7 ms·

Groupon’s Bad Deal

69 points by mitmads 14y ago

jamesaguilar 14y ago
Title needs to be changed to reflect factual content of article: "executives ... and shareholders."
- mitmads 14y ago
  Done. Used the second half of that sentence to make it more appropriate.
  - lifeisstillgood 14y ago
    Title changed again, far less informative - is this you or a mod?
    - mitmads 14y ago
      No. The second mod is not mine.
deleted 14y ago
[deleted]
PnuklOEvolu 14y ago
Imagine that billion divided up as $50,000 seed money to 20,000 new startups. Don't just plunk it down on them set up an automated system requiring justification for every expense. Then have a contest over the year where the earliest, best performers get to advance to another round of funding the next year.
- lifeisstillgood 14y ago
  I've suggested something like this before - I think it's brilliant (obviously) - although I truly would not bother with tracking the expenses (#) - at this level it's just noise. I would suggest that this is the next evolutionary step for VCs - not managing 5m dollar investments but 100x as many 50k investments. But I doubt anyone in the VC industry wants to move from selling at Tiffany's to the KMart in Tucson, Arizona. Luckily the VCs of Pune/Mumbai will have no such qualms. SV may find itself out-evolved quite quickly. (#) well you may have to to avoid seed money for drug deals but you get my point
  - mertd 14y ago
    Isn't that what the banks and small business loans are for? VCs are a playing different game.
    - wpietri 14y ago
      That's way too risky a game for banks. Banks want to put in $1 and be pretty much assured of getting $1.10 back next year. If you go to a bank and ask for a business loan, they'll say, "Great! Let's see the last few years of your financial statements." If you say you don't have any because you haven't actually started your business yet, they will look at you funny and tell you to come back in a few years. That's as it should be. We citizens guarantee that banks will always pay back depositor money. So they should only be allowed to make pretty safe loans.
antr 14y ago
I genuinely do not understand US securities law. One needs to be a "qualified" investor to invest in startups; these investors trade shares among themselves (no primary share issuance) at indefensible and unrealistic valuations, and they are later allowed to sell their shares (secondary issue) in the open market to "unqualified" investors. Shouldn't the SEC and a bunch of attorneys be investigating this? Congresses is having all kinds of hearings with banks for misselling mortgages and a dozen other shenanigans. Who is going to call on investors who (literary) pumped-and-dumped Groupon? I still vividly remember watching Jeff Clavier defending the Groupon IPO valuation on TC TV (http://www.youtube.com/watch?v=MKrWtMmsl7I http://www.youtube.com/watch?v=MKrWtMmsl7I), and I couldn't feel more ashamed for all the unsubstantiated arguments he made back then. He wasn't the only one to do this.
- InclinedPlane 14y ago
  How about facebook? That was one of the most artful manipulations of the IPO system ever conceived. They didn't even make a majority of the company public, and yet managed to rake in a preposterous amount of money and cash out all of the early investors to an absolutely ridiculous degree. The stock is still down nearly 30% from the IPO level.
  - antr 14y ago
    You are right, Groupon is not alone, FB and Zynga are the two other which come to mind in these recents times.
  - gus_massa 14y ago
    Facebook lost "only" a 27% of the initial price (maximal lost was 53%). Groupon lost 80% of the initial price (maximal lost was 90%)!
- wpietri 14y ago
  The valuations for startups are generally pretty defensible. Any serious valuation number is based on somebody actually buying shares at that price, generally a professional investor with a lot of experience. The price of a thing is what the thing will bring. Whether or not they're realistic is hard to say because they are bets on wildly unpredictable situations. Not long after Amazon IPOed, I considered shorting the stock because I thought it was wildly overvalued. Now it's worth circa 100x what it was worth then. Qualified investors are just people with enough money that they are presumed to know what they're doing. The reason non-qualified investors generally can't buy in early is precisely because the SEC is protecting them from getting taken for a ride. The whole "going public" thing is mainly about disclosing enough that you're following the investor protection rules. I agree that Groupon is a hot mess, but I don't expect that any rules were broken, and I don't know what new rule could have prevented it without doing more harm than good. Do you have something in mind? My guess is that the people who bought Groupon stock made one of two classic mistakes. One is buying shares because they like the product. The other is buying because it's hot. I've seen professional investors make those mistakes too, and learn some valuable lessons thereby. It's sad that a lot of people had to learn those lessons with Groupon. But the SEC isn't there to protect people from ignorance or bad trading strategies. They're just there to stop fraud and cheating.
InclinedPlane 14y ago
How many people have been shouting about groupon being a BS company from day one? Sometimes I boggle at how dysfunctional this entire industry is.
- pyre 14y ago
  It just paints a picture of Fox Moulder's "I Want To Believe" poster, but with a GroupOn logo instead of a UFO. I was particularly surprised at how their 'aggressive accounting' didn't get them into hot water in the beginning.
- potatolicious 14y ago
  I was one of those people - but to be fair, it's easy to dismiss a company, and given the failure rate of startups, you'd be right a lot more than you'd be wrong. Being down about a startup is an easy game to play. Being optimistic - and being right - are much, much harder.
deleted 14y ago
[deleted]
- samstave 14y ago
  Groupon having a sound business model is completely debatable, though. When your business model requires that your suppliers provide you with goods and services at a nearly ~75% off their typical retail value, so that you may sell it at ~50% of the typical retail value, and you must amass ~10,000 employees to perpetually hunt down supply inventory, the soundness and sustainability can be easily questioned.
