Try to digest the Groupon story

http://shortlogic.tumblr.com/post/6142108636/groupon-ipo-pass-on-this-deal

by jagira • 15 years ago

372 165 15 years ago

shortlogic.tumblr.com

dbaugh• 15 years ago

Whenever a business grows by hiring more and more people it won't scale well and be massively profitable.. People are expensive. They are always going to have razor thin margins.

bad_user• 15 years ago

There's always the exception of Amazon, but Amazon has built infrastructure instead of letting insiders cash-out early.

bproper2• 15 years ago

And while Groupon argues it will be sustainable once it hits a certain threshold, its business is actually decaying in older markets like Boston -

http://www.betabeat.com/2011/06/03/groupons-business-is-deca...

nanoanderson• 15 years ago

It's always a big red flashing warning sign to me when investors who've stood by a company from the beginning take a major cash-out _before_ an IPO. Nobody can argue they didn't know an IPO was coming soon.

If you don't believe you'll make more money from an IPO than a private investment, then what does that say about your faith in the company's future profitability?

miespanolesmalo• 15 years ago

I always wondered how Salesforce became so successful. Their saas is janky garbage. Their software is everywhere, but they excel at nothing.

Now I know their success is hype and creative accounting.

suking2• 15 years ago

I agree - we tried salesforce at our company and you need a PhD to get anything custom done. Way too bloated for us and way too long of a training period - then add on top of that the custom functionality we needed and it got expensive VERY fast.

megamark16• 15 years ago

Don't forget Enterprisy. No one ever got fired for picking SalesForce.

lurker19• 15 years ago

Adapting a Stroustrup quote: There are two types of CRM/ERP software: the ones everyone complains about and the ones nobody uses. By all means, please build a competitor that does not suck. Thousands of small/medium businesses will make you a billionaire.

gaius2• 15 years ago

People are only supposed to get rich after the IPO, and even then, only on paper, for the first few years.

Still, VCs are supposed to be grownups who know what they're doing, if they got screwed it's their own fault.

raganwald7• 15 years ago

If everyone who invests in the company plays by these rules, I'm all for it. Unfortunately, the true narrative is: "Founders and employees are only supposed to get actually rich a few years after the IPO, however VCs, Investment Bankers, and their cozy clients can get stinking rich immediately."

If you are willing to make the VCs and other bankers wait a few years, I have no problem with founders and employees waiting a few years as well.

raganwald7• 15 years ago

p.s. Conjecture: if the VCs had to wait for years to cash out, Groupon would be a very different company with much stronger fundamentals and less emphasis on flashy growth.

suking2• 15 years ago

Usually there is a 6 month waiting period after IPO.

johnx123• 15 years ago

If the suspicion that it's a paid news http://rajeshanbiah.blogspot.com/2010/12/groupon-hype-or-pai... they'll have to shut it down when others start following that strategy.

jrp• 15 years ago

If the article is correct (future really bad, tricked public going to invest on day 1), wouldn't it make sense to invest and sell very soon?

Is something special about an IPO where you have to hold it for some time?

kmavm• 15 years ago

Wow, this is the first time since early 2000 I've seen the "greater fool theory" espoused without irony. Maybe it really is a bubble, now.

raganwald7• 15 years ago

That's a great idea and a lot of people are going to do exactly that. However, think about this: It's a bubble, it will pop, but we don't know when it will pop.

Imagine you want to invest a million dollars and sell when you have doubled your investment. The sooner and cheaper you can buy the stock, the greater your chance to double your million dollars. The longer you wait, the higher the chance that you will be one of the suckers whose investment makes other people rich.

The safest strategy is to buy at the offering price and sell as soon as the stock reaches your target for selling (double in our example). You pay the least and get out the soonest, before the collapse. With every passing minute, the price of the stock rises but the probability of the bubble popping before it reaches your target also rises.

So how do you buy at the offering price? By having a cosy relationship with the investment bank leading the issue, that's how. Do you have a cosy relationship with the investment bank leading the issue? If not, you are playing a game rigged to make other people rich at your expense.

