6 ms·

On Grouponzi

84 points by mariorz 15y ago

sunchild 15y ago
Some thoughts on this: A. Spending on customer acquisition is building real barriers to entry. I tend to agree with DHH that the barriers to entry will never be high enough in the daily deal area. Also, as Groupon seeks to stay ahead of daily deal competitors, it cannibalizes its own business model – namely, the artificial scarcity and urgency of daily bargains reverts to more and more on-demand variety. We see this already. B. Spending on direct sales is building a valuable collection of local merchants. Others have built directories of local businesses before. The Yellow Pages, Yahoo are examples. Yelp, etc. are more modern examples. Can Groupon unlock a profitable business model from their collection? C. Spending on marketing is building enough public goodwill to transcend value propositions altogether. Groupon is a great brand name, so far. Public goodwill is damn fickle, though. I'd like to think that consumers require a real value proposition from their favorite brands, but I'm not sure that they always do. When it comes to daily deals, I doubt consumers will chose Groupon over a better deal, just because of the Groupon name.
- SwellJoe 15y ago
  When it comes to daily deals, I doubt consumers will chose Groupon over a better deal, just because of the Groupon name. On this count, it's worth remembering that extreme bargain hunters have very low loyalty to vendors. It's what allows them to take advantage of the best deals. Which is why I think a lot of businesses have been disappointed in the results from Groupon deals, and why the moat around Groupon is pretty shallow, given how much they've spent.
  - tptacek 15y ago
    Eh. How much Groupon disappointment do you think comes instead from brick & mortar small businesses being utterly unacquainted with the high-volume low-conversion sales model of the web? Because that seems like the thesis behind Groupon: give local biz a taste of how customer acquisition is tuned and scaled on the web. I'm a loyal customer of several well-known, well-regarded small businesses in Chicago, and none of them have the marketing savvy of the least-successful successful web startup we can think of. So in that regard, I think the people who worry about the disloyal deal hunters miss the point a bit. That's the flip side of the 5-10% conversion rate: the 90% who bounce. Web people don't flip out about this. Local biz does. Remember, the most popular current alternative to Groupon is advertising. The only reason local biz people don't flip out over advertising effectiveness is that nobody knows how to figure it out.
deleted 15y ago
[deleted]
bentlegen 15y ago
Does anyone here have any loyalty to one group-based buying service over another? I certainly don't.
deleted 15y ago
[deleted]
- deleted 15y ago
  [deleted]
christopherslee 15y ago
I'm pretty sure there are "Groupon for X" companies in YC. So clearly people see that there is money to be made. I'm not exactly sure why everyone is hating on Groupon. Why not hate on Zynga for coping other games? Why not hate on Linked In's 500 P/E IPO that has already lost 25% off it's high? The daily deal marketplace may not end up being a winner-take all market. But will having the biggest subscriber list give Groupon an advantage? Once they flip the switch from growth mode to profit mode, who knows what might happen? I assume the hate is mostly just misdirected jealousy because it seems "so obvious anyone could do it." But like Andrew Chen's recent post, it's not easy to build both your consumer side and your merchant side. Anecdotally, I've heard many of the top 10 deal sites have trouble lining up their next day's deal. While the daily deal industry is far from perfect yet, Groupon certainly unlocked a space that a lot of people are jumping into. And I assume that someone will figure out how to do it right for both merchants and consumers in a profitable, sustainable way.
- rokhayakebe 15y ago
  Secretly, a lot of people are jealous.
- afterburner 15y ago
  "Why not hate on Linked In's 500 P/E IPO that has already lost 25% off it's high?" I assume the hate is partly financial advice of sorts, and there's no great need to harp on Linkedin after its stock goes down. Besides, there was hate on Linkedin just before and after the IPO.
- ceejayoz 15y ago
  > Why not hate on Zynga for coping other games? This is quite common. > Why not hate on Linked In's 500 P/E IPO that has already lost 25% off it's high? This too.
Daniel14 15y ago
I just feel as if the only justification for this new round of founding MG brings to the table, is that a) they will be able to cut back spending (=profit) and b) Google and Facebook are producing similar products, so it must be something good. Personally, I'm convinced by neither arguments and would argue that it isn't just risky, but pretty much doomed to fail (or rather, be a really bad investment for the public).
rkon 15y ago
The fact that there are so many clones isn't proof that Groupon's business model works, it's just proof that there are no barriers to entry. Compared to Google and Facebook, their mailing list isn't much to brag about either. If they had impressive churn rates, you can bet we'd be hearing all about it by now. The fact that they keep those numbers secret is highly suspect, in my opinion. Also, paying hundreds of millions out to early investors is exactly what they should NOT be doing if they're trying to "get ahead" of their competition. If they had any faith in their own business model, they'd put it into the business and expect even higher returns.
- ericd 15y ago
  I agree with most of what you said, but it's not highly suspect to want to keep something as vital as churn rate secret from your competitors.
- lotusleaf1987 15y ago
  There are almost zero barriers to entry. Groupon has a list of a few thousand merchants, a few million emails, 8000 employees, and sells a dollar for fifty cents. How can you scale with so many employees and ever be profitable? It's not sustainable at all. They have no patents or any semblance of a defensive moat. Groupon is also declining in the cities it first launched in like Boston. Their future does not look good.
