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This is diplomatic and charitable. When I see a repeat pattern of GroupOn and Zynga type companies I see someone who knows how to pump and dump. It's not quite

by api 14y ago

This is diplomatic and charitable. When I see a repeat pattern of GroupOn and Zynga type companies I see someone who knows how to pump and dump. It's not quite fraud but it's getting close, given how loose these sorts of people typically play the truth.

antr 14y ago
Agree on GroupOn and Zynga, and there are still plenty of popular services which are far from being economically sustainable and yet everybody says what a "great company" that is, when in reality all it is is a "great product/service" with no revenue proposition (still, kudos for building it). See Path, Foursquare, Turntable.fm, Tumblr, etc. If the liquidity from large companies such as FB, Google, AOL, Yahoo, etc. disappears, the value of the above mentioned startups will collapse. A big part of the startup ecosystem is a house of cards, unfortunately many first time entrepreneurs did not experience the .com rise and bust to understand what a downturn really looks like.
- untog 14y ago
  I would actually exclude Foursquare from that list- they're building up a really interesting collection of business partnerships- the one with American Express was particularly significant. Doesn't mean all their money making problems are solved of course, but they're further down the line than turntable.fm are, who continue to confuse me in terms of their lack of business model.
- hkmurakami 14y ago
  >See Path, Foursquare, Turntable.fm, Tumblr, etc. Gasp How could you forget Quora! :)
- pron 14y ago
  To reiterate what I've said in my comment above, I'm not sure this is a downturn. A downturn implies some shift in the market, while this phenomenon is intrinsic to the particular startup economy. There might be a downturn in investment, though, as this inherent behavior gives rise to investment cycles.
danso 14y ago
I have to strongly disagree with comparing Groupon to any of the OP's failed examples. Groupon may well run into the ground, but consider that: a) It was the first big success in its space b) at its peak, hired dozens (hundreds?) of actual employees, even copywriters from journalistic institutions. c) Had a huge, huge base of customers Groupon's leaders should be faulted for the various strategies and actions that have put the company where it is. But Groupon did create a vibrant service out of something that seemed quite pedestrian (can't you just get coupons from the weekend newspaper?)...and a lot if its downfall comes from how easy it is to copycat it. Color, in contrast, had none of the above.
- antr 14y ago
  Success? GroupOn isn't profitable, it hasn't even returned via income the equity invested + accumulated losses. Anyone can hire tonnes of people, pay them, provide a service/product, and still deliver negative equity returns. Anyone.
  - danso 14y ago
    ...But not Bill Nguyen (at least with Color). I probably gave more than $200 to Groupon during the time that I found it useful. I checked into Color over a period of weeks and never stayed on for more than a minute. So while both are money-losing ventures, I think Groupon should still be ranked higher than Color.
  - hkmurakami 14y ago
    >Anyone can hire tonnes of people, pay them, provide a service/product, and still deliver negative equity returns. Anyone. Well I don't think anyone can successfully pitch investors and take millions of dollars of their hard earned (sometimes) money, but agreed on the other points.
    - antr 14y ago
      who is talking about raising capital? is raising equity capital a measure of a success? i'd say the contrary. equity is the most expensive source of financing. i've raised equity, and trust me, it's a mixed feeling.
bduerst 14y ago
I doubt it's fraud-level, but it is cashing in on the hype-machine in the silicon valley. If there wasn't a market for this, then we wouldn't be reading this article. VCs do due diligence - success for them isn't just funding a real business, but more along the lines of cashing out at the right moment.
- pron 14y ago
  One thing to realize is that the "hype-machine" is a cornerstone of modern, capitalist, economy. So much in the economy is built around expectations, so I wouldn't single out silicon valley. Silicon valley, since it occupies the innovation/novelty niche, is just a exaggerated, caricaturized, even (not necessarily in a bad way), microcosm for the entire capitalist economy.
drumdance 14y ago
I think Groupon was/is overvalued, but I also think they can deliver value beyond leads. I believe they already offer a booking service, and they should be offering opt-in email, social management services, and other services that SMBs have already shown they will pay for. They may have grown too fast to do it under the Wall St microscope though.
- roc 14y ago
  That's like saying Pets.com could have worked out -- given how readily people took to buying pet meds, food and accessories over the internet -- if only they hadn't grown so fast. Growing so fast is not only a problem of expectation, it's a problem of massive overhead that competitors don't have. That's going to harm their competitiveness in anything they do.
  - drumdance 14y ago
    The reason I said they grew too fast is I experienced this myself in the late 90s. I was with a public company that did email marketing services. That sector has turned out to be a massively profitable business. ExactTarget just went public about 6 months ago, and I know a lot of other private players who are doing very well. The company I was with failed because they bought into the "get big fast" meme that was driving consumer Internet companies. So they went on a acquisition spree, tried launching too many products when they should've just focused on their core, opened several international offices etc. AND they were already public, so they had to deal with all the BS that comes with that. The did all of this inside of two years. It was senseless. A company culture rarely scales that well. And it turns out that in most B2B markets (except for commodities like bandwidth), you don't need to grow that fast. You need to grow in a way that makes your customers happy, yes, but you don't have to worry about everyone suddenly adopting a new competitor (i.e. switching from Yahoo to Google). But when you have investors throwing money at you, it's easy to think that every decision you make is genius and that you can solve problems simply by throwing money at them. So to my original point. I think Groupon has multiple strategic options, but it may take them 3-4 years to see them through and in the meantime they have to justify their valuation to angry investors every 90 days. This would not be necessary if they hadn't bought into the "get big fast" mantra. However, I believe they do have lots of cash in the bank so they may still have time to turn it around. It will be painful and take years.
