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The Fall of Groupon: Is the Daily-Deals Site Running Out of Cash?
- dreww 15y agoit's increasingly clear that groupon is essentially a ponzi scheme with some graphic design. can't wait for the post mortem documentary a la "the smartest guys in the room".
- pbreit 15y agoGroupon's cash flow is just like any other business: it buys merchandise (coupons) from vendors (on a net 60 basis), marks it up and sells it to consumers. How is that a ponzi scheme? I think you might be confused since many news outlets are making it sound like today's Groupon buyer's are funding yesterday's vendors in some sort of mischievous way. But that's how all businesses work.
- freshhawk 15y agoMost businesses don't spend more money to aquire new customers than the lifetime value of that customer. There's a reason the term ponzi scheme is being used by the business news, and it's not because they don't know how businesses work.
- cbr 15y agodon't spend more money to aquire new customers than the lifetime value of that customer. If groupon thought they were doing this they would stop.
- freshhawk 15y agoWhy? It's entirely possible they are doing this, it's also possible they don't believe they are doing this. Either way, they are making a lot of money and the early investors have already been paid off very well. So if this is the case why would they stop until they run out of new cities?
- danmaz74 15y agoThe Ponzi scheme allegation isn't about the cash flow model, it's about the investment return model: Groupon used money from the late investors to pay back the first ones with a profit, even if for now their business is losing money - and it isn't clear if they will start making real money from their business model. Or at least enough money to make the total investment worthwhile.
- pbreit 15y agoI've typically seen "ponzi" referencing Groupon's business model, not it's financing activity. Having a late stage investor payoff earlier investors/shareholders is not uncommon. IPO investors then payoff those investors and so forth. Is that what you mean?
- ForrestN 15y agoAs you stated elsewhere, the explanation for this was that it insulated them from the pressure of takeover offers. Getting offered 6 billion for a company you started 2 years ago must be an incredibly difficult thing to turn down, so taking some equity out allows you to make decisions that you think are best for the business without worrying so much about your personal risk profile and so on.
- danmaz74 15y agoYes, that's what I mean. Ponzi schemes are about investors - who expect to earn money from their investment - not about consumers. In the end, if after the IPO the business starts making money and that money gives a healthy return to the latest investors, everything is fine. If, on the other had, it turns out that the business model can't give a return on the investment and the latest investors lose their money, which was used to pay off the first investors, the mechanic of a Ponzi scheme is perfectly respected :)
- dreww 15y agoif groupon is losing money on every customer, adding more customers actually exacerbates the cash flow problem, and every time those customers buy a deal, groupon goes farther in the hole. they use the cash to pay their oldest debts but eventually there will be a reckoning. it's unfathomable to me that it would be an attractive investment.
- pbreit 15y agoYour whole comment is lacking but this part is plainly false: "every time those customers buy a deal, groupon goes farther in the hole". Groupon's share of the every coupon purchase, which is around 40%, drops right to the bottom line.
- webwright 15y agoFor how many years did Amazon lose money on every customer? Land grabs WORK. I'm not convinced that it will here, or that Groupon is a good investment at its current valuation... But the idea that a retail voucher business can't be self-sustaining seems kinda silly. Groupon has 42% gross margins in 2011 q1 (UP 6% from the previous quarter).
- chromatic 15y agoFor how many years did Amazon lose money on every customer? Fewer than most people think. Consider the financial model of a (successful) grocery store ostensibly losing a penny on each transaction. If you're clever, you can make plenty of money by arranging your contract terms carefully.
- webwright 15y ago6 years is the answer to my rhetorical question, if you're curious. Groupon is less than halfway to that point, and has much higher gross margins than Amazon did at the time (and about 2x what Amazon has right now).
- mostlycarbon 15y agoI remember this happening 5 years ago, but instead of a bunch of salesmen frantically searching for businesses to pitch couponing to, it was mortgage brokers pitching exotic loans to home buyers. I'll go out on a limb and guess that most of Groupon's sales team consists of ex-mortgage brokers and washed-up real estate agents.
- byrneseyeview 15y agoI wrote a little about this: Another way to respond to this critique: Groupon could have theoretically solved this problem by adopting faster payment plans for merchants. That would make theirs a worse business with lower cash flow, but it would help their PR (and perhaps their valuation). It’s counterintuitive that Groupon could make their business worse but make their valuation better—it depends on whether their share price is, at the margin, determined by the skeptics or the believers. ( http://www.digital-dd.com/hp-immaterial-usability-users/ http://www.digital-dd.com/hp-immaterial-usability-users/ )
- ghshephard 15y agoI don't understand, from Blodget: ". "As of June 30, Groupon had $680 million in current liabilities -- bills the company has to pay,".... "Meanwhile, Groupon only had $376 million of current assets with which to pay them." " If they pay their merchants faster, where would they get the money? I just checked at Wikipedia, and, "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. " It kind of sounds like existing merchants "Daily Deals" are being paid by new merchants. Because this isn't really an "investment" per se, I guess it's not illegal - but right about now I'd be a little cautious if I were a small business engaging with group on - at least determine what level of protection I have.