Of course, if you like the fundamentals and plan to buy and hold, that's a different matter. But if you're playing the speculation game, you ought to know that the casino is rigged and that you are not in the business, you are the business.

SandB0x• 15 years ago

So what you're saying is it's a game of chicken?

jolan• 15 years ago

They need to move on from low margin stuff like food and physical services.

* Copy AppSumo and sell software/webapp services.

* Try to work out deals on high value items like automobiles where there's lots of wiggle room in pricing.

* Talk to Apple. They have high demand and large margins.

Do anything to get rid of thousands of cold calling sales people.

joeguilmette• 15 years ago

$4 billion in revenue would be much more impressive if it could scale efficiently and without a $430 million loss.

euroclydon• 15 years ago

So Groupon is a massive affiliate network scheme built using humans, software and hype.

The lesson for nearly everyone here on HN, is that this market is huge! I'm signing up for Groupon, Living Social, and others, and I plan to just sit back and absorb the marketplace for a couple of months and brainstorm about how to get a piece of the pie!

stevenj3• 15 years ago

>Do anything to get rid of thousands of cold calling sales people.

If I remember correctly, it sees its sales force as a competitive advantage.

pdxgene• 15 years ago

Thousands of employees, slim (if any) margins... sounds a bit like Kozmo.com...

kprobst2• 15 years ago

There's nothing wrong with low margin, look at Wal-Mart. The problem is getting the customers through the door (or in this case through the website).

ben1040• 15 years ago

Pardon my ignorance but how often do insiders get their stakes cashed out after funding rounds like this, as opposed to using the money for operations or growing the business?

My lack of knowledge about corporate finance and the part of that blog post that refers to cashouts is making me see Groupon as more of a DrKoop.com or Webvan than it may be. But nevertheless I can't see how struturing a funding deal like that benefits anyone other than the insiders who got in early enough?

raganwald7• 15 years ago

The IPO makes investors very, very, very rich. The Groupon executives have built something that is going to make the investors and the bankers very, very, very rich. Why shouldn't they be rewarded for creating all this value?

I am not being sarcastic. That's how business works: If I can make you a lot of money, you need to share some of that with me, or I'll go make someone else a lot of money.

The Groupon deal is a business built to flip to the public. The structure benefits the insiders, but it benefits the VCs who cashed them out invested in the last round even more, and it will benefit the bankers. And that's why they can get away with getting rich right away: Because they're making a lot of other people rich.

portman4• 15 years ago

Genuine question for raganwald: you consistently capitalize it as GroupOn, even though the press and the company itself capitalize it as Groupon.

I know you're a careful, deliberate and consistent writer, so this is clearly intentional.

Any particular reason why?

gvb• 15 years ago

That is also what a Ponzi scheme is also, except a Ponzi scheme is losing money hand-over-fist in a hidden way. With a Ponzi scheme, the piling on of new investors covers up the losses... for a while.

Hmmmm, that sounds almost exactly like Groupon. While their losses are pretty well known, they are waving their hands (accounting gimmicks) and saying "That's not a loss. Honest."

Lambent_Cactus2• 15 years ago

Making some people very rich is not the same thing as creating value.

If Groupon investors get rich at the expense of retail investors, that's bad. If the Groupon founders get rich at the expense of retail investors and later venture investors, that's also bad. In fact it's worse, because they have more information about the business than the investors do. The closer you are to the center of the business, the more you are implicated if it turns out to be a giant pump-and-dump scheme. The founders are the rotten core of that scheme.

portman4• 15 years ago

>> "how often do insiders get their stakes cashed out"

While this used to be the exception, it is starting to become the norm. The technical term is "secondary".

