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The Ponzi moniker is somewhat relevant in the sense that existing investors (angels and VCs) could cash out to the next series of investors (public market) befo

by johnrob 15y ago

The Ponzi moniker is somewhat relevant in the sense that existing investors (angels and VCs) could cash out to the next series of investors (public market) before the company turns a profit.

raganwald 15y ago
A Ponzi Scheme rests on misrepresenting new investments as income for existing investors. To date, I have seen no evidence of misrepresentation. Cashing out before the next round invests is not a pyramid or Ponzi scheme, it's exactly what happens when you buy a public stock for $100 and sell for $200: Somebody else is willing to pay $200 and you sell your shares to them. The fact that this happens before they make a profit and before they go public is irrelevant, that speaks to the mindset of the people buying the stock for $200, not to those selling for $200. Now if they lied about being profitable and were merely using invested funds to generate fictitious revenue that turns into fictitious dividends, you might have something. During the last bubble, there were cases where investors put a bunch of money into a company and then demanded that it spend a bunch of that money on another company in their portfolio, effectively creating fictitious revenues. I'd go along with calling those deals "Ponzi Schemes." But this one? Not a Ponzi Scheme, just people who are willing to make a bet on Groupon's success. p.s. http://en.wikipedia.org/wiki/Ponzi_scheme http://en.wikipedia.org/wiki/Ponzi_scheme is instructive. Especially the description of "similar schemes" and the word "bubble." (I am not making any claim about Groupon stock being or being part of a bubble).
- johnrob 15y ago
  I agree. I was almost going to make a similar argument a few days ago, but ultimately decided not to because the masses have effectively redefined what that term means. At this point, "Ponzi Scheme" has become a general term for financial sketchiness. The challenge becomes how to how to denounce the Ponzi term without also denying the presence of financial engineering. Your argument does this as well as possible IMO. When a pundit claims that Groupon is a Ponzi scheme, he really means "Groupon is raising money and using the money to buy more revenue at more than face value". We don't really have a classification for what this is, and the proposed scheme seems somewhat scam-ish, so the Ponzi term is being used. I'm not claiming that Groupon is simply raising money and buying revenue. But I do believe that's what the pundits mean to say when they call Groupon a Ponzi scheme.
  - raganwald 15y ago
    Groupon is absolutely buying revenues. I read somewhere that $1.00 of revenue costs them $1.43. Given estimates as high as B$4 for 2011 revenues, if investors will value the company at B$15, it is clear that each dollar of revenue is worth $3.75 to investors. Groupon's financing strategy exploits the difference between what an investor will pay for a dollar of revenue--$3.75--and what it costs to earn a dollar of revenue--$1.43. Let's say they have a dollar of revenue in hand. They can sell $3.75 of stock based on that dollar of revenue. At $1.43 per, they can buy $2.62 more revenue. Which they can use to raise $9.82 from investors. Which buys $6.87 in revenues. Which they can use to raise $25.76, and so on and so forth, until they exhaust the market's capacity for buying Groupon stock or everyone tries to cash out at once. Of course, this is not necessarily a bad thing. If a dollar of revenue is actually a dollar of recurring revenue, it could be worth much more than $3.75. It all depends... How much churn do they have? How much competition will they have? It costs $1.43 to get the first dollar of revenue. How much does it cost them to get a second dollar from an existing merchant? I don't know the answer to any of these questions. If it turns out that these revenue dollars are not recurring and the participants in the business know this but are disguising the situation from investors and misleading them into thinking that these dollars are just like regular business revenue dollars... If that were the case, maybe one day people would be on HN claiming that such-and-such a company is a "Groupon Scheme." But if it turns out that they have been spending $1.43 to buy a growing revenue stream, investors might end up looking exceptionally smart.

by johnrob 15y ago

The Ponzi moniker is somewhat relevant in the sense that existing investors (angels and VCs) could cash out to the next series of investors (public market) before the company turns a profit.

raganwald 15y ago

A Ponzi Scheme rests on misrepresenting new investments as income for existing investors. To date, I have seen no evidence of misrepresentation. Cashing out before the next round invests is not a pyramid or Ponzi scheme, it's exactly what happens when you buy a public stock for $100 and sell for $200: Somebody else is willing to pay $200 and you sell your shares to them. The fact that this happens before they make a profit and before they go public is irrelevant, that speaks to the mindset of the people buying the stock for $200, not to those selling for $200. Now if they lied about being profitable and were merely using invested funds to generate fictitious revenue that turns into fictitious dividends, you might have something. During the last bubble, there were cases where investors put a bunch of money into a company and then demanded that it spend a bunch of that money on another company in their portfolio, effectively creating fictitious revenues. I'd go along with calling those deals "Ponzi Schemes." But this one? Not a Ponzi Scheme, just people who are willing to make a bet on Groupon's success. p.s. http://en.wikipedia.org/wiki/Ponzi_scheme http://en.wikipedia.org/wiki/Ponzi_scheme is instructive. Especially the description of "similar schemes" and the word "bubble." (I am not making any claim about Groupon stock being or being part of a bubble).

johnrob 15y ago
I agree. I was almost going to make a similar argument a few days ago, but ultimately decided not to because the masses have effectively redefined what that term means. At this point, "Ponzi Scheme" has become a general term for financial sketchiness. The challenge becomes how to how to denounce the Ponzi term without also denying the presence of financial engineering. Your argument does this as well as possible IMO. When a pundit claims that Groupon is a Ponzi scheme, he really means "Groupon is raising money and using the money to buy more revenue at more than face value". We don't really have a classification for what this is, and the proposed scheme seems somewhat scam-ish, so the Ponzi term is being used. I'm not claiming that Groupon is simply raising money and buying revenue. But I do believe that's what the pundits mean to say when they call Groupon a Ponzi scheme.
- raganwald 15y ago
  Groupon is absolutely buying revenues. I read somewhere that $1.00 of revenue costs them $1.43. Given estimates as high as B$4 for 2011 revenues, if investors will value the company at B$15, it is clear that each dollar of revenue is worth $3.75 to investors. Groupon's financing strategy exploits the difference between what an investor will pay for a dollar of revenue--$3.75--and what it costs to earn a dollar of revenue--$1.43. Let's say they have a dollar of revenue in hand. They can sell $3.75 of stock based on that dollar of revenue. At $1.43 per, they can buy $2.62 more revenue. Which they can use to raise $9.82 from investors. Which buys $6.87 in revenues. Which they can use to raise $25.76, and so on and so forth, until they exhaust the market's capacity for buying Groupon stock or everyone tries to cash out at once. Of course, this is not necessarily a bad thing. If a dollar of revenue is actually a dollar of recurring revenue, it could be worth much more than $3.75. It all depends... How much churn do they have? How much competition will they have? It costs $1.43 to get the first dollar of revenue. How much does it cost them to get a second dollar from an existing merchant? I don't know the answer to any of these questions. If it turns out that these revenue dollars are not recurring and the participants in the business know this but are disguising the situation from investors and misleading them into thinking that these dollars are just like regular business revenue dollars... If that were the case, maybe one day people would be on HN claiming that such-and-such a company is a "Groupon Scheme." But if it turns out that they have been spending $1.43 to buy a growing revenue stream, investors might end up looking exceptionally smart.