neilbaylor 15y ago
Google doesn't offer to buy Ponzi schemes for six billion dollars.
- billswift 15y ago
  I suspect Google was looking at the possibility of modifying it to fit in with their advertising business. I can envision several ways that could have worked out.
  - tptacek 15y ago
    That's a little weasely, because the people calling Groupon a Ponzi scheme tend to talk about how minimal their competitive advantage and technological "moat" is. Google can build stuff. Why'd they try to buy this?
    - antiscam 15y ago
      It wouldn't be right to assume that because Google has many smart people, everything they do as a result is smart. Google is hardly an innovative company anymore. In fact, they seem mostly to be coasting on existing models and paying lots of people mostly just so that they don't work for existing and potential competitors.
      - tptacek 15y ago
        I think this is a fallacy stemming from the fact that Google's initial products were so unbelievably successful and important that they are likely to be permanently hard to top. I do not agree with you that Google is no longer innovative, and I particularly disagree with the notion that they are so uninnovative that they'd believe they lack the technological prowess to compete with Groupon.
        antiscam 15y ago
        Oh, I don't mean to suggest that at all. I'm just trying to suggest that an offer from Google doesn't, to me, at present imply that the offeree has any special merit. Google is cash-rich and can use cash strategically.
laurenkuhlman 15y ago
I don't see Groupon, or any of the clones as a good investment, for a very simple reason: there's no network effect. In the social realm, thats really the key. Social networks like LinkedIn, FaceBook and Twitter increase their value with each additional user. Telephones are also a classic example of the network effect. Groupon does not become more useful to me the more users it has. Possibly, it becomes more useful to merchants but from the merchant's I've discussed this with, other sites simply offer them better terms and, therefore, more profit. Personally, I think sunchild had a great point by addressing that the artificial scarcity is gone. Myself, and my peers, have now reverted to buying these deals on-demand. If I want a massage deal, I head over to YipIt (an aggregator) and do a quick search. I don't waste my time reading their emails. SwellJoe and GentleBen also addressed the same issue: lack of loyalty. My biggest complaint as a person on constant data overload is that Groupon (I use the Android app) now sends me over a dozen deals per day, half of them for suburban restaurants which I would never patronize. Its no better than coupon books or every other "deal" marketing ploy now.
ditojim 15y ago
what justifies taking ~300 million off the table (and that's just 1 person) and then going back to ask for more a short time after? sounds like the investors were keen to exit and make their buck ASAP. i don't think that is a good sign in general. andrew mason took a much more reasonable payday.
sgdesign 15y ago
"You cannot overlook the fact that they’re also making hundreds of millions of dollars each quarter now" I don't understand this "oh but they're making $4 billion so they must be a great company!" argument. If my business plan is to pay people $2 and have them give me $1 back, I could also make $4 billion (and I'd be loosing $4 billion in the process, but that's just "marketing expenses"…).
- ojbyrne 15y ago
  Clueless cheerleading? Its pretty standard tech press behavior.
- _delirium 15y ago
  It's not the usual use of the term "making money" in business, either. If you run a restaurant that has $5m in expenses, and $5.5m in revenues, you're making $500k, not $5.5m.
stevenj 15y ago
This may not apply to this market, but I think it's still insightful: "Here's a model that we've had trouble with. Maybe you'll be able to figure it out better. Many markets get down to two or three big competitors—or five or six. And in some of those markets, nobody makes any money to speak of. But in others, everybody does very well. Over the years, we've tried to figure out why the competition in some markets gets sort of rational from the investor's point of view so that the shareholders do well, and in other markets, there's destructive competition that destroys shareholder wealth. If it's a pure commodity like airline seats, you can understand why no one makes any money. As we sit here, just think of what airlines have given to the world—safe travel, greater experience, time with your loved ones, you name it. Yet, the net amount of money that's been made by the shareholders of airlines since Kitty Hawk, is now a negative figure—a substantial negative figure. Competition was so intense that, once it was unleashed by deregulation, it ravaged shareholder wealth in the airline business. Yet, in other fields—like cereals, for example—almost all the big boys make out. If you're some kind of a medium grade cereal maker, you might make 15% on your capital. And if you're really good, you might make 40%. But why are cereals so profitable—despite the fact that it looks to me like they're competing like crazy with promotions, coupons and everything else? I don't fully understand it. Obviously, there's a brand identity factor in cereals that doesn't exist in airlines. That must be the main factor that accounts for it. And maybe the cereal makers by and large have learned to be less crazy about fighting for market share—because if you get even one person who's hell-bent on gaining market share.... For example, if I were Kellogg and I decided that I had to have 60% of the market, I think I could take most of the profit out of cereals. I'd ruin Kellogg in the process. But I think I could do it. In some businesses, the participants behave like a demented Kellogg. In other businesses, they don't. Unfortunately, I do not have a perfect model for predicting how that's going to happen. For example, if you look around at bottler markets, you'll find many markets where bottlers of Pepsi and Coke both make a lot of money and many others where they destroy most of the profitability of the two franchises. That must get down to the peculiarities of individual adjustment to market capitalism. I think you'd have to know the people involved to fully understand what was happening." -Charlie Munger http://ycombinator.com/munger.html http://ycombinator.com/munger.html
