Groupon stock sinks to new low, investors sue

http://www.chicagobusiness.com/article/20120404/NEWS08/120409912/groupon-stock-sinks-to-new-low

by joejohnson • 14 years ago

90 127 14 years ago

bfrog• 14 years ago

Please. As if anyone with half a brain couldn't see this ponzi scheme on the blowup train of doom. Who are these magical investors?

sc68cal• 14 years ago

Goldman Sachs - for starters. They set up the deal - and let their "muppet" clients get their eyes ripped out. Business as usual for them.

This is not surprising to me - I did say that they were going to "ladder" the price and pocket a huge chunk of money - then watch everyone else get screwed.

== Sources ==

My previous comments on Groupon: http://news.ycombinator.com/item?id=3139614

Groupon Chooses Goldman Sachs & Morgan Stanley as the underwriters for their IPO: http://www.bloomberg.com/news/2011-04-15/groupon-said-to-cho...

Goldman calls their clients "Muppets": http://www.nytimes.com/2012/03/14/opinion/why-i-am-leaving-g...

dantheman• 14 years ago

It's not a ponzi scheme.

jasonrr• 14 years ago

Simply stating it is not a ponzi scheme doesn't advance the conversation in a meaningful way in my opinion.

It's really just semantics at this point. There is a lot of evidence here that suggests systematic misleading (if not out-right defrauding) of investors. So you while you are technically correct, I think what Groupon has done is in the spirit of Ponzi even if it is executed differently. What's happened here is more than just a bad business plan executed honestly producing poor results. Just because we don't have the exact word for it doesn't make it any more ethical.

Quizzy6• 14 years ago

It is when you need new sales to pay for the cost of maintaining existing client base: 1) client #1 pays you, but you have to give him back half at a future date, 2) while his money sits in your account, you spend it on operating costs, 3) get new client money in order to pay client #1 back.

It is that money sitting in the account that gives Groupon the cash flow it needs to hire more sales people to grow the revenues further, but remember always that a % of that must be returned to the customer at a future date. Where it falls apart is when your new sales can no longer replenish the client account (no it does not sit in a trust or escrow, but in company's general operating account).

So what happens when Groupon declares Bankruptcy? All that money sitting in the account is gone, customers get NOTHING back. Yes, this is indeed a Ponzi scheme because the last customers in get nothing, even though they are owed the %.

run4yourlives4• 14 years ago

Perhaps not, but the only way it's a sound investment is if you exit quickly by finding another sucker that is willing to take a risk it doesn't come crashing down before he can exit. Everyone agrees there is no long term business model there, certainly not at that valuation.

But no, not a ponzi scheme at all.

victork2• 14 years ago

Who would have imagined that groupon had a future? It worked on the novelty effect and it was doomed to fail.

On the other hand, Chicago business is full of bugs. Ghostery block 13 (!) calls to different websites such as: Quantcast, 24/7 real media, Outbrain etc... I won't visit this website again. I wish I was warned of that before hand not when I go to the website, I value my privacy more than going there.

itsmequinn• 14 years ago

The writing was also poor. The second paragraph starts saying "The first two lawsuits were filed..." without having given any context either in the headline or the first paragraph. The HN headline was better than the one at the site itself.

dclowd9901• 14 years ago

In theory, every "bargain" mechanism is doomed to failure as companies learn how to game it, returns diminish, and consumers fall out of favor with it.

pbhjpbhj• 14 years ago

How do companies game Groupon standing at the checkout taking the customers money and giving the company 20% of the invoice amount?

zaidf7• 14 years ago

It worked on the novelty effect and it was doomed to fail.

A little premature to write an obituary of a company that finished 2011 with 1.6B in revenue.

ceejayoz3• 14 years ago

Not if it's unlikely to turn that revenue into actual profits.

unabridged• 14 years ago

Not when that company's popularity has leveled off and still finished last year with a $370M loss.

http://biz.yahoo.com/e/120330/grpn10-k.html

http://www.google.com/trends/?q=groupon&ctab=0&geo=a...

ohashi4• 14 years ago

1.6B in revenue is pretty meaningless if you're not even making a profit. They are simply really good at losing a lot of money.