brown9-2 14y ago
When people complain about how the $1 billion raised in 2011 just went to insiders - did the investors who contributed that $1 billion know where the money was going to go? If they knew, then it's all their fault.
- paul_f 14y ago
  They knew. And wrote the checks gladly.
AznHisoka 14y ago
"“I was fired today. If you’re wondering why… you haven’t been paying attention.” Or maybe they were paying attention to the WRONG people.. such as.. oh say, HR and corporate spokespeople in Groupon who want you to believe Groupon is on the rise and will be a great company to work for! Seriously, that statement is such an insult. Sounds like someone who can't admit he's wrong, by saying "Well duh! Didn't you knew this was gonna happen" to save face, rather than "Ok, I made a mistake by doing X, Y, Z"
blahedo 14y ago
Original HN title: "950 million of 1 billion of Groupon's funding wasn't used to fund the company" This also stood out to me as an interesting claim from the article. Does anyone have a perspective on how that can happen without raising some sort of legal issue?
- wmf 14y ago
  This was pretty well documented when it happened in 2011. You can do anything you want in a private company if the shareholders agree. In this case, Groupon's existing shareholders agreed to roll around in big piles of money so that new investors could get in at any price.
  - Sujan 14y ago
    Came here to ask the same question as blahedo. Especially as the claim in made in the article, but not expanded. Are there any sources for or reports on this?
    - wmf 14y ago
      Google for "Groupon series D" or "Grouponzi".
- paul_f 14y ago
  That sounds like a win to me. How can anyone fault the founders for taking that deal?
  - wmf 14y ago
    Taking money off the table does tend to indicate a lack of confidence in the future of the company.
paulsutter 14y ago
Google offered $6B to buy Groupon. Instead they took a private financing deal which allowed the founders and others to take some money off the table and go for an IPO. The $6B from Google was real. The risk of proceeding was tempered by the private money. Nothing dishonest happened here. All that happened was a little overexuberance about the scalability of their business model. While it's true that some people (including me) thought their model non-scalable back at the time, it's also true that a broken (analog) clock is right twice a day. Everyone made their bets and they're all big boys and girls. That includes the public investors as well as the private ones.
- hkmurakami 14y ago
  Wasn't there some speculation at that time that Groupon may have shied away from the Google offer since they would have had to open up their books completely to an audit before the deal would have closed? (and they possibly didn't want to contend with the possibility of a botched Google deal)
- lifeisstillgood 14y ago
  >> and they're all big boys and girls. Thank you, not a phrase heard often enough I think.
- OGinparadise 14y ago
  The $6B from Google was real Unless Google would have to agreed to a $6 Billion fee in the event of not being allowed to buy them, it wasn't, there was speculation that it may be blocked by the DOJ. Imagine being in limbo for 18 months or so when you need to grow. They took a chance and lost. Or some of them lost, execs did sell a bunch of stock
  - aristus 14y ago
    Deals that large usually come with a "breakup fee" on the order of hundreds of millions of dollars, precisely for this reason.
    - 14y ago
pg 14y ago
FWIW, Andrew is one of the smartest founders I've met (and I've met a lot).
- dennisgorelik 14y ago
  Is Andrew one of the most determined?
  - pg 14y ago
    Yes, I think so, though that is harder to judge from a conversation.
- LambdaDriver 14y ago
  The honesty and empathy that he demonstrated in his memo to employees sure impressed me.
- joelhaus 14y ago
  'Smartest' in what way? Is there a standout characteristic he has that other founders should emulate?
  - pg 14y ago
    I didn't mean "smart" in a way different than it's ordinarily used.
    - joelhaus 14y ago
      Do appreciate the response and don't mean to press the issue, but guess I was just curious about what gave you that impression... particularly because, coming from you, it is an extremely high compliment that most on HN would be thrilled to hear.
      - djt 14y ago
        smart /smärt/ Adjective Having or showing a quick-witted intelligence. Verb (of a wound or part of the body) Cause a sharp, stinging pain: "the wound was smarting". Noun Intelligence; acumen.
MarcBodnick 14y ago
My understanding (which I heard from a pretty reliable source at the time) is that this deal was baked (both sides agreeing), but broke down because the Groupon board insisted on a guarantee from Google that it would close over anti-trust objections, and Google wouldn't give that term. Background: in a typical acquisition, closing is subject to HSR anti-trust approval. If the government doesn't approve, then the deal breaks up. This means that the target company is taking a risk that after announcing the deal (and being paralyzed in a post-signing/pre-closing period that could last several months), the deal could be broken up and the target company could be left holding the bag and forced to get back on an independent path. Which is pretty rough. In this case, Groupon wanted Google to go long the anti-trust risk -> in other words, Google would have to divest the asset if the government killed the deal. I think (not sure) Google had given this term up on the AdMob deal, but believed that it couldn't do it again on the Groupon acquisition (which would have been the biggest deal Google had ever done), or it would have set a precedent that every other company would have insisted on going forward in M&A discussions.
coditor 14y ago
Groupon was always a ponzi like scheme. Once they ran out of suckers (err businesses) their income dropped like a rock. Everyone I know uses Groupons but challenge them on actually visiting the Grouponee again and you hear crickets.

