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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 te

by 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

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.