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Based upon the mounting evidence about the condition of Groupon, cletus' fear "that a collapse of Groupon--which I actually see as a non unrealistic possibility

Based upon the mounting evidence about the condition of Groupon, cletus' fear "that a collapse of Groupon--which I actually see as a non unrealistic possibility--will taint other Internet/tech IPOs and, even worse, prompt the Federal government into more kneejerk regulation even stupider and more onerous than Sarbanes-Oxley." makes absolutely no sense. Suggesting that a poorly performing companies weak IPO, or otherwise, will taint other IPOs and prompt regulations makes no sense whatsoever. For the health and vigor of the tech markets, Groupon's IPO should be a spectacular failure based upon the poor business model and weaker financial position.

cletus 15y ago
Imagine a worst case scenario where Groupon files for Chapter 11 and defaults on all outstanding debts to merchants, which by that stage could amount to over a billion dollars (IIRC it's currently $280 million). Imagine that because of that lost revenue many small businesses end up collapsing. At the same time it becomes more public knowledge that 2010 funding rounds were to buy out early investors, who made out like bandits, and retail investors, pension funds and so on lose a huge stack of money. Now look at that (admittedly pessimistic) picture and try and tell me there won't at least be calls for "reform".
- SwellJoe 15y ago
  I think the more dangerous result will be that the scheme continues to "work" for another couple of years, a half dozen competitors come along and run the same basic scheme (with tweaks to make the new businesses "unique"; maybe they go for particular niches currently unserved or whatever), those companies also have explosive IPOs, and then the whole thing comes crashing down in a couple more years when the IPO money runs out. One company with a 280 million dollar bankruptcy (or, more realistically, by the time of the IPO it will be a few billion dollars) isn't going to make a big dent in how the markets work. But, a half dozen such companies in the same boat when the bottom falls out of the market and the fallout for all of the companies that they suckered into taking these deals, could very well lead to something scary enough to get regulators and legislators involved. It's plausible, if not entirely likely, that Groupon, and their ilk, could very well kill IPOs for the rest of us for yet another decade.
- ChuckFrank 15y ago
  I misunderstood. I thought you were saying that a weak IPO would result in additional regulations. I thought you were saying that it is in the tech segments best interest for solid IPO launches, so as to not taint other future IPO companies. And I was saying that the opposite was true, overinflated, unsubstantiated, and unsecured IPO will expose the industry to greater enforced accountability. As for the worst case scenario, for the sake of all the small business 'investors' in Groupon (though I'm not sure that they actually realize their participation), I certainly hope that something like this doesn't happen. However, considering the ugly and apparently underhanded 2010 funding play, some investigations may be in order. Besides which, the chairman of Groupon is already Mr. Class Action Lawsuit. So, based upon previous performance, one can likely predict future results in this case.
- jbooth 15y ago
  There's a huge difference between this and Enron/Worldcom, which inspired Sarbanes Oxley. The latter two committed actual fraud. As in, this article would be saying "Wow, Groupon is hugely profitable" rather than the press we're seeing now.
  - scottkduncan 15y ago
    While this is admittedly quite different from Enron/Worldcom style fraud, Groupon Chairman Eric Lefkofsky did recently proclaim that Groupon will be "wildly profitable." That's quite a statement for a company's pre-IPO quiet period and one that people will certainly look back to should the worst-case (or even somewhat-bad-case) come to pass.