Groupon’s Bad Deal

69 points by mitmads 14y ago

jamesaguilar 14y ago

Title needs to be changed to reflect factual content of article: "executives ... and shareholders."

mitmads 14y ago
Done. Used the second half of that sentence to make it more appropriate.
- lifeisstillgood 14y ago
  Title changed again, far less informative - is this you or a mod?
  - mitmads 14y ago
    No. The second mod is not mine.

deleted 14y ago

[deleted]

PnuklOEvolu 14y ago

Imagine that billion divided up as $50,000 seed money to 20,000 new startups. Don't just plunk it down on them set up an automated system requiring justification for every expense. Then have a contest over the year where the earliest, best performers get to advance to another round of funding the next year.

lifeisstillgood 14y ago
I've suggested something like this before - I think it's brilliant (obviously) - although I truly would not bother with tracking the expenses (#) - at this level it's just noise. I would suggest that this is the next evolutionary step for VCs - not managing 5m dollar investments but 100x as many 50k investments. But I doubt anyone in the VC industry wants to move from selling at Tiffany's to the KMart in Tucson, Arizona. Luckily the VCs of Pune/Mumbai will have no such qualms. SV may find itself out-evolved quite quickly. (#) well you may have to to avoid seed money for drug deals but you get my point
- mertd 14y ago
  Isn't that what the banks and small business loans are for? VCs are a playing different game.
  - wpietri 14y ago
    That's way too risky a game for banks. Banks want to put in $1 and be pretty much assured of getting $1.10 back next year. If you go to a bank and ask for a business loan, they'll say, "Great! Let's see the last few years of your financial statements." If you say you don't have any because you haven't actually started your business yet, they will look at you funny and tell you to come back in a few years. That's as it should be. We citizens guarantee that banks will always pay back depositor money. So they should only be allowed to make pretty safe loans.

antr 14y ago

I genuinely do not understand US securities law. One needs to be a "qualified" investor to invest in startups; these investors trade shares among themselves (no primary share issuance) at indefensible and unrealistic valuations, and they are later allowed to sell their shares (secondary issue) in the open market to "unqualified" investors. Shouldn't the SEC and a bunch of attorneys be investigating this? Congresses is having all kinds of hearings with banks for misselling mortgages and a dozen other shenanigans. Who is going to call on investors who (literary) pumped-and-dumped Groupon? I still vividly remember watching Jeff Clavier defending the Groupon IPO valuation on TC TV (http://www.youtube.com/watch?v=MKrWtMmsl7I http://www.youtube.com/watch?v=MKrWtMmsl7I), and I couldn't feel more ashamed for all the unsubstantiated arguments he made back then. He wasn't the only one to do this.