Fred Wilson has been doing a great job chronicling the rise of these transactions for almost 2 years. (He calls them "DST-style" investments.)

http://www.avc.com/a_vc/2011/02/some-thoughts-on-public-and-...

http://www.avc.com/a_vc/2009/04/a-second-market-is-emerging....

http://www.avc.com/a_vc/2010/08/angel-liquidity.html

http://www.avc.com/a_vc/2009/09/founder-liquidity.html

SwellJoe2• 15 years ago

As others have noted, it's become much more common. Partly because IPOs have become so uncommon, and the majority of large investments are private equity rather than public offerings. If they have no hope of a near-term IPO (because there was no IPO market for a while), founders can get frustrated locking up their time, effort, money, etc. into a company and start looking for acquisitions. If the investors don't want to see an early acquisition, and want the company to keep growing, the founders and investors may agree on an exit, or partial cash-out, for the founders that allows the company to keep growing.

It's not much different from the IPOs during the dotcom bubble: It makes the founders rich, and possibly pays off early investors, and transfers more ownership to the buyer (in the IPO case, the public is the buyer, in the private equity case, it is a VC or investment bank or conglomerate of the former).

In this case, it confirms for me that Groupon was built to flip. If it accidentally becomes a profitable company that lasts, I'll probably be as surprised as the founders (who, as you note, have already mostly cashed out; sure, they'll make more from the IPO, because I'm sure they still have some stock, but they locked in winnings already, and are mostly gambling with other peoples money from now on).

prpon• 15 years ago

I find that groupon using most of its funding from last round to payout people questionable.

I can understand founders wanting to cash out a portion of their equity before going public. However, when you are raising money say 10 million to fund growth etc, what % is considered reasonable to pay founders before it raises red flags to investors?

brandoncor• 15 years ago

"In this case, it confirms for me that Groupon was built to flip"

If it was built to flip wouldn't they have accepted Google's offer?

mikeryan2• 15 years ago

Its greater fool investing. The last round probably had a lot of "We're going to IPO in a year" which means that last round is expecting to get their payday on an IPO and, frankly, future company performance be damned.

I'm not as skeptical as some on Groupon's future I think they still have a vast amount of room to grow. But this lack of a focus on fundamentals is how bubbles get made.

starnix17• 15 years ago

In case anyone didn't notice, this blog post is by DHH.

stevenj3• 15 years ago

That's interesting given that Jason Fried (his partner at 37signals) was a board member of Groupon and is now an advisor to the company.

mikeryan2• 15 years ago

According to the payout statements Jason was also one of the folks who took money out in the last funding round to the tune of 500k (which seems like a pittance all things considered).

mechanical_fish• 15 years ago

I didn't see that at first or second glance, but that does explain why this blog post reads like DHH's Twitter feed from yesterday. ;)

fleitz2• 15 years ago

I was wondering about that myself, I was thinking wow, this guy is really channeling dhh from yesterday.

tednaleid• 15 years ago

no obvious rss feed for it, but if you look at the source, you can see that http://shortlogic.tumblr.com/rss will work, only 29 subscribers so far according to google reader, probably partially because it's a PITA to find the link

rayiner3• 15 years ago

This article is full of handwaving.

1) Lot's of businesses run in the red for awhile in order to build up their market share. Just pointing to losses in the first few years of major operations isn't particularly compelling.

2) The adjusted CSOI metric isn't as ridiculous as the author makes it seem. The claim is that their marketing expense is a function of how fast they want to grow. Presumably once they reach a size they want, they scale back that expense, and the revenues turn into profit. The Forbes article says: "The bottom line is that considering the profitability of Groupon without online marketing expenses is silly; Groupon without marketing expenses is not Groupon at all." How is Groupon without marketing not Groupon at all? It's an interesting-sounding statement without any meaning.

gaius2• 15 years ago

1) Read down to the bit about Amazon.

noodle• 15 years ago

it seems that his point with CSOI is that despite all the money they've spent, they don't have much customer or user loyalty and at least on some level, their revenue is linked to their marketing expenses. scaling back marketing expense = scaling back revenues.

brown9-2• 15 years ago

How is Groupon without marketing not Groupon at all?