JHSheridan2• 14 years ago

This argument always blows my mind. Who cares about revenue? Profit is what counts. If you make 10 trillion, but have to spend 10 trillion and 1, you're failing.

Web-based companies have to make a profit too. Why do people forget this?

rprasad4• 14 years ago

Part of Groupon's problem is that it did not actually book 1.6billion in revenue under generally accepted accounting principles (GAAP). It booked 1.6billion under Groupon's magical accounting practices (MAP).

Under GAAP, money which is contractually owed to a third party at the time of collection is not booked as revenue. Under Groupon's accounting practices, it is. This allows them to inflate revenue while downstating their liabilities. This is why the SEC is investigating them for fraud.

Uchikoma• 14 years ago

If I give 1B to my friends company for a service, and he gives me 1B for a service I provide, do we both have 1B in revenue?

StacyC2• 14 years ago

A little premature to write an obituary of a company that finished 2011 with 1.6B in revenue.

Revenue != profit. You could generate a trillion in revenue. What's left after the bills are paid is what counts.

diogenescynic• 14 years ago

They should be going after the SEC for allowing this company to IPO in the first place. Going public used to be a privilege, now it seems too easy.

wmil• 14 years ago

Since SOX successful tech companies have been avoiding going public for as long as possible (ie Google, Facebook).

I wonder if there was some pressure from investment bankers who want to encourage more IPOs as well as government types who want the law to seen as a success.

gammarator• 14 years ago

Per the new JOBS act, it's about to get easier.

walru• 14 years ago

GRPN was a always a short sellers dream come true. Next up, ZNGA.

untog• 14 years ago

Why do you say Zynga? It was my understanding that their financials are a good bit more stable, even if they are Facebook-dependent.

Quizzy6• 14 years ago

Zynga's business model is like any other gaming publisher (such as EA, Blizzard, etc.). To succeed in gaming you MUST have a pipeline of games that continue revenue growth. If you cannot create your own, then you must acquire indie developers (OMGPOP recently). In time Zynga stock will be no different than any other gaming publisher stock. Look at Blizzard: other than Diablo, Starcraft and WoW, it has created nothing in the last 4 years beyond sequels. Homegrown innovation is nearly impossible.

Rovio was in the business for 5 years before Angry Birds, and I doubt they'll have another hit like Angry Birds ever again.

Id fell apart when it couldn't come up with something better than the Doom franchise.

OMGPOP was very smart to sell out to Zynga, because there is no way it would have come up with something even close to Draw Something in another 5 years.

Unlike rock stars and pop singers, creating a string of gaming hits is so much harder because it requires the perfect storm of so many variables each and every time, whereas a single person like Adele, Amy Winehouse, etc. can rely on their genius alone to create a hit.

dia803• 14 years ago

Yes, it was, and that's why it is nearly impossible to short. I've been paying 30-40% annualised to borrow the stock for shorting and the rate spiked to nearly 60% recently. Being short is more expensive that most people think.

nowarninglabel3• 14 years ago

Why not just buy puts on it?

guptaneil• 14 years ago

As a Silicon Valley native currently living in Chicago, I've always found it disappointing that Groupon is the poster child of innovation and entrepreneurship in Chicago. They seem to lack a solid business plan and have a history of deliberately misleading investors and businesses. Far more impressive companies, such as 37signals or GrubHub, are based here that deserve that kind of attention instead.

I very much doubt the legitimacy of this story, but I was in a barbershop a few weeks ago, where the owner told me about one of the Groupon executives who was in the shop earlier. He was saying we shouldn't expect Groupon to be around in 10 years because the company's plan is to collect as much cash as possible, fire everybody, and shut down, keeping the money for the investors. While I doubt a Groupon executive would have actually said that in a barbershop, I can believe that actually was their long-term plan, but if things keep up at their current rate, I'm not sure if Groupon will even last that long.

jpdoctor• 14 years ago

> He was saying we shouldn't expect Groupon to be around in 10 years because the company's plan is to collect as much cash as possible, fire everybody, and shut down, keeping the money for the investors.