- eurohacker 15y ago
  how can banks invest their pension funds clients money in Groupon shares anyway - without responsibility for the losses shouldnt it be illegal by law to invest pension funds in startups - especially in startups having some of the ugliest balance sheets on earth
- justin_vanw 15y ago
  This is just 'the sky is falling' thinking. If groupon defaults, the businesses will just not honor the groupon coupons. After all, they haven't been paid for. The entire hypothesis of this article is that Groupon amounts to a marketing firm where you pay most of the cost in kind much later, instead of paying up front for a big marketing campaign. The 'in kind and later' part makes your scenario absurd. However, I this article basically misses the point. Lots of businesses have excess capacity that costs them nothing to utilize. For example, a hair salon which employs 4 stylists will have several hours per week, and perhaps many more, where a stylist is idle. Giving someone a very cheap haircut when otherwise idle is a chance to win a future paying customer, and has basically no cost. It's a win for the customer and a win for the stylist, and of course groupon is getting a fee for that. The same is true of items, like designer clothing and food, that have absurd markups. Selling it for closer to cost will cannibalize some future purchases, but overall isn't really that harmful, and may generate recurring income from newly converted customers. It is certainly MUCH lower risk than an advertising campaign, in that all the cost is baked in to people who actually show up in your store, instead of spread to the wind in the hopes of hitting the right people. The problem with groupon is that it has no moat. http://37signals.com/svn/posts/333-warren-buffett-on-castles-and-moats http://37signals.com/svn/posts/333-warren-buffett-on-castles... Any competitor can come along and set up an identical business, and there is basically no network effect to speak of to keep customers coming to groupon instead of living social or any other competitor, and no risk for retailers or customers of trying another competing site. This is why there is 1 classified site in the US (craigslist) and 1 auction site (ebay), but innumerable comparison shopping sites all sharing the same retailers (amazon, half, cnet, shopping.com, pricegrabber, etc etc).
  - cletus 15y ago
    > Lots of businesses have excess capacity that costs them nothing to utilize. I dispute this assertion or, in the very least, see this as being far more complex than you suggest, for two reasons: 1. Customers who might otherwise pay full price will end up using these deals, which is a direct loss to the business; and 2. The inventory may be used up by such offers to such an extent that customers who might otherwise pay full price may not be able to do so. > The problem with groupon is that it has no moat. On this point you are I agree. As for being "win win", apart from the above, you have to look at a number of factors: - Do Groupon customers return? - What word-of-mouth do they give to businesses as a result? - How much do they spend (initially and on repeat visits)? - Are they people brought in by Groupon representative of your existing or desired customer base? There is plenty of anecdotal evidence suggestings "Grouponers" are "cheap" (both in spending habits and tips). The "offer marketplace" providers (Groupon, LivingSocial or whoever) seem to be missing a golden opportunity to mine useful data here by tying an offer redemption to an actual person.
- fleitz 15y ago
  They need more rev so they become to big to fail and can use the fed discount window or QE3.
DrJokepu 15y ago
Why does not it make sense?
gaius 15y ago
But it will tho', because remember that the actual money comes from people who think in terms of asset classes, not individual companies. If a pension fund or a university endowment says, let's reduce our exposure to Internet companies, then VCs get less money to play with.