- Hisoka 15y agoI hope they can do an IPO, and short it, along with Demand Media. You gotta invest in what you know.
- jsm386 15y agoDemand Media was a great short...until the borrow cost went through the roof (same problem with LinkedIn). Did not want to cover that but didn't have much of a choice. This was before options were available on DMD.
- pbreit 15y agoThis article is kind of a yawner. No new information and not exactly the magazine I would go to for this topic. I don't really understand the final paragraph which suggests a $6b exit might have been favorable to a $10-25b exit. Groupon-hate is tired. More interesting is a bull case: http://news.ycombinator.org/item?id=2904187 http://news.ycombinator.org/item?id=2904187
- tedjdziuba 15y agoIn a federal prison somewhere, Andy Fastow mutters "...amateurs".
- arethuza 15y agoGroupon actually reminds me more of Value America: http://en.wikipedia.org/wiki/Value_America http://en.wikipedia.org/wiki/Value_America
- RexRollman 15y agoI just don't see how Groupon, as it currently operates, is going to make money. And I wonder how well its IPO is going to go, now that they have had to admit that they are losing money.
- chlee 15y agoIf the owners didn't take ~700 million of the table from the last rounds of founding, groupon would be in a better financial situation than they are today.
- iwwr 15y agoIf they didn't, they may not have had a second chance.
- felipemnoa 15y agoWhich underscores one of the main problems. If the founders didn't think they were going to have a second chance, why should anybody else?
- veyron 15y agoDid groupon start in chicago or boston. The article says boston, but I thought it was chicago ...
- pbreit 15y agoGroupon is based in Chicago and Chicago was indeed its first market. Boston, it's second market, gets cited frequently because Groupon itself spotlights it as an example market, possibly because it's a broader proxy than Chicago would be.
- mikeryan 15y agoWell its a good thing $810M of their $946M round paid out the founders and early investors. Now no one but the late round VC's and the 5000 employees get stuck holding the bag if this thing implodes. This is the problem with those early payouts (I don't mind these in theory but this case was egregious). There's not a lot of incentive anymore for the people running the company to do anything but what they're currently doing. They've already had their exit.
- maukdaddy 15y ago100% correct and it really makes me wonder what the late round VCs were thinking. The only I can come up with is pure greed - willing to take an enormous risk for future IPO (above and beyond typical VC risk)
- joe_the_user 15y agoWell, If we're wildly speculating, we could also imagine kick-backs and money laundering. I know nothing of Groupon's financing. I know Digital Sky was a large, late investor in Facebook. And they are controlled by a Russian oligarch. Wealthy criminals are sometimes willing to invest in unprofitable businesses to launder money, buy influence and hope that a bigger fool will follow them.
- lnxkrnl 15y agoIf Yuri Milner is the Russian mafia money man. He is f*cked. Most of his investments are going to implode in a double dip recession, and bring down the rest of Silicon Valley elites.
- mchusma 15y agoThese investors are big boys, so if they wanted to buy out founders then more power to them. Early investors, the ones who would potentially be screwed by this, often have a provision allowing them to sell too. It's not a greed issue (implying morality), it's simply a stupidity issue.
- pbreit 15y ago
- ig1 15y agoThe problem with all of these analysises is that they focus on rather meaningless things. Lots of companies operate with bigger debt than assets, as long you have incoming cash you can just get a bridging loan against it. What profitability comes down to is what the lifetime value of a user (in this case we have two types of users, consumers and providers) is and the cost of acquiring a user. Nothing else really matters, focusing on the accounting of how a company is handling raising money or managing it's cashflow isn't really that relevant in the long term. Sure it adds risk that the company might have cashflow problems in the short term, but it's the price you pay for agressive growth and presumably the investors are happy with it. People seem to forget that you could have said the same thing about Amazon, in the early days it was losing money hand over fist because it was using investor money to subsidize product sales. Amazon gambled on the high LTV of customers and it paid off hugely for them.
- mikeryan 15y agoLots of companies operate with bigger debt than assets, as long you have incoming cash you can just get a bridging loan against it. Thats not the problem. The problem is greater expenditures then income. Very few companies survive long in this position.
- ForrestN 15y agoThey aren't planning to operate with greater expenditures for long, as they've stated. The plan is fast-growth in order to compete with clones to establish market dominance, and then to drastically cut back the marketing expenses.