Every bubble produces these, but usually the money is kept for the management-investors only. SCMR and Zhone from the tech bubble executed that plan spectacularly.

pbreit7• 14 years ago

> I was in a barbershop a few weeks ago, where the owner told me about one of the Groupon executives who was in the shop earlier

Great source!

tptacek4• 14 years ago

I don't know why this was downmodded. It's trenchant. Nobody on HN seems to like Groupon, but that doesn't make this kind of ridiculous hearsay more valid.

brandall10• 14 years ago

(Seemingly) explosive growth garners much attention, it's human nature. Tech 'reporters' Techcrunch, VentureBeat, Mashable, etc, like a good story.

Maybe I'm naive, but it seems like there's always been this question mark over their model being non-sustainable, and to those who are aware of 37Signals hold them in much higher esteem.

joezydeco2• 14 years ago

"Far more impressive companies, such as 37signals or GrubHub, are based here that deserve that kind of attention instead."

Every time someone says this, the neck-hairs of every Orbitz employee (current and former) stand up on end and twitch a little.

__float• 14 years ago

I don't think that's exactly the same comparison. Orbitz, to me, seems much more corporate and doesn't have the same connection with the developer and startup community that these do. That's not to say Orbitz isn't worthy of attention, merely they don't shove it in our faces like 37signals ;)

johnrob• 14 years ago

The plan might be the most rational one I've heard regarding Groupon. Not the most moral strategy, but it's one that seems to factor in their vague value proposition.

knows_chicago2• 14 years ago

Groupon is the typical Chicago-based startup. After experiencing enough sleazy startups in the mold of Groupon, I decided I've had enough with Chicago. That type of business plan is typical of many Chicago startups.

The same investors behind Groupon are funding many other startups. They've got plenty more ponzi startups waiting in the wings.

freehunter• 14 years ago

I'm not agreeing nor disagreeing with you, since Groupon is the only startup I know from Chicago, but Chicago has this same problem with politicians. Pump-'n-Dump. 1 in 5 Illinois state politicians have seen jail time in the past 100 years.[1]

I can't honestly put anything down to words that could describe why, or if it's just coincidence. Just an odd trend.

[1]http://articles.marketwatch.com/2011-12-07/economy/30779893_...

ironchef2• 14 years ago

Created just to post this? Wow.

Anyways...so...would you say the following are all sleazy: braintree, orbitz, threadless (aka skinnycorp), 37signals

Those are the next startups i think about when i think chicago.

islander• 14 years ago

I might disagree with you on that. I am not a GroupOn FAN but if that was their real intention, they would have sold the company to Google long back for $6 bn.

snorkel• 14 years ago

Who would guess that there could be an integrity issue with a company that tried to invent new accounting rules where marketing costs don't appear on the balance sheet? You'd have a crystal ball or a brain to see this coming.

lubos• 14 years ago

Marketing costs are not supposed to appear on balance sheet.

I don't really watch this company but if I remember correctly, their way of doing accounting was to show all received money from customers as income instead of liabilities since they were collecting half of it on behalf of vendors.

They were simply inflating their revenue but it's not like it matters, because profit (loss) would be always the same regardless.

rprasad4• 14 years ago

You mean the income statement, which tracks money in and out. The balance sheet is used to track assets, liabilities, and equity.

fasteddie31003• 14 years ago

People I know who currently work for Groupon say that the culture there is falling apart. To get the numbers investors expect the sales people need to reach unrealistic sales numbers. Management is grasping at straws, trying every trick in the book to not let the whole thing fall apart. The Groupon model is simply not sustainable, it was a onetime gimmick.

As someone who lives in Chicago, I am worried about its failure and with that the future of the tech scene in Chicago.

timjahn• 14 years ago

Groupon is a large part of the tech scene here in Chicago, contributing a lot to the scene.

But they're not our sole pillar any more. I think we all know that pillar is going to come crashing down in the near future, and we're ready.