InclinedPlane 14y ago
How about facebook? That was one of the most artful manipulations of the IPO system ever conceived. They didn't even make a majority of the company public, and yet managed to rake in a preposterous amount of money and cash out all of the early investors to an absolutely ridiculous degree. The stock is still down nearly 30% from the IPO level.
- antr 14y ago
  You are right, Groupon is not alone, FB and Zynga are the two other which come to mind in these recents times.
- gus_massa 14y ago
  Facebook lost "only" a 27% of the initial price (maximal lost was 53%). Groupon lost 80% of the initial price (maximal lost was 90%)!
wpietri 14y ago
The valuations for startups are generally pretty defensible. Any serious valuation number is based on somebody actually buying shares at that price, generally a professional investor with a lot of experience. The price of a thing is what the thing will bring. Whether or not they're realistic is hard to say because they are bets on wildly unpredictable situations. Not long after Amazon IPOed, I considered shorting the stock because I thought it was wildly overvalued. Now it's worth circa 100x what it was worth then. Qualified investors are just people with enough money that they are presumed to know what they're doing. The reason non-qualified investors generally can't buy in early is precisely because the SEC is protecting them from getting taken for a ride. The whole "going public" thing is mainly about disclosing enough that you're following the investor protection rules. I agree that Groupon is a hot mess, but I don't expect that any rules were broken, and I don't know what new rule could have prevented it without doing more harm than good. Do you have something in mind? My guess is that the people who bought Groupon stock made one of two classic mistakes. One is buying shares because they like the product. The other is buying because it's hot. I've seen professional investors make those mistakes too, and learn some valuable lessons thereby. It's sad that a lot of people had to learn those lessons with Groupon. But the SEC isn't there to protect people from ignorance or bad trading strategies. They're just there to stop fraud and cheating.

InclinedPlane 14y ago

How many people have been shouting about groupon being a BS company from day one? Sometimes I boggle at how dysfunctional this entire industry is.

pyre 14y ago
It just paints a picture of Fox Moulder's "I Want To Believe" poster, but with a GroupOn logo instead of a UFO. I was particularly surprised at how their 'aggressive accounting' didn't get them into hot water in the beginning.
potatolicious 14y ago
I was one of those people - but to be fair, it's easy to dismiss a company, and given the failure rate of startups, you'd be right a lot more than you'd be wrong. Being down about a startup is an easy game to play. Being optimistic - and being right - are much, much harder.

deleted 14y ago

[deleted]

samstave 14y ago
Groupon having a sound business model is completely debatable, though. When your business model requires that your suppliers provide you with goods and services at a nearly ~75% off their typical retail value, so that you may sell it at ~50% of the typical retail value, and you must amass ~10,000 employees to perpetually hunt down supply inventory, the soundness and sustainability can be easily questioned.

brown9-2 14y ago

When people complain about how the $1 billion raised in 2011 just went to insiders - did the investors who contributed that $1 billion know where the money was going to go? If they knew, then it's all their fault.

paul_f 14y ago
They knew. And wrote the checks gladly.