- freshhawk 15y agoYou're missing the part where it's become obvious that Groupon is spending more on provider aquisition than their lifetime value and they are spending a lot on consumer aquisition, more than what most analysts would put as a high end of consumer lifetime value. Sure, it's a new market and there are some unknowns, but the only route to success with their current strategy is fanaticaly loyal consumers (who are very disloyal to providers but will be loyal to groupon over it's competitors?) and an ever expanding number of businesses that are willing to try groupon but have so far been unlikely to return. Sure, it might be an Amazon but it seems arbitrary to pick that comparison considering how many other businesses arounds Amazons time turned out to be exactly what everyone said they were: unsustainable.
- fleitz 15y ago"Groupon must spend to grow, but must continue growing to cover its operational expenditures" I believe some of Charles Ponzi's companies also suffered from these kinds of structural problems, luckily Ponzi like Mason was able to exit his position in the company through follow on investors before the issues started to seriously affect the valuation of the company.
- freshhawk 15y agoIt really stretches the term to call this a "Catch 22". Since it hardly fits that metaphor and "Ponzi Scheme" matches that definition exactly.
- sinzone 15y agoAndrew Mason will not fail. Look at people behind companies not just at the box. Or you may follow the Michael Dell path when Steve just came back at Apple and Dell said: "Shut down the company and give the money left back to the shareholder. You don't have chances to succeed". 1998 circa.
- ForrestN 15y agoThe competition for most outlandish criticism of Groupon is getting really boring. All of these articles ignore the same basic facts. Groupon is spending a huge amount on customer acquisition. They've stated numerous times that this is a short-term competitive play, to try to create as much of an advantage as possible to counteract the dozens of clones by building up their brand awareness and subscriber list. The idea that they are a ponzi scheme or the next Madoff because they are choosing a fast-growth strategy is absurd. I might disagree that this is a smarter strategy than growing more slowly, but this doesn't prove that they're insolvent or something. Existing customers don't stop spending after one purchase, so the idea that they have to spend on acquisition in order to make money to cover operating costs is nonsense. They have total control over how much they spend on customer acquisition, and at a certain point will have to slow down. Again, you can disagree with their strategy, but there's no scam here. Likewise, there is no evidence that any majority of businesses who work with Groupon, or customers who purchase Groupons, are overwhelmingly dissatisfied with the value they get. Tons of business still agree to run groupons every day, including businesses that have run groupons many times. Obviously, it's not a great experience for everyone, and I'm not even arguing that in the long term this model will do well. But to say that Groupon doesn't do anything or provides no value just isn't backed up by any credible evidence, at least that's been present in all these threads. Boston is not Groupon's oldest or largest market. And the numbers in that article are to be expected, and aren't really "troubling" as the BI article's source states. Groupon is spending money to acquire more subscribers because the initial trove of low-hanging fruit has already been acquired. They're trying to keep a big market from rival companies, so they're going after people who are more difficult to acquire (and obviously therefor less likely to spend). Anyone who expects these more difficult acquisitions to spend the same amount per user as people who found their way to Groupon more easily is ridiculous. I'm not arguing that Groupon isn't overvalued, or that their model doesn't have problems. But the arguments that Groupon is a scam or not a real business or that they're going to have to close up shop any day now range from unsophisticated to dishonest.
- shawndrost 15y agoI'm in full agreement. Relatedly, why so much hatred for Groupon's ACSOI metric? If you believe you've got a great business, expansion via deficit spending is one possible strategy. If you're pursuing this strategy, you'll need metrics that show how you would be doing if you weren't expanding via deficit spending. Reasonable people can disagree about whether Groupon is a great business at its core, and whether the ACSOI accurately reflects how Groupon would be doing if they weren't expanding via deficit spending... but the widespread derision that they're "trying to claim they're profitable when they're not" seems intentionally obtuse.
- craigmc 15y agoUltimately for Groupon if these articles begin to intensify in frequency and ambition (wait for the first one to use bankruptcy in its title), then they stand a fairly good chance of becoming a self-fulfilling prophecy.
- jprobert 15y agoThe business model of Groupon is eerily similar to that of the US. Use current cash/bonds to fund payables and hope that it doesn't get out of control. For the US it already has but at least the US can raise the debt ceiling and print more money... something that Groupon can not do.
- r00fus 15y agoThe analogy also fails because the USG has weaponry (spending more than everyone else in the world combined) and Groupon does not.
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- mkr-hn 15y agoGroupon has a huge mailing list and a lot of demographic data. A company like Pepsi or Home Depot could pay $0.10 per e-mail to send a coupon out to 10 million people. That's $1m, and there are enough companies with that in their marketing budget to make it viable. What matters is whether or not Groupon realizes what they have.