The Fall of Groupon: Is the Daily-Deals Site Running Out of Cash?

http://www.theatlantic.com/technology/archive/2011/08/the-fall-of-groupon-is-the-daily-deals-site-running-out-of-cash/243863/

by nbj914 • 15 years ago

67 75 15 years ago

theatlantic.com

dreww2• 15 years ago

it'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".

pbreit14• 15 years ago

Groupon'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.

freshhawk4• 15 years ago

Most 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.

danmaz743• 15 years ago

The 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.

dreww2• 15 years ago

if 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.

mostlycarbon• 15 years ago

I 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• 15 years ago

I 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/ )

ghshephard• 15 years ago

I 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.

pbreit14• 15 years ago

Calling this a ponzi scheme is a mistake. If you consider coupons merchandise and Groupon getting net 60 day terms it's just like any other retailer.

Hisoka• 15 years ago

I hope they can do an IPO, and short it, along with Demand Media. You gotta invest in what you know.

jsm386• 15 years ago

Demand 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.

pbreit14• 15 years ago

This 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

tedjdziuba• 15 years ago

In a federal prison somewhere, Andy Fastow mutters "...amateurs".

arethuza• 15 years ago

Groupon actually reminds me more of Value America:

http://en.wikipedia.org/wiki/Value_America

RexRollman• 15 years ago

I 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• 15 years ago

If 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• 15 years ago

If they didn't, they may not have had a second chance.

felipemnoa• 15 years ago

Which 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• 15 years ago

Did groupon start in chicago or boston. The article says boston, but I thought it was chicago ...

pbreit14• 15 years ago

Groupon 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.

mikeryan2• 15 years ago

Well 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• 15 years ago

100% 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• 15 years ago

Well, 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.

mchusma• 15 years ago

These 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.

pbreit14• 15 years ago

There is one palatable explanation although I have not seen any confirmation: the early payouts assuaged investors and executives who might have preferred the Google deal.

Also, there are many examples of fantastically wealthy folks who remain quite motivated.

ahi• 15 years ago

Oh, it's way worse than the late round VC's and the 5000 employees. All those small businesses don't get their share of the groupons immediately. When it implodes, and I think it will, thousands of small businesses will have the unenviable decision of whether or not they honor groupons they weren't paid for.

ig16• 15 years ago

The 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.

mikeryan2• 15 years ago

Lots 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.

ForrestN6• 15 years ago

They 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.

freshhawk4• 15 years ago

You'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.

ig16• 15 years ago

I'm not saying Groupon has a good business, I'm saying that most of these articles are talking about complete irrelevancies.

LTV and acquisition costs are the important metrics that we should be judging them by, not the ones presented in this article.

yuvadam• 15 years ago

Let's stop with the Amazon analogy. Yes, Groupon, like early-day-Amazon, is bleeding cash on customer acquisition. It ends there.

Amazon was building a retail infrastructure and they succeeded in providing value to their customers.

Groupon is busy spending truckloads of cash on luring businesses into their pyramid scheme, while founders and early-stage VCs are cashing in.

Pray tell how either customers or businesses are benefiting from Groupons. Is Groupon providing them with some service that I cannot duplicate tomorrow? Are they building some secret infrastructure that no one knows about? Follow the money, and you will see that no such thing exists.

Groupon is a fraud, and it's time we call it the way it is.

ig16• 15 years ago

I'd like to see you build a global local salesforce tomorrow. Groupon's infrastructure isn't technological but rather operational and human resource based, something which is actually much harder to duplicate than technology.

It's likely the reason that Google wanted to buy them isn't for daily deals, but the fact that they've got a huge salesforce with expertise in selling to local businesses.

Local business ad spend in the US alone is a $100bn dollar market, only a tiny percentage of which is spent online at the moment, but the only way to reach this audience is direct sales. And that's something that google doesn't have the people infrastructure for.

danmaz743• 15 years ago

Cash flow management is really important to the long term. Actually, if you run out of money in the short term, there is no long term at all...

fleitz• 15 years 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.

freshhawk4• 15 years ago

It really stretches the term to call this a "Catch 22". Since it hardly fits that metaphor and "Ponzi Scheme" matches that definition exactly.

sinzone• 15 years ago

Andrew 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.

ForrestN6• 15 years ago

The 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.

pbreit14• 15 years ago

Why is a good post like this downvoted? I know HNers tend to disagree but the sentiment is for the most part spot on. Groupon is not a ponzi scheme. It operates like any other business that buys from vendors on net 60 terms. It can obviously dial down on acquisition spending and be left with a fabulously valuable asset of 100+ million opted-in subscribers/accounts. A list that it can market to very inexpensively.

ForrestN6• 15 years ago

Thanks for the support. Clearly I have yet to master the paradigm of "adding value" that classifies it'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" as more valuable than my comment. Will continue to try and adapt to the local culture.

r00fus2• 15 years ago

None of this "land grab" reasoning answers my concern I raised earlier ( http://news.ycombinator.com/item?id=2870094 )... how is Groupon going to defend their landgrab? There are NO BARRIERS in this market, as far as anyone can explain to me.

I'd love to hear any reasonable argument as to how Groupon will defend it's ground. It's not like the big boys (Google: Offers, Amazon: LivingSocial) are ignoring the space either.

ForrestN6• 15 years ago

As. I said, I'm not convinced this will work. I think you raise a good question. Their argument would be that, like Amazon or any number of other companies that spend a ton of time at the beginning being unprofitable in competitive spheres, wthey are building up lots of forms of entrenchment that together constitute a barrier to entry.

Things like brand awareness, relationships with large national merchants, mailing list, I'm sure they are working on systems to tailor deals to user's buying profile, "groupon now", travel deals, etc. Amazon's barrier is that they have so much available for purchase no one can compete with their breadth. If Groupon's list is the biggest, maybe they can leverage it to exclusive partnerships to the detriment of competitors.

Again, I'm not sure this will work, but you're not calling them a scam. You just think they're overvalued, or that their competitive strategy is flawed. I would never argue that they are certain to succeed, I just think a lot of this Madoff nonsense is overblown.

sunchild• 15 years ago

I can tell you for sure: no one I've ever met is remotely loyal to Groupon. Groupon is viewed as, at best, a deal – at worst, an off-target annoyance.

There are no meaningful barriers to entry. Margins will tend to zero in the face of competition. Users have no lasting connection to Groupon's web presence. Every new model propose by Groupon further erodes its original appeal: false scarcity. Meanwhile, there's a war for customer acquisition, with spending up to $40 per user, when it should be closer to $2.50.

Anyone who gave this market a serious look saw these issues coming a thousand miles away.

shawndrost• 15 years ago

I'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.

puredemo• 15 years ago

It's just a bit off-putting that a company would try to justify a $10B - $30B valuation when they have never shown any net profit.

craigmc• 15 years ago

Ultimately 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• 15 years ago

The 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.

r00fus2• 15 years ago

The analogy also fails because the USG has weaponry (spending more than everyone else in the world combined) and Groupon does not.

mkr-hn• 15 years ago

Groupon 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.

The Fall of Groupon: Is the Daily-Deals Site Running Out of Cash?

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