Groupon helped propel us to where we are, and we're standing on our own now. In my opinion, the future of tech in Chicago will not solely depend on Groupon's activity.

tedkalaw• 14 years ago

I chatted with some engineers from BrainTree and I was impressed at their commitment to helping build the tech scene in Chicago.

It's an exciting time.

davidmr• 14 years ago

My impression from working in their building (at a different company) is that they really don't have that many tech people. From what little one can divine from elevator conversations, it seems like far less than 1/10 have anything even remotely technical in their conversations.

Those that are sent packing when Groupon shuffles off this mortal coil will get snapped up in a hurry. The other 5k+ twenty-something sales force will be much more problematic. If you're under 35, you know at least one person who works there, so it's going to be a real horror show when all those people get tossed out on their collective asses.

cpher• 14 years ago

I, too, live in Chicago, and I don't think this matters one bit. If you think Chicago should live and die by the same rules as Silicon Valley, then that's your first problem. Native mid-westerners live by the philosophy of "Show Me", which is apt for Missouri's slogan. If Groupon, or any other company, can't show real results then let the chips fall where they may. I ran into a few Groupon employees at a bar on the northside a few months ago. They (the man, not the women with him) were bragging about Groupon and the fact that he was in the "sales" dept. at the company. This was before any shit hit the fan. And all I could think about was, "I hope you have other job prospects." I didn't think this because of some hatred toward Groupon, but rather the naivete of making such a statement. So, the fat salesman wandered off with the cute salesgirls. And I wonder what they're life is like now.

silentscope• 14 years ago

When your boss is your shareholders, the seat of your pants accounting doesn't really cut it.

api• 14 years ago

I remember hearing about how this company ran, and figuring it was nothing but a giant boiler room sales pit and a gimmick. I am not surprised.

Quizzy6• 14 years ago

Anecdotally, the first generation of sales rep have nothing but depressing things to say about this entire market segment now. The first year sales numbers were gangbusters, until their clients called back complaining, swearing never to do another Groupon deal, ever again.

It's not just Groupon, this entire business model is unsustainable: asking a retailer to discount his products for a fee in the hopes that he will attract new "local deal" customers willing to pay full retail next time, when the ONLY reason these customers came in the first place was because of the discount.

notJim• 14 years ago

Not only that, but I suspect that people who are loyal to businesses and like interacting with local business owners are less likely to use sites like groupon, because they know that the businesses often get screwed, and because they don't want to be thought of as bargain-shoppers.

MatthewPhillips2• 14 years ago

There's nothing ridiculous about using sales as a customer acquisition strategy. What is unsustainable about GroupOn, etc. is the requirement for extreme discounting that crushes the retailer.

Quizzy6• 14 years ago

They should have unloaded this fraud on Google when there was a $6 billion cash offer sitting on the table (assuming that was true).

The fact that Google even offered that much leads me to believe that they have jumped the shark with that offer.

Anybody who knows anything about retail would have studied the business model and realized that this was not sustainable. Obvious red flags: 1. Heavy reliance on field sales (the largest expense), which is NOT scalable 2. Exclusive reliance on repeat sales as the key driver of sustainability: this being the obvious case, did Google not do its due diligence and actually surveyed past Groupon customers? Such a siimple survey would have easily revealed the issues of this "local deals" model. 3. Heavy reliance on "small business" owners as the driver of revenue. This is a sensitive and fickle market, where even slight movements in the general economy will cause huge moves in spending patterns.

These 3 points were readily available to anybody with some insight into this segment; Google with all its money must be surrounded by "yes" men, nothing else could explain it's willingness to part with $6 billion so quickly.

nakor• 14 years ago

I'm not sure if they actually could have sold the company to google even if they wanted to. My understanding is that you must open your books to the prospective buyer after a certain stage and it is likely that once the google accountants had a look at Groupons books the deal would have fallen through.

That could have created negative press and damaged their pump-and-dump strategy for the IPO.

Quizzy6• 14 years ago

Excellent point.

byrneseyeview2• 14 years ago

Why should they have sold for $6 billion? They're worth $9.6 billion today.

