people are just a blight on humanity in this way.
I remember my girlfriend many years ago working in a restaurant that offered a ‘kids eat free’ deal one night a week. People would come in with their kids and their neighbors’ kids, order one burger and let the restaurant feed a bunch of kids for nothing. Obviously the restaurant needed to put some terms around the deal, which they later did, but some people are just a blight on humanity in this way.
They should have unloaded this fraud on Google when there was a $6 billion cash offer sitting on the table (assuming that was true).
The fact that Google even offered that much leads me to believe that they have jumped the shark with that offer.
Anybody who knows anything about retail would have studied the business model and realized that this was not sustainable. Obvious red flags: 1. Heavy reliance on field sales (the largest expense), which is NOT scalable 2. Exclusive reliance on repeat sales as the key driver of sustainability: this being the obvious case, did Google not do its due diligence and actually surveyed past Groupon customers? Such a siimple survey would have easily revealed the issues of this "local deals" model. 3. Heavy reliance on "small business" owners as the driver of revenue. This is a sensitive and fickle market, where even slight movements in the general economy will cause huge moves in spending patterns.
These 3 points were readily available to anybody with some insight into this segment; Google with all its money must be surrounded by "yes" men, nothing else could explain it's willingness to part with $6 billion so quickly.
The fact that Google even offered that much leads me to believe that they have jumped the shark with that offer.
Anybody who knows anything about retail would have studied the business model and realized that this was not sustainable. Obvious red flags: 1. Heavy reliance on field sales (the largest expense), which is NOT scalable 2. Exclusive reliance on repeat sales as the key driver of sustainability: this being the obvious case, did Google not do its due diligence and actually surveyed past Groupon customers? Such a siimple survey would have easily revealed the issues of this "local deals" model. 3. Heavy reliance on "small business" owners as the driver of revenue. This is a sensitive and fickle market, where even slight movements in the general economy will cause huge moves in spending patterns.
These 3 points were readily available to anybody with some insight into this segment; Google with all its money must be surrounded by "yes" men, nothing else could explain it's willingness to part with $6 billion so quickly.
I'm not sure if they actually could have sold the company to google even if they wanted to. My understanding is that you must open your books to the prospective buyer after a certain stage and it is likely that once the google accountants had a look at Groupons books the deal would have fallen through.
That could have created negative press and damaged their pump-and-dump strategy for the IPO.
That could have created negative press and damaged their pump-and-dump strategy for the IPO.
Excellent point.
Why should they have sold for $6 billion? They're worth $9.6 billion today.
Groupon is not a bet on the coupons business--that doesn't justify the current valuation. Groupon is a bet that if you can reinvent the Yellow Pages, at scale and online, you can make a ridiculous amount of money. It's probably one of the largest companies around with such a high probability of failure, but their value if they end up being the winner in local is just staggering.
Groupon is not a bet on the coupons business--that doesn't justify the current valuation. Groupon is a bet that if you can reinvent the Yellow Pages, at scale and online, you can make a ridiculous amount of money. It's probably one of the largest companies around with such a high probability of failure, but their value if they end up being the winner in local is just staggering.
Assuming Google was ok for the deal they could have sold 100% of the company against cash or maybe Google stocks. Instead they sold I think only 5% during the IPO. Right now the CEO cannot sell more of his shares until May 2012 (http://ipo.nasdaq.com/Fundamentals.asp?cikid=826818&fnid...).
May 2012 $15.00 puts are $2.10/share, so at the current market price the insiders are still ahead. They may put a premium on diversification, but they also sold stock before the IPO.
And this is what happens when inventors invest in a company they know noting about. This is what happens when you listen to the hype, and the street and NOT do your own due diligence. There's a reason why the big banks backed the IPO but didn't take a percentage.
When it all comes down in flames, (I think it's already begun - if you haven't gotten out, get out now) the only saving grace is that the CEO and board will be embattled in court for years. The investors might get a few pennies on the dollar.
When it all comes down in flames, (I think it's already begun - if you haven't gotten out, get out now) the only saving grace is that the CEO and board will be embattled in court for years. The investors might get a few pennies on the dollar.
"There's a reason why the big banks backed the IPO but didn't take a percentage."
Morgan stanley has 19 mil shares. Goldman has 2 mil shares. They backed the IPO and took a percentage. Am i misunderstanding your statement?
they didn't invest cash, they just exercised their green-shoe.
Exactly. They never invested cash. It's all vapor. In other words, both banks lose nothing except the promise of future profits.
Both banks already made their money (and then some) on the IPO and associated fees. Now of course, assuming the banks had no knowledge of Groupon's true financial health; they did nothing illegal.
BUT ethically, brokers/traders have a responsibility to informed their clients when it's time to cash out. A lot of people made money off this deal. And lot didn't.
But Groupon, if what I'm hearing is true, is committing fraud. I mean, my god, are they cooking the books? Sort of reminds me of Enron. But only time (and many lawsuits later) will tell.