cletus 15y ago

Imagine a worst case scenario where Groupon files for Chapter 11 and defaults on all outstanding debts to merchants, which by that stage could amount to over a billion dollars (IIRC it's currently $280 million). Imagine that because of that lost revenue many small businesses end up collapsing. At the same time it becomes more public knowledge that 2010 funding rounds were to buy out early investors, who made out like bandits, and retail investors, pension funds and so on lose a huge stack of money. Now look at that (admittedly pessimistic) picture and try and tell me there won't at least be calls for "reform".

SwellJoe 15y ago
I think the more dangerous result will be that the scheme continues to "work" for another couple of years, a half dozen competitors come along and run the same basic scheme (with tweaks to make the new businesses "unique"; maybe they go for particular niches currently unserved or whatever), those companies also have explosive IPOs, and then the whole thing comes crashing down in a couple more years when the IPO money runs out. One company with a 280 million dollar bankruptcy (or, more realistically, by the time of the IPO it will be a few billion dollars) isn't going to make a big dent in how the markets work. But, a half dozen such companies in the same boat when the bottom falls out of the market and the fallout for all of the companies that they suckered into taking these deals, could very well lead to something scary enough to get regulators and legislators involved. It's plausible, if not entirely likely, that Groupon, and their ilk, could very well kill IPOs for the rest of us for yet another decade.
ChuckFrank 15y ago
I misunderstood. I thought you were saying that a weak IPO would result in additional regulations. I thought you were saying that it is in the tech segments best interest for solid IPO launches, so as to not taint other future IPO companies. And I was saying that the opposite was true, overinflated, unsubstantiated, and unsecured IPO will expose the industry to greater enforced accountability. As for the worst case scenario, for the sake of all the small business 'investors' in Groupon (though I'm not sure that they actually realize their participation), I certainly hope that something like this doesn't happen. However, considering the ugly and apparently underhanded 2010 funding play, some investigations may be in order. Besides which, the chairman of Groupon is already Mr. Class Action Lawsuit. So, based upon previous performance, one can likely predict future results in this case.
jbooth 15y ago
There's a huge difference between this and Enron/Worldcom, which inspired Sarbanes Oxley. The latter two committed actual fraud. As in, this article would be saying "Wow, Groupon is hugely profitable" rather than the press we're seeing now.
- scottkduncan 15y ago
  While this is admittedly quite different from Enron/Worldcom style fraud, Groupon Chairman Eric Lefkofsky did recently proclaim that Groupon will be "wildly profitable." That's quite a statement for a company's pre-IPO quiet period and one that people will certainly look back to should the worst-case (or even somewhat-bad-case) come to pass.
eurohacker 15y ago
how can banks invest their pension funds clients money in Groupon shares anyway - without responsibility for the losses shouldnt it be illegal by law to invest pension funds in startups - especially in startups having some of the ugliest balance sheets on earth
justin_vanw 15y ago
This is just 'the sky is falling' thinking. If groupon defaults, the businesses will just not honor the groupon coupons. After all, they haven't been paid for. The entire hypothesis of this article is that Groupon amounts to a marketing firm where you pay most of the cost in kind much later, instead of paying up front for a big marketing campaign. The 'in kind and later' part makes your scenario absurd. However, I this article basically misses the point. Lots of businesses have excess capacity that costs them nothing to utilize. For example, a hair salon which employs 4 stylists will have several hours per week, and perhaps many more, where a stylist is idle. Giving someone a very cheap haircut when otherwise idle is a chance to win a future paying customer, and has basically no cost. It's a win for the customer and a win for the stylist, and of course groupon is getting a fee for that. The same is true of items, like designer clothing and food, that have absurd markups. Selling it for closer to cost will cannibalize some future purchases, but overall isn't really that harmful, and may generate recurring income from newly converted customers. It is certainly MUCH lower risk than an advertising campaign, in that all the cost is baked in to people who actually show up in your store, instead of spread to the wind in the hopes of hitting the right people. The problem with groupon is that it has no moat. http://37signals.com/svn/posts/333-warren-buffett-on-castles-and-moats http://37signals.com/svn/posts/333-warren-buffett-on-castles... Any competitor can come along and set up an identical business, and there is basically no network effect to speak of to keep customers coming to groupon instead of living social or any other competitor, and no risk for retailers or customers of trying another competing site. This is why there is 1 classified site in the US (craigslist) and 1 auction site (ebay), but innumerable comparison shopping sites all sharing the same retailers (amazon, half, cnet, shopping.com, pricegrabber, etc etc).
- cletus 15y ago
  > Lots of businesses have excess capacity that costs them nothing to utilize. I dispute this assertion or, in the very least, see this as being far more complex than you suggest, for two reasons: 1. Customers who might otherwise pay full price will end up using these deals, which is a direct loss to the business; and 2. The inventory may be used up by such offers to such an extent that customers who might otherwise pay full price may not be able to do so. > The problem with groupon is that it has no moat. On this point you are I agree. As for being "win win", apart from the above, you have to look at a number of factors: - Do Groupon customers return? - What word-of-mouth do they give to businesses as a result? - How much do they spend (initially and on repeat visits)? - Are they people brought in by Groupon representative of your existing or desired customer base? There is plenty of anecdotal evidence suggestings "Grouponers" are "cheap" (both in spending habits and tips). The "offer marketplace" providers (Groupon, LivingSocial or whoever) seem to be missing a golden opportunity to mine useful data here by tying an offer redemption to an actual person.
fleitz 15y ago
They need more rev so they become to big to fail and can use the fed discount window or QE3.

DrJokepu 15y ago

Why does not it make sense?

gaius 15y ago

But it will tho', because remember that the actual money comes from people who think in terms of asset classes, not individual companies. If a pension fund or a university endowment says, let's reduce our exposure to Internet companies, then VCs get less money to play with.