- Super_Jambo 15y ago
po 15y ago
Yes, the amount of money they’re spending on customer acquisition and retention is absolutely insane. (And the amount owed to merchants is especially troubling.) But look at what they’re up against. Pretty much single major player is now coming directly at them — including the company that tried to buy them for several billion and was turned down, Google. Facebook is charging fast too. LivingSocial. Etc. They need to get out in front of this. And that’s what they’re trying to do. If your explanation for why they are losing money is that they're doing what needs to be done then that's fine, but you're forfeiting the 'defensible moat' argument. They're losing money because a bunch of established businesses could come in and take over if they don't. That part doesn't make them a ponzi scheme but it does make it a bad business to be in. The part that makes it a ponzi scheme is that they are now seeking more investors even though the vast majority of the money from the last few rounds went to earlier investors. That's pretty much the dictionary definition of a ponzi scheme: A Ponzi scheme is a fraudulent investment operation that pays returns to separate investors, not from any actual profit earned by the organization, but from their own money or money paid by subsequent investors http://en.wikipedia.org/wiki/Ponzi_scheme http://en.wikipedia.org/wiki/Ponzi_scheme There is nothing wrong with taking some money off the table so the early investors/employees aren't operating under undue risk, but the scale of cash-out at Groupon is more than a bit fishy. edit: As a side-note the actual original Ponzi scheme was supposed to be profitable through arbitrage of buying and selling Postal coupons: http://en.wikipedia.org/wiki/International_reply_coupon http://en.wikipedia.org/wiki/International_reply_coupon
- edanm 15y ago
  "If your explanation for why they are losing money is that they're doing what needs to be done then that's fine, but you're forfeiting the 'defensible moat' argument. They're losing money because a bunch of established businesses could come in and take over if they don't." It's not one argument or the other - that's a false dichotomy. It could be that, right now they're still vulnerable, but are doing what needs to be done to build their "defensible moat". And in fact, this makes perfect sense. They're a very young business, they're spending a lot of money building their economic fortress. The fact that they aren't profitable is surprising, but for such a young company not too surprising. "There is nothing wrong with taking some money off the table so the early investors/employees aren't operating under undue risk, but the scale of cash-out at Groupon is more than a bit fishy." I agree, but I'm not sure I get this argument. Isn't this something that the investors decide? I mean, it's not like the founders were duping anyone. They went up to some VCs, asked them to buy a big portion of their shares, and the VCs agreed (after thoroughly looking at the numbers, I might add). The investors seemed fine with it and considered it a good investment nonetheless, so what does it prove? Nobody was duped here. I think the only difference between what's happening now with Groupon and what usually happens with small startups is the scale of money involved. Groupon is similar to other young companies, but a lot more money happens to be involved.
pbreit 15y ago
I worry about Groupon but not for the reasons here. Regarding the financials, it could easily ratchet down acquisition and marketing spend and be very profitable. The barriers to entry arguments are very superficial. Sure, just programming a competing service and closing a few merchants is not that hard. But building an 8 figure mailing list is not easy. Finally, some suspected and I'm inclined to agree that the otherwise ridiculous payoff of early investors and employees might be explainable as necessary to turn down the Google offer. My main concern about Groupon is the core proposition may not actually work in the long term. There are all sorts of problems with fatigue, inherently cheapskate customers, high rates of existing customers, worsening economics, etc.
ssharp 15y ago
In reference to this part: "Yes, the amount of money they’re spending on customer acquisition and retention is absolutely insane. (And the amount owed to merchants is especially troubling.) But look at what they’re up against. Pretty much single major player is now coming directly at them — including the company that tried to buy them for several billion and was turned down, Google." Wouldn't a proper business model dictate just about the opposite? When trying to build a profitable customer base, you should focus on keeping customer acquisition costs DOWN, not spending 3x revenue on it. For example, Super Bowl ads just don't seem like an appropriate way to spend money for them right now. This is nearly identical to what happened in the last dot com crash. Sure, Groupon does have significant revenues, but they haven't proved (to me anyway) that these revenues are sustainable without their massive expenditures. We've heard numerous times that Groupon considers its sales force to be a major asset, partially justifying its valuation and forthcoming IPO. Maybe. However, unless that sales force proves to be a strategic asset to a customer-facing feature, whether it be cheaper or more interesting deals than the competition, I don't see a multi-billion dollar value there.