Both banks already made their money (and then some) on the IPO and associated fees. Now of course, assuming the banks had no knowledge of Groupon's true financial health; they did nothing illegal.
BUT ethically, brokers/traders have a responsibility to informed their clients when it's time to cash out. A lot of people made money off this deal. And lot didn't.
But Groupon, if what I'm hearing is true, is committing fraud. I mean, my god, are they cooking the books? Sort of reminds me of Enron. But only time (and many lawsuits later) will tell.
The problem with Groupon and other local deal companies is that they have to manage fluctuations on both the consumer as well as the merchant side. Even if one side of the equation wobbles a little, Groupon will feel the impact. I think at this stage, Groupon is fighting a dual (losing) battle:
1) Merchants perception of the whole daily deal market is very negative. Repeat business is quite low and it mainly attracts the spendthrifts who are looking for a deal. Given the margins that most local businesses have, running a daily deal means taking a hit on those margins.
2) From a consumer perspective, the novelty of the daily deals market has really worn off. Consumer fatigue has set in and more and more people are tired of having their inboxes flooded with emails. Personalization is still a joke and ticks people off even further.
It wont be long before the whole local deal market implodes (think of it -- the 2nd largest player - LivingSocial is not yet profitable). Groupon is well aware of this and so is trying to ramp up its technology platform via acquisitions to eventually evolve into something more. Its just a matter of time that the whole thing comes crashing down.
1) Merchants perception of the whole daily deal market is very negative. Repeat business is quite low and it mainly attracts the spendthrifts who are looking for a deal. Given the margins that most local businesses have, running a daily deal means taking a hit on those margins.
2) From a consumer perspective, the novelty of the daily deals market has really worn off. Consumer fatigue has set in and more and more people are tired of having their inboxes flooded with emails. Personalization is still a joke and ticks people off even further.
It wont be long before the whole local deal market implodes (think of it -- the 2nd largest player - LivingSocial is not yet profitable). Groupon is well aware of this and so is trying to ramp up its technology platform via acquisitions to eventually evolve into something more. Its just a matter of time that the whole thing comes crashing down.
The local deals is analogous to department store clearance sales. Retailers have perfected the art of the sale and they know that clearance sales are a different animal. If someone comes into you store and heads straight to clearance they can't be upsold. Don't waste your time on them.
This is different from your event sale, which are an excellent way to gain repeated customers (and upsell them). There is a future for local deal sites but it needs a different hook with customers.
This is different from your event sale, which are an excellent way to gain repeated customers (and upsell them). There is a future for local deal sites but it needs a different hook with customers.
A TV network is going to Pilot with a new fictional sitcom -- called "Friend Me" I believe. It's about a man who packs-up and moves so he can work at Groupon (not made-up). Perhaps making it a comedy isn't such a good idea. ;-)
The first two shareholder lawsuits were filed Tuesday in federal court in Chicago after the markets closed, seeking class-action status for people who bought stock before the company restated fourth-quarter financial results on Friday.
Perhaps those people should have been reading Hacker News:
http://www.hnsearch.com/search#request/all&q=groupon&...
(The first post is rather long and fairly neutral, but check out some of the posts (and their dates) right after that.)
Perhaps those people should have been reading Hacker News:
http://www.hnsearch.com/search#request/all&q=groupon&...
(The first post is rather long and fairly neutral, but check out some of the posts (and their dates) right after that.)
It's interesting looking through the history. In the chronological ascending view, things are pretty overwhelmingly positive for the first 10 pages:
http://www.hnsearch.com/search#request/submissions&q=gro...
There are articles with headlines like "Industry-Changing, Profit Machine", "Is Groupon The Next Google?" (money quote from the article: "I think that, if anything, Groupon is severely undervalued.", etc. Prize for the first seriously skeptical piece discussed on HN is "Why Groupon is Overvalued" by Phil Michaelson:
http://news.ycombinator.com/item?id=1288116
http://www.hnsearch.com/search#request/submissions&q=gro...
There are articles with headlines like "Industry-Changing, Profit Machine", "Is Groupon The Next Google?" (money quote from the article: "I think that, if anything, Groupon is severely undervalued.", etc. Prize for the first seriously skeptical piece discussed on HN is "Why Groupon is Overvalued" by Phil Michaelson:
http://news.ycombinator.com/item?id=1288116
Thanks for the link. What I find troubling is to read so many articles pointing to shady business practices from Groupon and bubble valuation, and still the SEC lets the IPO go through and investors lose their money - that part did not happen yet but it seems written on the wall.
Investors sue? Really?
So basically, I want to drink the koolaid but god damn you if it makes me sick...
You should not be allowed to sue as a method to correct your own stupidity.
So basically, I want to drink the koolaid but god damn you if it makes me sick...
You should not be allowed to sue as a method to correct your own stupidity.
I think in this case it makes sense. Groupon restated a sharp drop in their reported revenues over three years.