Because Groupon is getting all of their visitors/subscribers through massive amounts of marketing. Without that marketing, it is not proven that they would still have so many visitors/subscribers.

rayiner3• 15 years ago

Yes, Groupon's userbase might not stick around if they reduce advertising expenditure to shift into profitability. That is unproven, uncertain, etc. However, it's quite a leap beyond that to say that the userbase definitely will leave if groupon doesn't keep up its massive advertising campaign, which is effectively what the Forbes article says: (Groupon isn't Groupon without unsustainable advertising).

kjames• 15 years ago

Why do they need to go public? Are they hoping that more ad buying power is going to provide them economies of scale? Graphic designers aren't that expensive to employ are they?

hvs2• 15 years ago

They need money. And the investors would like to cash out before the company runs out of money.

sunir• 15 years ago

The general impression is that the founders sold their shares to a VC fund with the intention of the VC fund returning their capital with an IPO.

nwjsmith• 15 years ago

I'd be interested in hearing Jason Fried's take on this. Isn't he an advisor for Groupon?

hvs2• 15 years ago

If he's an advisor to Groupon, then I'm pretty sure he can't say anything without violating a slew of SEC rules.

pchristensen• 15 years ago

http://mixergy.com/jason-fried-sortfolio-interview/

"Andrew: You’re on the board of directors at Groupon. What have you learned from working with them?

Jason: Sure. Well, just a clarification. I’m not on the board of directors anymore.

Andrew: Board of advisors.

Jason: I’m on the advisory board now instead, and that was a smart move by them.

Andrew: Why?

Jason: My main role there on the board was . . . the reason Andrew Mason asked me to be on the board was to help them with product ideas and work on product design and copyrighting and think about products because that’s what I think I’m good at.

The board of directors isn’t really a place for that, especially at the stage that Groupon is at right now. They need people with international business experience. Howard Schultz came on after I left, the CEO of Starbucks. He knows brand name. He knows big business. He knows that stuff. I don’t know that stuff. That’s not my role. They need more people like that than people like me.

By moving over to the advisory board, I’m working with Andrew. I was just working with him this morning on some stuff around their new Groupon Now product which is coming out short. Now, I’m doing really what I should be doing, which is working with Andrew and his team on product design and thinking about product copyrighting and that kind of stuff. It’s a better place for me, a better fit for me.

That whole process of being on the board was absolutely fascinating, and I really enjoyed it. I feel like it was a bit lopsided because I certainly learned a lot more from them than they learned from me."

jasonfried7• 15 years ago

I commented above: http://news.ycombinator.com/item?id=2617160

danvoell3• 15 years ago

Should they take customer acquisition out of the "fastest growing internet company ever" title? or just the financial analysis.

Great Write-Up.

I have to imagine the wall in their office with biggest internet failure magazines is a self fulfilling prophecy.

alain94040• 15 years ago

My main concern is: how do I tell my 401k and mutual funds to stay away from Groupon?

I'm a smart investor, I'm strongly deciding to not touch Groupon with a thousand feet pole. But I'm pretty sure bankers in NYC will do it for me. What can I do?

hammock2• 15 years ago

Dont buy funds invest it yourself. Move your 401k into a self-directed account.

djb_hackernews• 15 years ago

Which may take some lobbying of your company to add a self directed component to your 401k offering, which as far as I know is a more costly option. (Because you won't be buying their selected funds and they won't be reaping the commissions)

joe_bleau• 15 years ago

How do you move a 401k to a self-directed account? Can you do it without quiting your job?

My single biggest gripe with my 401k--a very poor selection of high cost managed funds.

chrisaycock2• 15 years ago

Groupon isn't going to make the S&P 500. If you're invested in a wide index fund, you'll be safe.

usaar333• 15 years ago

If you can figure out how much the fund is investing in Groupon, short an equivalent percentage of Groupon.

aresant3• 15 years ago

I count 3 negative Groupon articles on the front page this AM.

A quick Google news search finds similarly uniform negative sentiment in the general web.