84 points by mariorz 15y ago

Some thoughts on this: A. Spending on customer acquisition is building real barriers to entry. I tend to agree with DHH that the barriers to entry will never be high enough in the daily deal area. Also, as Groupon seeks to stay ahead of daily deal competitors, it cannibalizes its own business model – namely, the artificial scarcity and urgency of daily bargains reverts to more and more on-demand variety. We see this already. B. Spending on direct sales is building a valuable collection of local merchants. Others have built directories of local businesses before. The Yellow Pages, Yahoo are examples. Yelp, etc. are more modern examples. Can Groupon unlock a profitable business model from their collection? C. Spending on marketing is building enough public goodwill to transcend value propositions altogether. Groupon is a great brand name, so far. Public goodwill is damn fickle, though. I'd like to think that consumers require a real value proposition from their favorite brands, but I'm not sure that they always do. When it comes to daily deals, I doubt consumers will chose Groupon over a better deal, just because of the Groupon name.

SwellJoe 15y ago
When it comes to daily deals, I doubt consumers will chose Groupon over a better deal, just because of the Groupon name. On this count, it's worth remembering that extreme bargain hunters have very low loyalty to vendors. It's what allows them to take advantage of the best deals. Which is why I think a lot of businesses have been disappointed in the results from Groupon deals, and why the moat around Groupon is pretty shallow, given how much they've spent.
- tptacek 15y ago
  Eh. How much Groupon disappointment do you think comes instead from brick & mortar small businesses being utterly unacquainted with the high-volume low-conversion sales model of the web? Because that seems like the thesis behind Groupon: give local biz a taste of how customer acquisition is tuned and scaled on the web. I'm a loyal customer of several well-known, well-regarded small businesses in Chicago, and none of them have the marketing savvy of the least-successful successful web startup we can think of. So in that regard, I think the people who worry about the disloyal deal hunters miss the point a bit. That's the flip side of the 5-10% conversion rate: the 90% who bounce. Web people don't flip out about this. Local biz does. Remember, the most popular current alternative to Groupon is advertising. The only reason local biz people don't flip out over advertising effectiveness is that nobody knows how to figure it out.

