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It's almost absurd how closely Groupon is following the classic 'tech bubble' road to disaster. 1. Hype (check) 2. IPO talk (check) 3. Turn down acquisition

It's almost absurd how closely Groupon is following the classic 'tech bubble' road to disaster. 1. Hype (check) 2. IPO talk (check) 3. Turn down acquisition at incredibly high P/E (check) 4. Superbowl Advert (check) 5. IPO just in time to avoid running out of money (on the way) 6. Market goes rational (inevitable, forces pushing it irrational can't do so forever), valuation plumets 7. Unable to raise money by selling stock, and a business model of 'sell stock to pay bills while making no profit', bankruptcy is announced 8. The talking heads repeat the mantra "nobody saw it coming" for the next 6 months.

encoderer 15y ago
You left out "generate massive sums of actual revenue from real, paying customers, and become the fastest growing company by revenue in history." I think a bunch of armchair analysts on this thread are going overboard with their predictions of imminent failure.
- gaius 15y ago
  Groupon spends $1.43 for every $1 in revenue. Hell they could just not do any business and increase their revenue 43% overnight...
  - jaredsohn 15y ago
    No; that would increase their profit at the expense of revenue.
  - 3pt14159 15y ago
    Does that spending include their dividends or other cash outflows to the founders? Because if it is straight spending money they are in trouble.
    - imjustatechguy 15y ago
      It doesn't include the hundreds of millions which have been cashed out -- there numbers would look even worse if they included those numbers.
- rsynnott 15y ago
  Ah, revenue. Yes, I remember this from last time round; revenue is what matters, regardless of the costs involved in producing that revenue, or its uncertain future footing. Right.
  - encoderer 15y ago
    From last time around? In the 90s? I don't. Then, it was all about subscribers/visitors, with the murky promise to monetize somehow. And many of the startups then that DID post revenue were involved in quasi-illegal quid pro quo scams where Startup A invests in Startup B with the understanding that B will use that newfound capital to purchase from A.
  - cte 15y ago
    From Groupon's S-1: "To demonstrate the economics of our business model, we have compared the revenue and gross profit generated from the North American subscribers we acquired in the second quarter of 2010, which we refer to as our Q2 2010 cohort, to the online marketing expenses incurred to acquire such subscribers. The Q2 2010 cohort is illustrative of trends we have seen among our North American subscriber base. The Q2 2010 cohort included 3.7 million subscribers that we initially spent $18.0 million in online marketing to acquire in the second quarter of 2010. In that quarter, we generated $29.8 million in revenue and $12.8 million in gross profit from the sale of approximately 1.2 million Groupons to these subscribers. Through March 31, 2011, we generated an aggregate of $145.3 million in revenue and $61.7 million in gross profit from the sale of approximately 6.3 million Groupons to the Q2 2010 cohort. In summary, we spent $18.0 million in online marketing expense to acquire subscribers in the Q2 2010 cohort and generated $61.7 million in gross profit from this group of subscribers over four quarters." They are seeing >3x profit on typical cohorts, so they decided to buy as many users as possible (which is smart).
- justin_vanw 15y ago
  This same argument applies if I were to convince 1M people to each give me $1000, all on one day, I would go from 0 to $1B in revenue in one day. The thing is, it still applies if I take that $1B and burn it in a big bonfire. I suspect you must see why your statement isn't convincing now, right? If I raised a few hundred million dollars, I could create a website where you went, and gave your credit card number. I would charge your card $1.00 and then credit your card $1.40. I would be Groupon, except I would be slightly more profitable.
  - encoderer 15y ago