Brings to mind Warren Buffet's famous quote about investing - "The time to get interested is when no one else is. You can’t buy what is popular and do well."

chrisaycock2• 15 years ago

That Warren Buffet quote doesn't mean you should buy a company that everyone hates. Buffet meant to go after "un-sexy" businesses (like railroads and insurance) and forgo "hot" fields (like technology or media).

The negativity surrounding Groupon isn't that they're boring; the negativity is that they're over-hyped.

lhorie• 15 years ago

I was just thinking about how Google must be rolling in all that cash Groupon spent on Youtube ads etc. And LivingSocial's. And the other me-too's. Talk about selling pickaxes.

aresant3• 15 years ago

I disagree.

This reminds me of the pre-Google IPO arguments.

It became popular in the press to pot-shot Google in the days leading up to their IPO.

Their revenue model was too tied to search.

Their IPO structure wasn't sound.

Their biggest growth was behind them.

Groupon is no Google today, but they do have a visionary founder, an incredible brand, insane revenue growth, and address a real problem for merchants and consumers.

calloc• 15 years ago

I'm doing very well with my Atmel stock ... just stepped in at the right time ;-)

danvoell3• 15 years ago

Other Warrent Buffet quotes:

"Rule No.1: Never lose money. Rule No.2: Never forget rule No.1"

bproper2• 15 years ago

It also seems that Groupon's business provides diminishing returns the more popular it becomes in a certain city - http://bit.ly/iDslVV

At this point in the tech boom, an underwhelming IPO wouldn't be a bad thing.

sedachv3• 15 years ago

Please post the full URI and not the bit.ly redirect on HN. This isn't twitter.

run4yourlives• 15 years ago

You can't buy what isn't profitable and do well either though.

I don't think Buffet advocates turning off your brain completely.

imjustatechguy2• 15 years ago

This is a gross misuse of Warren Buffet's famous quote to say the least. I would highly recommend reading about Warren Buffet's investment strategy -- he never talks about buying into the latest high tech IPO. Investing in hot IPOs (or even hyped IPOs) isn't at all how he made his money. He bought into boring industries that everyone was basically ignoring and then he helped them increase their margins by bringing in very good management that was focused on the long-term bottom line. The management at Groupon is very scary as they are clearly cashing out and are not looking at the long term at all.

Also, if there is general negative sentiment (not just isolated as it is now) about Groupon, there won't be an IPO. It could easily be withdrawn and if it is withdrawn, it likely won't come back if what everyone is saying here on HN is true.

kadavy• 15 years ago

Warren invests in what he knows. The fact that he doesn't buy technology stocks is more likely due to the fact that he doesn't know much about technology.

At this year's shareholder's meeting, someone asked him and his business partner, Charlie Munger, which industry they wish they knew more about. Charlie said "technology."

rst• 15 years ago

But this isn't a time when "no one else is" investing in Groupon --- it's a time when a whole lot of major players have, evidently betting on the willingness of a deal-happy general public to buy even more when they can. If they don't, the wolf will be at the door in a hurry.

Which, by the way, is in marked contrast to the kind of negative buzz Google had at the time of their IPO. There were legitimate doubts about the sustainability of their business model, in part because they were deliberately concealing the size of their profits as long as they could to avoid attracting competition. (See Levy, "In the Plex".) But at the time they went public, they were making money, in much larger amounts than anybody outside the company had realized.

As to Groupon: if dhh is reading the balance sheet right, they need the proceeds of the IPO just to keep the company going, unless something very dramatic happens soon. They have only two quarters' worth of cash on hand at the current burn rate. The $750 million from the IPO will extend that by about two years (if the burn rate doesn't go up!). But if you invest, then you're counting on management to pull a not-yet-evident rabbit out of a hat within that time. And you're expecting that from a management team that put most of the roughly $1 billion that they raised off private markets in the last two rounds in their own private pockets (they sold founder shares to the VCs), leaving only $150 million available to the business itself as working capital.

Good luck!