deleted 14y ago
[deleted]
patmcguire 14y ago
Groupon may never make money, but some company with a similar business model will eventually make a profit. What deal of the day sites offer that no one did before is an immediate and essentially limitless supply of customers. Even if most companies lose their shirt on that, there are going to be some industries and situations where infinite customers at a temporary loss makes business sense, and once the market for it becomes rational again someone will be able to do it better than they could internally and make a profit on it.
- Tipzntrix 14y ago
  But that's what GroupOn was betting on to begin with!
- drumdance 14y ago
  It was many years before Amazon.com made a profit. Compared to them Groupon is ahead of schedule.
pg 14y ago
Calling Zynga and Groupon pump-and-dump schemes is a mark of one's one's understanding of business in much the same way that believing vaccines cause autism is a mark of one's understanding of science. Mark Pincus and Andrew Mason are both still running these companies. Running a public company that's doing badly is extraordinarily painful. No one would bring that on himself.
- majani 14y ago
  That's a rather off-colour reply, it has to be said, sir. First you resort to an absurd comparison in a poor attempt at snark, then you claim that Mark Pincus and Andrew Mason are severely pained by their lacklustre performance on the public markets, without providing any evidence of that. This deserves downvotes in my opinion.
  - knieveltech 14y ago
    Definitely not up to PG's typical standards for a reply.
    - api 14y ago
      I get the impression it pushed a few peoples' buttons because the startup culture likes to think it's morally superior to Wall Street.
- ahi 14y ago
  Pincus and Mason may still be running them, but they both already cashed out big time.
  - staunch 14y ago
    Don't you see how that defies the notion that it was a pump and dump? Why would they (with tens of millions of dollars) stick around? No one can force them to stay. They're already obscenely rich. Think about what their motivations must be.
pron 14y ago
I don't think it's fraud, or anything like it. After all, there is something so-far sustainable here, and it's not the companies; it's the pattern (which is not quite new), and fraud is never sustainable. I have a theory about why we see this pattern, and it starts with how those companies are financed. VCs fund many promising startups, often flooding them with money that can support the company for a long time, while maintaining a very active public image that perpetuates the sense that the company is successful. Not only is the actual business value hidden, VCs encourage the companies to not try to turn a profit, but to grow very, very quickly. This is, perhaps, what obscures the actual value the most. Now, why do VCs do that? Because they hope for a good ROI, and some of them do quite well (the entire portfolio taken together, of course). Some say that VC's true desired goal for a company is an IPO, but IPOs are rare, and, I think a good IPO (for anyone who's not Facebook) is only about 10x that of a good acquisition. So I believe, that it is the acquisitions (that outnumber IPOs more than 10x) that really drive the VC investments, and, in turn, the whole industry. But how can acquisitions be the bread-and-butter of the industry if so many of them fail (for the acquirer, that is)? Because, on the whole, acquisitions are still much cheaper for the acquirers than funding their own technology - or market - research. Instead of throwing a lot of money on large, money-hungry research departments, Big Tech would rather let a ton of entrepreneurs and VCs fight it out, and award the winners handsomely. The price they pay is far less than what they would have had to invest doing independent research. So, who loses? I'm not sure anyone does. Entrepreneurs get the independence, excitement, and the possibility of huge payoffs of a winner-takes-all market; VCs - well, some of them - do alright, and Big Tech saves a ton of money on thousands of employees they don't need to directly employ and manage. Oh, and bloggers and industry insiders get a lot of juicy gossip and cautionary tales. The one remaining question is, how come so many companies seem very promising, get good indications from the market, and then slowly (or quickly) declines. I don't have a good answer, but I do have a hypothesis. Web companies mostly compete in a global market. That means that in order for them to succeed, all relevant consumers must learn about them, and must learn about them quickly (fast growth, right?). But this is just not possible, because the average consumer can only keep in mind a bounded (and rather small) set of vendors. So, not only is, say, Groupon competing with uhmm, I dunno, Amazon, maybe for the purchase of some items, it is also competing with Zynga over my time. And not only that, it's even competing with Salesforce because there are only so many products I can even remember to use on a regular basis. And when new startups are funded, they are encouraged to very quickly get global attention, and - out with old, in with the new - novelty seeking consumers forget about yesterday's big thing. So all of these companies are competing with one another for attention, so the question is, how many fast-growth, global companies can even prosper at the same time?