AznHisoka 14y ago

"“I was fired today. If you’re wondering why… you haven’t been paying attention.” Or maybe they were paying attention to the WRONG people.. such as.. oh say, HR and corporate spokespeople in Groupon who want you to believe Groupon is on the rise and will be a great company to work for! Seriously, that statement is such an insult. Sounds like someone who can't admit he's wrong, by saying "Well duh! Didn't you knew this was gonna happen" to save face, rather than "Ok, I made a mistake by doing X, Y, Z"

blahedo 14y ago

Original HN title: "950 million of 1 billion of Groupon's funding wasn't used to fund the company" This also stood out to me as an interesting claim from the article. Does anyone have a perspective on how that can happen without raising some sort of legal issue?

wmf 14y ago
This was pretty well documented when it happened in 2011. You can do anything you want in a private company if the shareholders agree. In this case, Groupon's existing shareholders agreed to roll around in big piles of money so that new investors could get in at any price.
- Sujan 14y ago
  Came here to ask the same question as blahedo. Especially as the claim in made in the article, but not expanded. Are there any sources for or reports on this?
  - wmf 14y ago
    Google for "Groupon series D" or "Grouponzi".
paul_f 14y ago
That sounds like a win to me. How can anyone fault the founders for taking that deal?
- wmf 14y ago
  Taking money off the table does tend to indicate a lack of confidence in the future of the company.

paulsutter 14y ago

Google offered $6B to buy Groupon. Instead they took a private financing deal which allowed the founders and others to take some money off the table and go for an IPO. The $6B from Google was real. The risk of proceeding was tempered by the private money. Nothing dishonest happened here. All that happened was a little overexuberance about the scalability of their business model. While it's true that some people (including me) thought their model non-scalable back at the time, it's also true that a broken (analog) clock is right twice a day. Everyone made their bets and they're all big boys and girls. That includes the public investors as well as the private ones.

hkmurakami 14y ago
Wasn't there some speculation at that time that Groupon may have shied away from the Google offer since they would have had to open up their books completely to an audit before the deal would have closed? (and they possibly didn't want to contend with the possibility of a botched Google deal)
lifeisstillgood 14y ago
>> and they're all big boys and girls. Thank you, not a phrase heard often enough I think.
OGinparadise 14y ago
The $6B from Google was real Unless Google would have to agreed to a $6 Billion fee in the event of not being allowed to buy them, it wasn't, there was speculation that it may be blocked by the DOJ. Imagine being in limbo for 18 months or so when you need to grow. They took a chance and lost. Or some of them lost, execs did sell a bunch of stock
- aristus 14y ago
  Deals that large usually come with a "breakup fee" on the order of hundreds of millions of dollars, precisely for this reason.
  - 14y ago

pg 14y ago

FWIW, Andrew is one of the smartest founders I've met (and I've met a lot).

dennisgorelik 14y ago
Is Andrew one of the most determined?
- pg 14y ago
  Yes, I think so, though that is harder to judge from a conversation.
LambdaDriver 14y ago
The honesty and empathy that he demonstrated in his memo to employees sure impressed me.
joelhaus 14y ago
'Smartest' in what way? Is there a standout characteristic he has that other founders should emulate?
- pg 14y ago
  I didn't mean "smart" in a way different than it's ordinarily used.
  - joelhaus 14y ago
    Do appreciate the response and don't mean to press the issue, but guess I was just curious about what gave you that impression... particularly because, coming from you, it is an extremely high compliment that most on HN would be thrilled to hear.
    - djt 14y ago
      smart /smärt/ Adjective Having or showing a quick-witted intelligence. Verb (of a wound or part of the body) Cause a sharp, stinging pain: "the wound was smarting". Noun Intelligence; acumen.

MarcBodnick 14y ago

My understanding (which I heard from a pretty reliable source at the time) is that this deal was baked (both sides agreeing), but broke down because the Groupon board insisted on a guarantee from Google that it would close over anti-trust objections, and Google wouldn't give that term. Background: in a typical acquisition, closing is subject to HSR anti-trust approval. If the government doesn't approve, then the deal breaks up. This means that the target company is taking a risk that after announcing the deal (and being paralyzed in a post-signing/pre-closing period that could last several months), the deal could be broken up and the target company could be left holding the bag and forced to get back on an independent path. Which is pretty rough. In this case, Groupon wanted Google to go long the anti-trust risk -> in other words, Google would have to divest the asset if the government killed the deal. I think (not sure) Google had given this term up on the AdMob deal, but believed that it couldn't do it again on the Groupon acquisition (which would have been the biggest deal Google had ever done), or it would have set a precedent that every other company would have insisted on going forward in M&A discussions.

coditor 14y ago

Groupon was always a ponzi like scheme. Once they ran out of suckers (err businesses) their income dropped like a rock. Everyone I know uses Groupons but challenge them on actually visiting the Grouponee again and you hear crickets.