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Try to digest the Groupon story
- dbaugh 15y agoWhenever 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.
- bad_user 15y agoThere's always the exception of Amazon, but Amazon has built infrastructure instead of letting insiders cash-out early.
- bproper 15y agoAnd 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-decaying-in-its-established-markets/ http://www.betabeat.com/2011/06/03/groupons-business-is-deca...
- nanoanderson 15y agoIt'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?
- miespanolesmalo 15y agoI 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.
- suking 15y agoI 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.
- megamark16 15y agoDon't forget Enterprisy. No one ever got fired for picking SalesForce.
- lurker19 15y agoAdapting 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.
- deleted 15y ago[deleted]
- gaius 15y agoPeople 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.
- raganwald 15y agoIf 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.
- raganwald 15y agop.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.
- suking 15y agoUsually there is a 6 month waiting period after IPO.
- johnx123 15y agoIf the suspicion that it's a paid news http://rajeshanbiah.blogspot.com/2010/12/groupon-hype-or-paid-news.html http://rajeshanbiah.blogspot.com/2010/12/groupon-hype-or-pai... they'll have to shut it down when others start following that strategy.
- jrp 15y agoIf 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?
- kmavm 15y agoWow, 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.
- raganwald 15y agoThat'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.
- jolan 15y agoThey 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.
- joeguilmette 15y ago$4 billion in revenue would be much more impressive if it could scale efficiently and without a $430 million loss.
- euroclydon 15y agoSo 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!
- r00fus 15y agoAgreed. 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)
- stevenj 15y ago>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.
- pdxgene 15y agoThousands of employees, slim (if any) margins... sounds a bit like Kozmo.com...
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- ben1040 15y agoPardon 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?
- raganwald 15y agoThe 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.
- portman 15y agoGenuine 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?
- raganwald 15y agoOh! My mind thought "Group Buying On _____," but now that you say it's actually "Group>o<n," I guess they mean "Group Coupon."
- portman 15y agoIt'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.
- starnix17 15y agoIn case anyone didn't notice, this blog post is by DHH.
- stevenj 15y agoThat's interesting given that Jason Fried (his partner at 37signals) was a board member of Groupon and is now an advisor to the company.
- mikeryan 15y agoAccording 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).
- cemerick 15y agoI 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.
- solutionyogi 15y agoAs 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.
- cemerick 15y agoI was talking about Mr. Fried, not @dhh.
- solutionyogi 15y agoBut 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.
- rayiner 15y agoThis 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.
- noodle 15y agoit 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.
- gaius 15y ago1) Read down to the bit about Amazon.
- brown9-2 15y agoHow 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.
- rayiner 15y agoYes, 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).
- kjames 15y agoWhy 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?
- nwjsmith 15y agoI'd be interested in hearing Jason Fried's take on this. Isn't he an advisor for Groupon?
- hvs 15y agoIf he's an advisor to Groupon, then I'm pretty sure he can't say anything without violating a slew of SEC rules.
- pchristensen 15y agohttp://mixergy.com/jason-fried-sortfolio-interview/ 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."
- jasonfried 15y agoI commented above: http://news.ycombinator.com/item?id=2617160 http://news.ycombinator.com/item?id=2617160
- danvoell 15y agoShould 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.
- alain94040 15y agoMy 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?
- hammock 15y agoDont buy funds invest it yourself. Move your 401k into a self-directed account.
- djb_hackernews 15y agoWhich 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)
- joe_bleau 15y agoHow 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.
- hammock 15y agoIt 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
- lsc 15y agoswitch jobs, roll your 401K over into an IRA that you can manage yourself.
- chrisaycock 15y agoGroupon isn't going to make the S&P 500. If you're invested in a wide index fund, you'll be safe.
- aresant 15y agoI 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."
- chrisaycock 15y agoThat 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.
- lhorie 15y agoI 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.
- benmathes 15y agoSimilarly, think of all the "recruiting 2.0" companies that are sourcing the sales team of Groupon and their ilk.
- aresant 15y agoI 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.
- illumin8 15y agoGoogle was profitable. Big difference.
- kprobst 15y agoEveryone 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.
- freshfunk 15y agoIf 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.
- firefoxman1 15y agoI agree. I can't see any investor with half a brain buying any company with a P/E of 2,147 (LinkedIn)
- fennecfoxen 15y agoI 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.
- firefoxman1 15y ago
- inkaudio 15y agoAnother 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.
- te_chris 15y agoMicrosoft 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.
- klbarry 15y agoDoes 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.
- jat850 15y agoCitation? I haven't seen this number and I'm very curious as to how it was derived.
- brandong 15y agoI wouldn't quite say adding 7000 is a "huge boost" to the economy.
- cosgroveb 15y agoMost 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.
- raldi 15y agoI 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.
- MrMan 15y agoAre there network effects in coupons/deals? You mean building the relationships with merchants?
- raldi 15y agoOf 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.
- blrgeek 15y agoMy 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.
- raldi 15y agoYou 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.
- blrgeek 15y agoNot 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.
- lightoverhead 15y agoCompletely 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.
- Hisoka 15y agoI 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.
- ChuckFrank 15y agoFalse 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.
- sedachv 15y agoI told you so: http://news.ycombinator.com/item?id=2117952 http://news.ycombinator.com/item?id=2117952 http://news.ycombinator.com/item?id=1968491 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.
- Revisor 15y agoWhy do you think that anything "local" in general is a money/energy drain?
- sedachv 15y agoThere 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.
- Revisor 15y agoSo 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.
- deleted 15y ago[deleted]
- evertonfuller 15y agoI'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...
- jcslzr 15y agoIs 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?
- firefoxman1 15y agoI 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/ http://www.slate.com/id/1004565/ [2]http://www.joelonsoftware.com/articles/fog0000000056.html http://www.joelonsoftware.com/articles/fog0000000056.html