by api 14y ago

antr 14y ago

Agree on GroupOn and Zynga, and there are still plenty of popular services which are far from being economically sustainable and yet everybody says what a "great company" that is, when in reality all it is is a "great product/service" with no revenue proposition (still, kudos for building it). See Path, Foursquare, Turntable.fm, Tumblr, etc. If the liquidity from large companies such as FB, Google, AOL, Yahoo, etc. disappears, the value of the above mentioned startups will collapse. A big part of the startup ecosystem is a house of cards, unfortunately many first time entrepreneurs did not experience the .com rise and bust to understand what a downturn really looks like.

untog 14y ago
I would actually exclude Foursquare from that list- they're building up a really interesting collection of business partnerships- the one with American Express was particularly significant. Doesn't mean all their money making problems are solved of course, but they're further down the line than turntable.fm are, who continue to confuse me in terms of their lack of business model.
hkmurakami 14y ago
>See Path, Foursquare, Turntable.fm, Tumblr, etc. Gasp How could you forget Quora! :)
pron 14y ago
To reiterate what I've said in my comment above, I'm not sure this is a downturn. A downturn implies some shift in the market, while this phenomenon is intrinsic to the particular startup economy. There might be a downturn in investment, though, as this inherent behavior gives rise to investment cycles.

danso 14y ago

I have to strongly disagree with comparing Groupon to any of the OP's failed examples. Groupon may well run into the ground, but consider that: a) It was the first big success in its space b) at its peak, hired dozens (hundreds?) of actual employees, even copywriters from journalistic institutions. c) Had a huge, huge base of customers Groupon's leaders should be faulted for the various strategies and actions that have put the company where it is. But Groupon did create a vibrant service out of something that seemed quite pedestrian (can't you just get coupons from the weekend newspaper?)...and a lot if its downfall comes from how easy it is to copycat it. Color, in contrast, had none of the above.