deleted 15y ago

[deleted]

bentlegen 15y ago

Does anyone here have any loyalty to one group-based buying service over another? I certainly don't.

deleted 15y ago

[deleted]

deleted 15y ago
[deleted]

christopherslee 15y ago

I'm pretty sure there are "Groupon for X" companies in YC. So clearly people see that there is money to be made. I'm not exactly sure why everyone is hating on Groupon. Why not hate on Zynga for coping other games? Why not hate on Linked In's 500 P/E IPO that has already lost 25% off it's high? The daily deal marketplace may not end up being a winner-take all market. But will having the biggest subscriber list give Groupon an advantage? Once they flip the switch from growth mode to profit mode, who knows what might happen? I assume the hate is mostly just misdirected jealousy because it seems "so obvious anyone could do it." But like Andrew Chen's recent post, it's not easy to build both your consumer side and your merchant side. Anecdotally, I've heard many of the top 10 deal sites have trouble lining up their next day's deal. While the daily deal industry is far from perfect yet, Groupon certainly unlocked a space that a lot of people are jumping into. And I assume that someone will figure out how to do it right for both merchants and consumers in a profitable, sustainable way.

rokhayakebe 15y ago
Secretly, a lot of people are jealous.
afterburner 15y ago
"Why not hate on Linked In's 500 P/E IPO that has already lost 25% off it's high?" I assume the hate is partly financial advice of sorts, and there's no great need to harp on Linkedin after its stock goes down. Besides, there was hate on Linkedin just before and after the IPO.
ceejayoz 15y ago
> Why not hate on Zynga for coping other games? This is quite common. > Why not hate on Linked In's 500 P/E IPO that has already lost 25% off it's high? This too.

Daniel14 15y ago

I just feel as if the only justification for this new round of founding MG brings to the table, is that a) they will be able to cut back spending (=profit) and b) Google and Facebook are producing similar products, so it must be something good. Personally, I'm convinced by neither arguments and would argue that it isn't just risky, but pretty much doomed to fail (or rather, be a really bad investment for the public).

rkon 15y ago

The fact that there are so many clones isn't proof that Groupon's business model works, it's just proof that there are no barriers to entry. Compared to Google and Facebook, their mailing list isn't much to brag about either. If they had impressive churn rates, you can bet we'd be hearing all about it by now. The fact that they keep those numbers secret is highly suspect, in my opinion. Also, paying hundreds of millions out to early investors is exactly what they should NOT be doing if they're trying to "get ahead" of their competition. If they had any faith in their own business model, they'd put it into the business and expect even higher returns.

ericd 15y ago
I agree with most of what you said, but it's not highly suspect to want to keep something as vital as churn rate secret from your competitors.
lotusleaf1987 15y ago
There are almost zero barriers to entry. Groupon has a list of a few thousand merchants, a few million emails, 8000 employees, and sells a dollar for fifty cents. How can you scale with so many employees and ever be profitable? It's not sustainable at all. They have no patents or any semblance of a defensive moat. Groupon is also declining in the cities it first launched in like Boston. Their future does not look good.

neilbaylor 15y ago

Google doesn't offer to buy Ponzi schemes for six billion dollars.

billswift 15y ago
I suspect Google was looking at the possibility of modifying it to fit in with their advertising business. I can envision several ways that could have worked out.
- tptacek 15y ago
  That's a little weasely, because the people calling Groupon a Ponzi scheme tend to talk about how minimal their competitive advantage and technological "moat" is. Google can build stuff. Why'd they try to buy this?
  - antiscam 15y ago
    It wouldn't be right to assume that because Google has many smart people, everything they do as a result is smart. Google is hardly an innovative company anymore. In fact, they seem mostly to be coasting on existing models and paying lots of people mostly just so that they don't work for existing and potential competitors.
    - tptacek 15y ago
      I think this is a fallacy stemming from the fact that Google's initial products were so unbelievably successful and important that they are likely to be permanently hard to top. I do not agree with you that Google is no longer innovative, and I particularly disagree with the notion that they are so uninnovative that they'd believe they lack the technological prowess to compete with Groupon.
      - antiscam 15y ago
        Oh, I don't mean to suggest that at all. I'm just trying to suggest that an offer from Google doesn't, to me, at present imply that the offeree has any special merit. Google is cash-rich and can use cash strategically.