EdiX• 15 years ago

Three articles about Groupon IPO prove it's a popular and interesting topic.

kprobst2• 15 years ago

Everyone remembers the Pets.com IPO for example, but no one remembers that it was Merrill Lynch that underwrote it and made most of the profit on the deal.

The problem is the market and VC environment that allows things like these to go down, not that there are unprofitable companies. Those have always existed. But there was a time when people didn't buy into them because they were unprofitable. The way things work now is just wrong and dangerous. But it's been 10+ years since the last dotcom bust, so I guess people will be people and start falling for it again. A fool and his money and all that.

freshfunk• 15 years ago

If you weren't around for the last dot-com bubble burst here's the simplest explanation for what happened then and what seems to be happening now:

Pump and dump.

firefoxman13• 15 years ago

I agree. I can't see any investor with half a brain buying any company with a P/E of 2,147 (LinkedIn)

fennecfoxen• 15 years ago

I can see an investor with half a brain buying a company with a P/E of 2147 - heck, some newer companies with lots of potential have negative P/E. What you need to make up for it is a really nice growth story.

Now, LinkedIn has an okay growth story, don't get me wrong. The problem is it's just not good enough. Let's do some back-of-the-envelope comparisons. Consider a relatively low-risk investment: an intermediate-term corporate bond fund. You can get about 4% yield these days. At the current market cap of $7.4 billion, that's earnings of roughly $300 million a year. That's roughly in line with LinkedIn's revenue, but they also need to pay for things like engineers and server farms.

In other words, you're going to need a heck of an earnings growth story just to break even against a safe investment - and LinkedIn is nowhere near as safe as a corporate bond fund.

inkaudio2• 15 years ago

Another major challenge Groupon face is: They are competing with major players, companies with considerable more resources. Google, Facebook, Amazon all have competing products and a very large user base. Google has billions in profits and Amazon have billions in revenue and hundreds of millions in profits. Facebook has one of, if not the largest user base in the world. For Groupon to succeed it will have to be beat Amazon, Google, and Facebook. It's hard enough to compete against one giant, but having limited resources and competing against all three will make it too easy to fail. Now more than ever you have to wonder why they did not sell to Google. Perhaps they are hoping Microsoft will want to get in game after they IPO and buy them.

te_chris• 15 years ago

Microsoft have made some questionable acquisitions, but there is no way they would want to come in, post-ipo inflation and sweep them up then (unless of course they bomb as hard as everyone is predicting). Like FB, Goog, MS too has millions of users they could turn into customers of Bing Offers. Bet they won't though. This whole market is one giant race to the bottom.

klbarry• 15 years ago

Does anyone else think Groupon has been a huge boost to the economy? They've created 7000 jobs in a few years, without displacing many old ones, and most of these jobs are low-skill.

jat850• 15 years ago

Citation? I haven't seen this number and I'm very curious as to how it was derived.

brandong• 15 years ago

I wouldn't quite say adding 7000 is a "huge boost" to the economy.

cosgroveb• 15 years ago

Most of these jobs are low skill? My understanding is that the majority of the people at Groupon are in the sales force. Just because it doesn't require a degree in CS or EE doesn't make a position low-skill. Being an effective salesperson takes a lot of skill.

raldi4• 15 years ago

I don't know if I agree with this assessment. There's a land rush going on. They need to grab as much of the market's network effects as they can before Google Offers and the like manage to get going. This is definitely one of those extreme first-mover-advantage situations, like online auctions fifteen years ago.

So to answer the author's question: When will Groupon be profitable? When the enormous costs of their explosive growth are no longer counting against their bottom line.

MrMan• 15 years ago

Are there network effects in coupons/deals? You mean building the relationships with merchants?

raldi4• 15 years ago

Of course there are! Consumers want to join the service that has the best (and most) deals. The service with the most consumers is going to be able to get the most merchants signed up and get the best deals out of them. It's a textbook virtuous cycle.

lightoverhead• 15 years ago

Completely agree with OP on this comment! I really doubt Groupon's business model, hardly believe that coupon style business could be a main stream of profit.