antr 14y ago
Success? GroupOn isn't profitable, it hasn't even returned via income the equity invested + accumulated losses. Anyone can hire tonnes of people, pay them, provide a service/product, and still deliver negative equity returns. Anyone.
- danso 14y ago
  ...But not Bill Nguyen (at least with Color). I probably gave more than $200 to Groupon during the time that I found it useful. I checked into Color over a period of weeks and never stayed on for more than a minute. So while both are money-losing ventures, I think Groupon should still be ranked higher than Color.
- hkmurakami 14y ago
  >Anyone can hire tonnes of people, pay them, provide a service/product, and still deliver negative equity returns. Anyone. Well I don't think anyone can successfully pitch investors and take millions of dollars of their hard earned (sometimes) money, but agreed on the other points.
  - antr 14y ago
    who is talking about raising capital? is raising equity capital a measure of a success? i'd say the contrary. equity is the most expensive source of financing. i've raised equity, and trust me, it's a mixed feeling.

bduerst 14y ago

I doubt it's fraud-level, but it is cashing in on the hype-machine in the silicon valley. If there wasn't a market for this, then we wouldn't be reading this article. VCs do due diligence - success for them isn't just funding a real business, but more along the lines of cashing out at the right moment.

pron 14y ago
One thing to realize is that the "hype-machine" is a cornerstone of modern, capitalist, economy. So much in the economy is built around expectations, so I wouldn't single out silicon valley. Silicon valley, since it occupies the innovation/novelty niche, is just a exaggerated, caricaturized, even (not necessarily in a bad way), microcosm for the entire capitalist economy.

drumdance 14y ago

I think Groupon was/is overvalued, but I also think they can deliver value beyond leads. I believe they already offer a booking service, and they should be offering opt-in email, social management services, and other services that SMBs have already shown they will pay for. They may have grown too fast to do it under the Wall St microscope though.

roc 14y ago
That's like saying Pets.com could have worked out -- given how readily people took to buying pet meds, food and accessories over the internet -- if only they hadn't grown so fast. Growing so fast is not only a problem of expectation, it's a problem of massive overhead that competitors don't have. That's going to harm their competitiveness in anything they do.
- drumdance 14y ago
  The reason I said they grew too fast is I experienced this myself in the late 90s. I was with a public company that did email marketing services. That sector has turned out to be a massively profitable business. ExactTarget just went public about 6 months ago, and I know a lot of other private players who are doing very well. The company I was with failed because they bought into the "get big fast" meme that was driving consumer Internet companies. So they went on a acquisition spree, tried launching too many products when they should've just focused on their core, opened several international offices etc. AND they were already public, so they had to deal with all the BS that comes with that. The did all of this inside of two years. It was senseless. A company culture rarely scales that well. And it turns out that in most B2B markets (except for commodities like bandwidth), you don't need to grow that fast. You need to grow in a way that makes your customers happy, yes, but you don't have to worry about everyone suddenly adopting a new competitor (i.e. switching from Yahoo to Google). But when you have investors throwing money at you, it's easy to think that every decision you make is genius and that you can solve problems simply by throwing money at them. So to my original point. I think Groupon has multiple strategic options, but it may take them 3-4 years to see them through and in the meantime they have to justify their valuation to angry investors every 90 days. This would not be necessary if they hadn't bought into the "get big fast" mantra. However, I believe they do have lots of cash in the bank so they may still have time to turn it around. It will be painful and take years.

deleted 14y ago

[deleted]

patmcguire 14y ago

Groupon may never make money, but some company with a similar business model will eventually make a profit. What deal of the day sites offer that no one did before is an immediate and essentially limitless supply of customers. Even if most companies lose their shirt on that, there are going to be some industries and situations where infinite customers at a temporary loss makes business sense, and once the market for it becomes rational again someone will be able to do it better than they could internally and make a profit on it.