laurenkuhlman 15y ago

I don't see Groupon, or any of the clones as a good investment, for a very simple reason: there's no network effect. In the social realm, thats really the key. Social networks like LinkedIn, FaceBook and Twitter increase their value with each additional user. Telephones are also a classic example of the network effect. Groupon does not become more useful to me the more users it has. Possibly, it becomes more useful to merchants but from the merchant's I've discussed this with, other sites simply offer them better terms and, therefore, more profit. Personally, I think sunchild had a great point by addressing that the artificial scarcity is gone. Myself, and my peers, have now reverted to buying these deals on-demand. If I want a massage deal, I head over to YipIt (an aggregator) and do a quick search. I don't waste my time reading their emails. SwellJoe and GentleBen also addressed the same issue: lack of loyalty. My biggest complaint as a person on constant data overload is that Groupon (I use the Android app) now sends me over a dozen deals per day, half of them for suburban restaurants which I would never patronize. Its no better than coupon books or every other "deal" marketing ploy now.

ditojim 15y ago

what justifies taking ~300 million off the table (and that's just 1 person) and then going back to ask for more a short time after? sounds like the investors were keen to exit and make their buck ASAP. i don't think that is a good sign in general. andrew mason took a much more reasonable payday.

sgdesign 15y ago

"You cannot overlook the fact that they’re also making hundreds of millions of dollars each quarter now" I don't understand this "oh but they're making $4 billion so they must be a great company!" argument. If my business plan is to pay people $2 and have them give me $1 back, I could also make $4 billion (and I'd be loosing $4 billion in the process, but that's just "marketing expenses"…).

ojbyrne 15y ago
Clueless cheerleading? Its pretty standard tech press behavior.
_delirium 15y ago
It's not the usual use of the term "making money" in business, either. If you run a restaurant that has $5m in expenses, and $5.5m in revenues, you're making $500k, not $5.5m.

stevenj 15y ago

This may not apply to this market, but I think it's still insightful: "Here's a model that we've had trouble with. Maybe you'll be able to figure it out better. Many markets get down to two or three big competitors—or five or six. And in some of those markets, nobody makes any money to speak of. But in others, everybody does very well. Over the years, we've tried to figure out why the competition in some markets gets sort of rational from the investor's point of view so that the shareholders do well, and in other markets, there's destructive competition that destroys shareholder wealth. If it's a pure commodity like airline seats, you can understand why no one makes any money. As we sit here, just think of what airlines have given to the world—safe travel, greater experience, time with your loved ones, you name it. Yet, the net amount of money that's been made by the shareholders of airlines since Kitty Hawk, is now a negative figure—a substantial negative figure. Competition was so intense that, once it was unleashed by deregulation, it ravaged shareholder wealth in the airline business. Yet, in other fields—like cereals, for example—almost all the big boys make out. If you're some kind of a medium grade cereal maker, you might make 15% on your capital. And if you're really good, you might make 40%. But why are cereals so profitable—despite the fact that it looks to me like they're competing like crazy with promotions, coupons and everything else? I don't fully understand it. Obviously, there's a brand identity factor in cereals that doesn't exist in airlines. That must be the main factor that accounts for it. And maybe the cereal makers by and large have learned to be less crazy about fighting for market share—because if you get even one person who's hell-bent on gaining market share.... For example, if I were Kellogg and I decided that I had to have 60% of the market, I think I could take most of the profit out of cereals. I'd ruin Kellogg in the process. But I think I could do it. In some businesses, the participants behave like a demented Kellogg. In other businesses, they don't. Unfortunately, I do not have a perfect model for predicting how that's going to happen. For example, if you look around at bottler markets, you'll find many markets where bottlers of Pepsi and Coke both make a lot of money and many others where they destroy most of the profitability of the two franchises. That must get down to the peculiarities of individual adjustment to market capitalism. I think you'd have to know the people involved to fully understand what was happening." -Charlie Munger http://ycombinator.com/munger.html http://ycombinator.com/munger.html