Groupon is not a bet on the coupons business--that doesn't justify the current valuation. Groupon is a bet that if you can reinvent the Yellow Pages, at scale and online, you can make a ridiculous amount of money. It's probably one of the largest companies around with such a high probability of failure, but their value if they end up being the winner in local is just staggering.

tucson2• 14 years ago

Assuming Google was ok for the deal they could have sold 100% of the company against cash or maybe Google stocks. Instead they sold I think only 5% during the IPO. Right now the CEO cannot sell more of his shares until May 2012 (http://ipo.nasdaq.com/Fundamentals.asp?cikid=826818&fnid...).

crag2• 14 years ago

And this is what happens when inventors invest in a company they know noting about. This is what happens when you listen to the hype, and the street and NOT do your own due diligence. There's a reason why the big banks backed the IPO but didn't take a percentage.

When it all comes down in flames, (I think it's already begun - if you haven't gotten out, get out now) the only saving grace is that the CEO and board will be embattled in court for years. The investors might get a few pennies on the dollar.

ironchef2• 14 years ago

"There's a reason why the big banks backed the IPO but didn't take a percentage." Morgan stanley has 19 mil shares. Goldman has 2 mil shares. They backed the IPO and took a percentage. Am i misunderstanding your statement?

antr2• 14 years ago

they didn't invest cash, they just exercised their green-shoe.

mleatherb• 14 years ago

It seems like everyone and their mother are trying for IPO. If the rumor about an offer from google was true, they should have taken the money and ran

taphangum• 14 years ago

I'm starting to think that it was google who ran away from this deal.

unohoo• 14 years ago

The problem with Groupon and other local deal companies is that they have to manage fluctuations on both the consumer as well as the merchant side. Even if one side of the equation wobbles a little, Groupon will feel the impact. I think at this stage, Groupon is fighting a dual (losing) battle:

1) Merchants perception of the whole daily deal market is very negative. Repeat business is quite low and it mainly attracts the spendthrifts who are looking for a deal. Given the margins that most local businesses have, running a daily deal means taking a hit on those margins.

2) From a consumer perspective, the novelty of the daily deals market has really worn off. Consumer fatigue has set in and more and more people are tired of having their inboxes flooded with emails. Personalization is still a joke and ticks people off even further.

It wont be long before the whole local deal market implodes (think of it -- the 2nd largest player - LivingSocial is not yet profitable). Groupon is well aware of this and so is trying to ramp up its technology platform via acquisitions to eventually evolve into something more. Its just a matter of time that the whole thing comes crashing down.

MatthewPhillips2• 14 years ago

The local deals is analogous to department store clearance sales. Retailers have perfected the art of the sale and they know that clearance sales are a different animal. If someone comes into you store and heads straight to clearance they can't be upsold. Don't waste your time on them.

This is different from your event sale, which are an excellent way to gain repeated customers (and upsell them). There is a future for local deal sites but it needs a different hook with customers.

smoody• 14 years ago

A TV network is going to Pilot with a new fictional sitcom -- called "Friend Me" I believe. It's about a man who packs-up and moves so he can work at Groupon (not made-up). Perhaps making it a comedy isn't such a good idea. ;-)

edw519• 14 years ago

The first two shareholder lawsuits were filed Tuesday in federal court in Chicago after the markets closed, seeking class-action status for people who bought stock before the company restated fourth-quarter financial results on Friday.

Perhaps those people should have been reading Hacker News:

http://www.hnsearch.com/search#request/all&q=groupon&...

(The first post is rather long and fairly neutral, but check out some of the posts (and their dates) right after that.)

tucson2• 14 years ago

Thanks for the link. What I find troubling is to read so many articles pointing to shady business practices from Groupon and bubble valuation, and still the SEC lets the IPO go through and investors lose their money - that part did not happen yet but it seems written on the wall.

radioact1ve• 14 years ago

Could the SEC really do that? Just outright stop an IPO?

aaronharnly• 14 years ago

It's interesting looking through the history. In the chronological ascending view, things are pretty overwhelmingly positive for the first 10 pages:

http://www.hnsearch.com/search#request/submissions&q=gro...