Tipzntrix 14y ago
But that's what GroupOn was betting on to begin with!
drumdance 14y ago
It was many years before Amazon.com made a profit. Compared to them Groupon is ahead of schedule.

pg 14y ago

Calling Zynga and Groupon pump-and-dump schemes is a mark of one's one's understanding of business in much the same way that believing vaccines cause autism is a mark of one's understanding of science. Mark Pincus and Andrew Mason are both still running these companies. Running a public company that's doing badly is extraordinarily painful. No one would bring that on himself.

majani 14y ago
That's a rather off-colour reply, it has to be said, sir. First you resort to an absurd comparison in a poor attempt at snark, then you claim that Mark Pincus and Andrew Mason are severely pained by their lacklustre performance on the public markets, without providing any evidence of that. This deserves downvotes in my opinion.
- knieveltech 14y ago
  Definitely not up to PG's typical standards for a reply.
  - api 14y ago
    I get the impression it pushed a few peoples' buttons because the startup culture likes to think it's morally superior to Wall Street.
ahi 14y ago
Pincus and Mason may still be running them, but they both already cashed out big time.
- staunch 14y ago
  Don't you see how that defies the notion that it was a pump and dump? Why would they (with tens of millions of dollars) stick around? No one can force them to stay. They're already obscenely rich. Think about what their motivations must be.

pron 14y ago

I don't think it's fraud, or anything like it. After all, there is something so-far sustainable here, and it's not the companies; it's the pattern (which is not quite new), and fraud is never sustainable. I have a theory about why we see this pattern, and it starts with how those companies are financed. VCs fund many promising startups, often flooding them with money that can support the company for a long time, while maintaining a very active public image that perpetuates the sense that the company is successful. Not only is the actual business value hidden, VCs encourage the companies to not try to turn a profit, but to grow very, very quickly. This is, perhaps, what obscures the actual value the most. Now, why do VCs do that? Because they hope for a good ROI, and some of them do quite well (the entire portfolio taken together, of course). Some say that VC's true desired goal for a company is an IPO, but IPOs are rare, and, I think a good IPO (for anyone who's not Facebook) is only about 10x that of a good acquisition. So I believe, that it is the acquisitions (that outnumber IPOs more than 10x) that really drive the VC investments, and, in turn, the whole industry. But how can acquisitions be the bread-and-butter of the industry if so many of them fail (for the acquirer, that is)? Because, on the whole, acquisitions are still much cheaper for the acquirers than funding their own technology - or market - research. Instead of throwing a lot of money on large, money-hungry research departments, Big Tech would rather let a ton of entrepreneurs and VCs fight it out, and award the winners handsomely. The price they pay is far less than what they would have had to invest doing independent research. So, who loses? I'm not sure anyone does. Entrepreneurs get the independence, excitement, and the possibility of huge payoffs of a winner-takes-all market; VCs - well, some of them - do alright, and Big Tech saves a ton of money on thousands of employees they don't need to directly employ and manage. Oh, and bloggers and industry insiders get a lot of juicy gossip and cautionary tales. The one remaining question is, how come so many companies seem very promising, get good indications from the market, and then slowly (or quickly) declines. I don't have a good answer, but I do have a hypothesis. Web companies mostly compete in a global market. That means that in order for them to succeed, all relevant consumers must learn about them, and must learn about them quickly (fast growth, right?). But this is just not possible, because the average consumer can only keep in mind a bounded (and rather small) set of vendors. So, not only is, say, Groupon competing with uhmm, I dunno, Amazon, maybe for the purchase of some items, it is also competing with Zynga over my time. And not only that, it's even competing with Salesforce because there are only so many products I can even remember to use on a regular basis. And when new startups are funded, they are encouraged to very quickly get global attention, and - out with old, in with the new - novelty seeking consumers forget about yesterday's big thing. So all of these companies are competing with one another for attention, so the question is, how many fast-growth, global companies can even prosper at the same time?