Would like to short this IPO when it comes to the stock market.

Hisoka• 15 years ago

I agree. It's just fundamentals. There's no such thing as a free lunch. No company can offer 50% coupons again and again, and be profitable, so the number of repeat merchants will go down, and Groupon will have to continue spending more to get more dumb merchants.

The customers are all looking for deals, they're not loyal. Plus more and more will get sick of the deals being targeted towards them.

In the end, Groupon is like a Ponzi scheme in that it will need to trick more new merchants to join in as old merchants drop out, and it will need to continue paying a premium to attract more consumers as the existing ones drop out. Compare that to companies like Amazon, and Google where ppl will never get tired of shopping online, or searching online.

ChuckFrank• 15 years ago

False valuation and poor accounting and financial transparency affects us all. We should do everything we can to discourage these type of shenanigans. A much better proposition would be to build companies that people want, and are willing to pay for, and then raise money based upon the future possibilities of those creations. Raising too much money is just as bad for us, and for Groupon, as raising too little money. Why? because any mis-allocation of capital will lead to market instability, which will lead to inefficiencies. Companies, Societies, Empires, rise and fall based upon these simple tenets.

sedachv3• 15 years ago

I told you so:

http://news.ycombinator.com/item?id=2117952

http://news.ycombinator.com/item?id=1968491

With all the experience of the past 12-15 years, I'm convinced that "local" is a hopeless hole for tech startups.

Revisor2• 15 years ago

Why do you think that anything "local" in general is a money/energy drain?

sedachv3• 15 years ago

There seems to be two types of "local" web startups: events and businesses.

Event listing sites are a very small market basically trying to take over the flyer and newspaper advertising. There's no money there. And in the past couple of years Facebook has stepped in and basically made all other event sites obsolete, for now.

Business listing sites are trying to tap into the Yellow Pages market. Yellow Pages were/are huge. This is why people continue trying to get in. The problem is that unlike physical Yellow Pages, which have a regional monopoly, the barrier to entry is very low. This leads to fragmentation, and any single local business directory isn't very valuable. Combine with extremely spotty coverage and out of date listings, and online directories themselves are pretty useless. Even Google can't stay on top.

It gets worse because you have to cold-call small businesses to sell to them. New ones are always starting up and old ones are going out of business. They also don't want to pay very much money and suck at paying their bills.

Then there's the effort to drive traffic to the directories (or in some cases specific businesses listed in them) via AdWords or other advertising. This can work but is hard to pull off, most who try screw it up.

Don't forget that in addition to Google, Yelp etc. the Yellow Page companies themselves all have online directories, and massive existing sales forces and lists of customers. And they are still struggling to turn a profit online.

evertonfuller• 15 years ago

I've always seen Groupon as a joke. I don't know anyone who has bought anything from there. Maybe I just hang out with the wrong crowd, but meals at random sushi bars, spa treatments, karate lessons...? Random...

jcslzr• 15 years ago

Is it possible for Groupon to tell Google I will spend millions on adsense but I need you to make a fake offer of 6 billion?

firefoxman13• 15 years ago

I think it's interesting that this story and the story from 2000 condening Amazon for losing money every quarter are both top stories on HN today[1].

Whenever history repeats itself you'll always hear people say "But this time is different!"

The article Joel Spolsky wrote about the "Amazon model" of growth (back in 2000) really explains why some companies grow the way Groupon and Amazon do[2]. They're in a land grab and they almost have to grow with huge losses and lots of funding or else they'll lose.

Personally, I'm a fan of what Joel calls the "Ben and Jerry's model" which I tend to call the Jason Fried model. Unfortunately, Groupon isn't one of those companies that can expect to win if they aren't growing extremely aggressively, and taking large losses at first is just part of the Amazon model.

[1]http://www.slate.com/id/1004565/

[2]http://www.joelonsoftware.com/articles/fog0000000056.html

Try to digest the Groupon story

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