Super_Jambo 15y ago

po 15y ago

Yes, the amount of money they’re spending on customer acquisition and retention is absolutely insane. (And the amount owed to merchants is especially troubling.) But look at what they’re up against. Pretty much single major player is now coming directly at them — including the company that tried to buy them for several billion and was turned down, Google. Facebook is charging fast too. LivingSocial. Etc. They need to get out in front of this. And that’s what they’re trying to do. If your explanation for why they are losing money is that they're doing what needs to be done then that's fine, but you're forfeiting the 'defensible moat' argument. They're losing money because a bunch of established businesses could come in and take over if they don't. That part doesn't make them a ponzi scheme but it does make it a bad business to be in. The part that makes it a ponzi scheme is that they are now seeking more investors even though the vast majority of the money from the last few rounds went to earlier investors. That's pretty much the dictionary definition of a ponzi scheme: A Ponzi scheme is a fraudulent investment operation that pays returns to separate investors, not from any actual profit earned by the organization, but from their own money or money paid by subsequent investors http://en.wikipedia.org/wiki/Ponzi_scheme http://en.wikipedia.org/wiki/Ponzi_scheme There is nothing wrong with taking some money off the table so the early investors/employees aren't operating under undue risk, but the scale of cash-out at Groupon is more than a bit fishy. edit: As a side-note the actual original Ponzi scheme was supposed to be profitable through arbitrage of buying and selling Postal coupons: http://en.wikipedia.org/wiki/International_reply_coupon http://en.wikipedia.org/wiki/International_reply_coupon

edanm 15y ago
"If your explanation for why they are losing money is that they're doing what needs to be done then that's fine, but you're forfeiting the 'defensible moat' argument. They're losing money because a bunch of established businesses could come in and take over if they don't." It's not one argument or the other - that's a false dichotomy. It could be that, right now they're still vulnerable, but are doing what needs to be done to build their "defensible moat". And in fact, this makes perfect sense. They're a very young business, they're spending a lot of money building their economic fortress. The fact that they aren't profitable is surprising, but for such a young company not too surprising. "There is nothing wrong with taking some money off the table so the early investors/employees aren't operating under undue risk, but the scale of cash-out at Groupon is more than a bit fishy." I agree, but I'm not sure I get this argument. Isn't this something that the investors decide? I mean, it's not like the founders were duping anyone. They went up to some VCs, asked them to buy a big portion of their shares, and the VCs agreed (after thoroughly looking at the numbers, I might add). The investors seemed fine with it and considered it a good investment nonetheless, so what does it prove? Nobody was duped here. I think the only difference between what's happening now with Groupon and what usually happens with small startups is the scale of money involved. Groupon is similar to other young companies, but a lot more money happens to be involved.

pbreit 15y ago

I worry about Groupon but not for the reasons here. Regarding the financials, it could easily ratchet down acquisition and marketing spend and be very profitable. The barriers to entry arguments are very superficial. Sure, just programming a competing service and closing a few merchants is not that hard. But building an 8 figure mailing list is not easy. Finally, some suspected and I'm inclined to agree that the otherwise ridiculous payoff of early investors and employees might be explainable as necessary to turn down the Google offer. My main concern about Groupon is the core proposition may not actually work in the long term. There are all sorts of problems with fatigue, inherently cheapskate customers, high rates of existing customers, worsening economics, etc.

ssharp 15y ago

In reference to this part: "Yes, the amount of money they’re spending on customer acquisition and retention is absolutely insane. (And the amount owed to merchants is especially troubling.) But look at what they’re up against. Pretty much single major player is now coming directly at them — including the company that tried to buy them for several billion and was turned down, Google." Wouldn't a proper business model dictate just about the opposite? When trying to build a profitable customer base, you should focus on keeping customer acquisition costs DOWN, not spending 3x revenue on it. For example, Super Bowl ads just don't seem like an appropriate way to spend money for them right now. This is nearly identical to what happened in the last dot com crash. Sure, Groupon does have significant revenues, but they haven't proved (to me anyway) that these revenues are sustainable without their massive expenditures. We've heard numerous times that Groupon considers its sales force to be a major asset, partially justifying its valuation and forthcoming IPO. Maybe. However, unless that sales force proves to be a strategic asset to a customer-facing feature, whether it be cheaper or more interesting deals than the competition, I don't see a multi-billion dollar value there.