There are articles with headlines like "Industry-Changing, Profit Machine", "Is Groupon The Next Google?" (money quote from the article: "I think that, if anything, Groupon is severely undervalued.", etc. Prize for the first seriously skeptical piece discussed on HN is "Why Groupon is Overvalued" by Phil Michaelson:

http://news.ycombinator.com/item?id=1288116

run4yourlives4• 14 years ago

Investors sue? Really?

So basically, I want to drink the koolaid but god damn you if it makes me sick...

You should not be allowed to sue as a method to correct your own stupidity.

jerf• 14 years ago

In general, I'd agree. However, many previous articles on HN have been about how Groupon has engaged in some shady accounting practices to get to where it is. It may be enough to make this exceptional enough that the investors have some "real" (for suitable definitions) grounds for complaint.

jetti• 14 years ago

It appears that the reason they are suing is because the 4th quarter results were posted and then based on that information people bought up the stock and then Groupon came back and said "Ya...about that information. We made a mistake" and the real results were much worse than they originally said, which makes the stock price drop.

I think it is a valid approach because a company should be able to get its own accounting correct. However, based on the creative accounting from Groupon (and other issues) I'm really surprised the FTC allowed them to have an IPO to begin with.

run4yourlives4• 14 years ago

Groupon's claims were so outlandish that a layman could have figured they weren't up to snuff.

At some point, personal responsibility for your own investments is part of the risk.

zecho• 14 years ago

I think in this case it makes sense. Groupon restated a sharp drop in their reported revenues over three years.

People don't necessarily invest in things they think are particularly good business models. They invest in things that are undervalued. If you looked at the revenue/price and thought it was undervalued and then Groupon changed 3 years worth of data on your after you made a stock purchase, you'd sue too.

Just look at these reductions. They're more than just a minor correction from Groupon:

- For 2008, revenue was reduced to $5,000, from $94,000.

- For 2009, revenue was reduced to $14.54 million, from $30.47 million.

- For 2010, revenue was reduced to $312.9 million, from $713.4 million.

run4yourlives4• 14 years ago

People don't necessarily invest in things they think are particularly good business models.

If you can't figure out the business model generating the reported millions, it's your own fault for thinking those millions are undervalued.

How many of these investors didn't actually care about the value of the stock, so long as there was somebody around tomorrow that would buy it for more?

Sorry, but I have no sympathy when you willingly play the game and then get burned by the same things you intended to inflict on someone else.

bhousel2• 14 years ago

It's very common.. Investment decisions are often made based on things that representatives from a company say to the press, or details reported in their public SEC filings. Any inaccuracies in these statements can be the basis for a lawsuit.

Lawsuits are basically part of the cost of doing business nowadays.

tptacek4• 14 years ago

My perception is that these kinds of shareholder suits are trivial to file, and that they occur regularly any time the stock of any public company drops significantly after some event about them hits the news.

It would be interesting to see someone chart this.

(No comment about Groupon's long-term viability is being implied here).

bhousel2• 14 years ago

As someone who builds legal matter management software for large publicly traded companies, I can confirm that your perception is correct.

Public companies are sued all the time for this kind of stuff. These lawsuits often allege misrepresentation in a company's SEC filings.

ssharp• 14 years ago

I think there are so many ways technology can help mom + pop type small businesses inexpensively stay competitive with the numerous forces working against them (including retail giants with substantially better technology), and the huge interest in daily deals justifies this assertion--at least in some small way.

But the technology needs to help the small business actually improve. Groupon doesn't do this. For the most part, it plays smoke and mirrors with revenues and the costs or profits are not entirely known because the small business cannot measure them.

option_greek• 14 years ago

I wonder how long it will be before we see Yahoo style head lines for Groupon and RIM.

nateberkopec• 14 years ago

So it's official - Groupon is this bubble's Pets.com.

jacquesm• 14 years ago

Would they have sued if they stock had gone up?

chc• 14 years ago

I don't understand why you'd ask. How would that injure them?

renatomoya• 14 years ago

I see why some already jumped off that boat. Started pretty good but, it could do better.

Groupon stock sinks to new low, investors sue

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