    As sensational as your statement is, it has absolutely no relevance to the analysis of Groupon as a business. Groupon believes they have a reliable fix on the Customer Lifetime Value. Some very smart investors who have done _actual_ analysis of Groupon (including the team that did due diligence for Google when they made the buyout offer earlier this year) clearly have at least some faith in these CLV numbers. All of the "armchair analysis" you see here -- including your opinion on the subject -- is looking at a snapshot of Groupon from their S1 backward. That's fine but if you want to leave pro forma out of it, but then quit making pro forma statements about the failure and decay of the business! All businesses are a money-multiplier machine, right? What you're complaining of is that by your analysis, that multiplier for Groupon is 0.72. Not a very good money machine at all really. Suppose that when you factor in the CLV, that multiplier falls into the range you'd expect from a company that has low variable product costs and a large sales team: 1.21. If you run that company, once you have enough data to really believe in the efficacy of those numbers, then you're going to do everything you can to purchase as many customers as possible. And if you're an investor, you're going to encourage management to do just that. I mean, this is the very handbook on non-seed startup investing. Find a profitable CLV model, and scale it out. But I'll give you this: you did a good job creating some outrageous, tongue-wagging scenarios.
    - _delirium 15y ago
      I don't think it's too outrageous a scenario in response to a claim that Groupon is interesting because it's "become the fastest growing company by revenue in history". The point is that becoming the fastest-growing company by revenue in history is not an independent accomplishment, because all it takes to do that is a large amount of money and a willingness to burn it. It is a measure of their ability to attract funding that can support spending, but not an independent measure of success, since, given sufficient funding, you can always buy revenue, e.g. by selling $100 bills for $50. To show that Groupon is more interesting than the money-burning scenario requires some metric other than revenue or revenue growth.
imjustatechguy 15y ago
I'd agree exceot for #8, everyone is actually talking about it for once and generally in agreement. It is sort of surreal.
- justin_vanw 15y ago
  There were people talking about the housing bubble in 2005. Hell, there were people calling it out in 2003. I remember people calling it a bubble in front of congress in 2006, and being rebutted by the president of some association of Realtors a few minutes later, also in testimony to congress. The facts of the housing bubble were widely argued during the bubble itself, and yet after the crash, somehow, 'no one saw it coming'.
mkn 15y ago
6. Market goes rational (inevitable, forces pushing it irrational can't do so forever), valuation plumets [sic] It's a nitpick, but the only irrationality that gets checked is unsustainable irrationality. It's a bit of a simplification to say that profits are actually "equilibrium irrationality," but not by much. If the market were actually composed of rational agents, all prices would be driven down to material cost + wages, and there'd be no need for advertising, either. Forces can, and in fact always do, push the market to irrationality. The only thing the market seems to do is moderate the degree of irrational excess. I'm not really going anywhere with this. I just have a fascination with people's manifold faith in markets and their powers. It's interesting that "free market theory" flatters consumers (as rational) and benefits businesses (via consumer irrationality). I think that this is why the notion survives so well in popular culture.
- justin_vanw 15y ago
  I wouldn't claim that the market generally is efficient, but I strongly suspect that it a lot like Brownian Motion. No observer could possibly predict which direction it will jump next, but the overall parameters are determined in some fundamental way. I call this Brownian because to someone observing the motion of a single atom, it appears random, but it is entirely determined by the motion and position of other atoms that end up colliding with it, and there are fundamental conditions, such as the overall temperature or density of the stuff surrounding the atom being observed, but while knowing those things lets you make predictions, those predictions only hold after averaging over a very large number of atoms or a very long amount of time, and by then, if you aren't in a carefully controlled laboratory environment, the global conditions will have changed enough that your predictions aren't sensible any longer. However, it's not efficient, since there is a lot you can do to make a better guess than assuming it is a completely random process. While this will make it more efficient, there are plenty of people making random guesses, which reduces the effect your better guesses have on the overall efficiency of the market. There are also plenty of fools, and they are investing on all sorts of techniques which ignore any of the global considerations, and of course this is how bubbles expand.
  - dxbydt 15y ago