People don't necessarily invest in things they think are particularly good business models. They invest in things that are undervalued. If you looked at the revenue/price and thought it was undervalued and then Groupon changed 3 years worth of data on your after you made a stock purchase, you'd sue too.
Just look at these reductions. They're more than just a minor correction from Groupon:
- For 2008, revenue was reduced to $5,000, from $94,000.
- For 2009, revenue was reduced to $14.54 million, from $30.47 million.
- For 2010, revenue was reduced to $312.9 million, from $713.4 million.
People don't necessarily invest in things they think are particularly good business models. They invest in things that are undervalued. If you looked at the revenue/price and thought it was undervalued and then Groupon changed 3 years worth of data on your after you made a stock purchase, you'd sue too.
Just look at these reductions. They're more than just a minor correction from Groupon:
- For 2008, revenue was reduced to $5,000, from $94,000.
- For 2009, revenue was reduced to $14.54 million, from $30.47 million.
- For 2010, revenue was reduced to $312.9 million, from $713.4 million.
People don't necessarily invest in things they think are particularly good business models.
If you can't figure out the business model generating the reported millions, it's your own fault for thinking those millions are undervalued.
How many of these investors didn't actually care about the value of the stock, so long as there was somebody around tomorrow that would buy it for more?
Sorry, but I have no sympathy when you willingly play the game and then get burned by the same things you intended to inflict on someone else.
If you can't figure out the business model generating the reported millions, it's your own fault for thinking those millions are undervalued.
How many of these investors didn't actually care about the value of the stock, so long as there was somebody around tomorrow that would buy it for more?
Sorry, but I have no sympathy when you willingly play the game and then get burned by the same things you intended to inflict on someone else.
I'm not entitled to lie to investors just because they should be smart enough to disbelieve me. There's a point beyond which it's not feasible for third parties to know how realistic my financial statements are, so the SEC has mandated I'm on the hook when I write them.
> If you can't figure out the business model generating the reported millions...
How, exactly, would I figure out that Groupon was lying/mistaken in their financials?
How, exactly, would I figure out that Groupon was lying/mistaken in their financials?
It appears that the reason they are suing is because the 4th quarter results were posted and then based on that information people bought up the stock and then Groupon came back and said "Ya...about that information. We made a mistake" and the real results were much worse than they originally said, which makes the stock price drop.
I think it is a valid approach because a company should be able to get its own accounting correct. However, based on the creative accounting from Groupon (and other issues) I'm really surprised the FTC allowed them to have an IPO to begin with.
I think it is a valid approach because a company should be able to get its own accounting correct. However, based on the creative accounting from Groupon (and other issues) I'm really surprised the FTC allowed them to have an IPO to begin with.
Groupon's claims were so outlandish that a layman could have figured they weren't up to snuff.
At some point, personal responsibility for your own investments is part of the risk.
At some point, personal responsibility for your own investments is part of the risk.
> Groupon's claims were so outlandish that a layman could have figured they weren't up to snuff.
If that's the case, it's pretty clear-cut fraud, which supports the lawsuit argument even more.
If that's the case, it's pretty clear-cut fraud, which supports the lawsuit argument even more.
It's very common.. Investment decisions are often made based on things that representatives from a company say to the press, or details reported in their public SEC filings. Any inaccuracies in these statements can be the basis for a lawsuit.
Lawsuits are basically part of the cost of doing business nowadays.
Lawsuits are basically part of the cost of doing business nowadays.
In general, I'd agree. However, many previous articles on HN have been about how Groupon has engaged in some shady accounting practices to get to where it is. It may be enough to make this exceptional enough that the investors have some "real" (for suitable definitions) grounds for complaint.
My perception is that these kinds of shareholder suits are trivial to file, and that they occur regularly any time the stock of any public company drops significantly after some event about them hits the news.
It would be interesting to see someone chart this.
(No comment about Groupon's long-term viability is being implied here).
It would be interesting to see someone chart this.
(No comment about Groupon's long-term viability is being implied here).
As someone who builds legal matter management software for large publicly traded companies, I can confirm that your perception is correct.
Public companies are sued all the time for this kind of stuff. These lawsuits often allege misrepresentation in a company's SEC filings.
Public companies are sued all the time for this kind of stuff. These lawsuits often allege misrepresentation in a company's SEC filings.
I think there are so many ways technology can help mom + pop type small businesses inexpensively stay competitive with the numerous forces working against them (including retail giants with substantially better technology), and the huge interest in daily deals justifies this assertion--at least in some small way.
But the technology needs to help the small business actually improve. Groupon doesn't do this. For the most part, it plays smoke and mirrors with revenues and the costs or profits are not entirely known because the small business cannot measure them.
But the technology needs to help the small business actually improve. Groupon doesn't do this. For the most part, it plays smoke and mirrors with revenues and the costs or profits are not entirely known because the small business cannot measure them.
I wonder how long it will be before we see Yahoo style head lines for Groupon and RIM.
So it's official - Groupon is this bubble's Pets.com.