encoderer 15y ago

You left out "generate massive sums of actual revenue from real, paying customers, and become the fastest growing company by revenue in history." I think a bunch of armchair analysts on this thread are going overboard with their predictions of imminent failure.

gaius 15y ago
Groupon spends $1.43 for every $1 in revenue. Hell they could just not do any business and increase their revenue 43% overnight...
- jaredsohn 15y ago
  No; that would increase their profit at the expense of revenue.
- 3pt14159 15y ago
  Does that spending include their dividends or other cash outflows to the founders? Because if it is straight spending money they are in trouble.
  - imjustatechguy 15y ago
    It doesn't include the hundreds of millions which have been cashed out -- there numbers would look even worse if they included those numbers.
rsynnott 15y ago
Ah, revenue. Yes, I remember this from last time round; revenue is what matters, regardless of the costs involved in producing that revenue, or its uncertain future footing. Right.
- encoderer 15y ago
  From last time around? In the 90s? I don't. Then, it was all about subscribers/visitors, with the murky promise to monetize somehow. And many of the startups then that DID post revenue were involved in quasi-illegal quid pro quo scams where Startup A invests in Startup B with the understanding that B will use that newfound capital to purchase from A.
- cte 15y ago
  From Groupon's S-1: "To demonstrate the economics of our business model, we have compared the revenue and gross profit generated from the North American subscribers we acquired in the second quarter of 2010, which we refer to as our Q2 2010 cohort, to the online marketing expenses incurred to acquire such subscribers. The Q2 2010 cohort is illustrative of trends we have seen among our North American subscriber base. The Q2 2010 cohort included 3.7 million subscribers that we initially spent $18.0 million in online marketing to acquire in the second quarter of 2010. In that quarter, we generated $29.8 million in revenue and $12.8 million in gross profit from the sale of approximately 1.2 million Groupons to these subscribers. Through March 31, 2011, we generated an aggregate of $145.3 million in revenue and $61.7 million in gross profit from the sale of approximately 6.3 million Groupons to the Q2 2010 cohort. In summary, we spent $18.0 million in online marketing expense to acquire subscribers in the Q2 2010 cohort and generated $61.7 million in gross profit from this group of subscribers over four quarters." They are seeing >3x profit on typical cohorts, so they decided to buy as many users as possible (which is smart).
justin_vanw 15y ago
This same argument applies if I were to convince 1M people to each give me $1000, all on one day, I would go from 0 to $1B in revenue in one day. The thing is, it still applies if I take that $1B and burn it in a big bonfire. I suspect you must see why your statement isn't convincing now, right? If I raised a few hundred million dollars, I could create a website where you went, and gave your credit card number. I would charge your card $1.00 and then credit your card $1.40. I would be Groupon, except I would be slightly more profitable.
- encoderer 15y ago
  As sensational as your statement is, it has absolutely no relevance to the analysis of Groupon as a business. Groupon believes they have a reliable fix on the Customer Lifetime Value. Some very smart investors who have done _actual_ analysis of Groupon (including the team that did due diligence for Google when they made the buyout offer earlier this year) clearly have at least some faith in these CLV numbers. All of the "armchair analysis" you see here -- including your opinion on the subject -- is looking at a snapshot of Groupon from their S1 backward. That's fine but if you want to leave pro forma out of it, but then quit making pro forma statements about the failure and decay of the business! All businesses are a money-multiplier machine, right? What you're complaining of is that by your analysis, that multiplier for Groupon is 0.72. Not a very good money machine at all really. Suppose that when you factor in the CLV, that multiplier falls into the range you'd expect from a company that has low variable product costs and a large sales team: 1.21. If you run that company, once you have enough data to really believe in the efficacy of those numbers, then you're going to do everything you can to purchase as many customers as possible. And if you're an investor, you're going to encourage management to do just that. I mean, this is the very handbook on non-seed startup investing. Find a profitable CLV model, and scale it out. But I'll give you this: you did a good job creating some outrageous, tongue-wagging scenarios.
  - _delirium 15y ago
    I don't think it's too outrageous a scenario in response to a claim that Groupon is interesting because it's "become the fastest growing company by revenue in history". The point is that becoming the fastest-growing company by revenue in history is not an independent accomplishment, because all it takes to do that is a large amount of money and a willingness to burn it. It is a measure of their ability to attract funding that can support spending, but not an independent measure of success, since, given sufficient funding, you can always buy revenue, e.g. by selling $100 bills for $50. To show that Groupon is more interesting than the money-burning scenario requires some metric other than revenue or revenue growth.

imjustatechguy 15y ago

I'd agree exceot for #8, everyone is actually talking about it for once and generally in agreement. It is sort of surreal.

justin_vanw 15y ago
There were people talking about the housing bubble in 2005. Hell, there were people calling it out in 2003. I remember people calling it a bubble in front of congress in 2006, and being rebutted by the president of some association of Realtors a few minutes later, also in testimony to congress. The facts of the housing bubble were widely argued during the bubble itself, and yet after the crash, somehow, 'no one saw it coming'.

mkn 15y ago

6. Market goes rational (inevitable, forces pushing it irrational can't do so forever), valuation plumets [sic] It's a nitpick, but the only irrationality that gets checked is unsustainable irrationality. It's a bit of a simplification to say that profits are actually "equilibrium irrationality," but not by much. If the market were actually composed of rational agents, all prices would be driven down to material cost + wages, and there'd be no need for advertising, either. Forces can, and in fact always do, push the market to irrationality. The only thing the market seems to do is moderate the degree of irrational excess. I'm not really going anywhere with this. I just have a fascination with people's manifold faith in markets and their powers. It's interesting that "free market theory" flatters consumers (as rational) and benefits businesses (via consumer irrationality). I think that this is why the notion survives so well in popular culture.

justin_vanw 15y ago
I wouldn't claim that the market generally is efficient, but I strongly suspect that it a lot like Brownian Motion. No observer could possibly predict which direction it will jump next, but the overall parameters are determined in some fundamental way. I call this Brownian because to someone observing the motion of a single atom, it appears random, but it is entirely determined by the motion and position of other atoms that end up colliding with it, and there are fundamental conditions, such as the overall temperature or density of the stuff surrounding the atom being observed, but while knowing those things lets you make predictions, those predictions only hold after averaging over a very large number of atoms or a very long amount of time, and by then, if you aren't in a carefully controlled laboratory environment, the global conditions will have changed enough that your predictions aren't sensible any longer. However, it's not efficient, since there is a lot you can do to make a better guess than assuming it is a completely random process. While this will make it more efficient, there are plenty of people making random guesses, which reduces the effect your better guesses have on the overall efficiency of the market. There are also plenty of fools, and they are investing on all sorts of techniques which ignore any of the global considerations, and of course this is how bubbles expand.
- dxbydt 15y ago