Try to digest the Groupon story
shortlogic.tumblr.com
shortlogic.tumblr.com
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.
Pump and dump.
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.
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?
None of that means I can't help someone who runs a company with a different model. I don't see how the two are related. I run my company one way, other people run their companies their way. If someone I respect asks for my help, and I want to help them, and I'm able to help them, I'll help them.
I get hundreds of emails a year from people who ask for my help. I help as many as I reasonably can. Sometimes it's an email. Sometimes it's a phone call. Sometimes it's office hours. Sometimes it's giving a talk or giving my feedback on their products, companies, or designs.
The Groupon experience was a very unique experience. I've never been presented with an experience like that before, so I got involved. It was a fantastic learning experience for me. I continue to help when asked. I wish everyone there nothing but the best.
My approach, in general, is to learn about what I don't understand before rejecting what I don't understand. I don't always live up to that ideal, but I try.
> I don't see how the two are related.
The simplest of affiliations can be taken by many as endorsement. That's only a problem (or, a "problem") if one's public persona is an asset and there's a perception of conflict or contradiction.
Anyway, I unfortunately speculated in abstract terms publicly, instead of saving it for the coffee shop. I apologize for any resulting grief.
The S-1 speaks for itself.
Back in mid-late 2009 Andrew Mason asked me to be on the Groupon board of directors. He wanted my opinions and advice on product development, design, copywriting, software development, and user experience. Andrew (and Brad and Eric) know where I stand on building bootstrapped, profitable businesses. I still stand there. I wasn't asked to be on the board to give them financial advice.
I agreed to be on the board. I like Andrew a lot and I was very happy to help him. I had never been on a board before so I saw it as a great learning experience for me as well.
Groupon compensated me for my involvement with options.
A few months ago when Groupon took a big round, I was asked if I would like to sell some of my shares. I said yes. That sale is listed in the S-1. I still have more shares. I don't see any problem morally or ethically with selling shares that I was granted as part of my involvement with the board. I owned something, someone offered to buy it, and I sold it.
I was asked to leave the board of directors in January of 2011. I serve as an advisor now. Whenever Andrew asks me for product, design, or writing advice, I'm happy to help.
I've never invested my own money in Groupon or any other private company. It's not that I wouldn't invest in a private company, it's that I haven't.
Those are the simple facts.
As for my credibility, I don't see how any of this is relevant. You can make up your own mind about that. I believe today what I've always believed - net profits rule, bootstrapping is the way to start a business, and spending less than you earn is the only way to have a healthy relationship with money.
As for DHH's opinions, they are his own. I may or may not share them, but we're both grown ups and we respect each other no matter what.
Don't you also have a rule about not growing beyond a certain number of employees?
Also, from the back of Jason's book, "Pick a fight." That's actually what this whole thread is about. DHH has been on a campaign to pick a fight with what he considers overvalued companies.
If you're interested in how 37signals is operated, you should start a separate thread about 37signals.
Groupon and 37signals are very interesting contrasting Chicago tech companies and would make an excellent comparative study, but Fried's involvement with both companies doesn't really set up the "consistency" narrative you're (maybe inadvertently) creating.
Jason responded that his philosophy is "balance." That's all well and good, but is that consistent with his involvement in Groupon? That's how this originally came up.
Certainly he has been very gracious to respond at all, and I think he's convinced me (and hopefully others) that there is no necessary inconsistency in preferring balance for one's own company and rapid growth for another -- or simply acknowledging that even if one doesn't gel with another philosophy on rapid growth that one can still provide valuable advice on design, etc.
Is that consistent with his philosophy as stated in Rework? I'm still not sure...
And I have a thing about us accidentally chasing primary actors in the tech community off of HN by acting like... you know... us.
so it fits his filosphy well - seems like he wants to get out of it slowly and profitably ..
Plus balance all that with maintaining the type of culture and environment we all want to work in, for, and towards.
For us it's about balance. Rapid growth is not balance. Not having enough people to serve our customers is not balance. Not improving our products frequently enough is not balance.
Balance is a moving target. Sometimes we're in better balance than other times. But the goal there is to try to strike the right balance as often as possible.
I hope that helps shed a bit more light on what we need to do. Have a nice weekend.
It sounds like Jason helped the company with the things he was best at (product design) and didn't have much involvement with every other aspect. His not wanting to be involved in every aspect may be part of the reason he became an advisor eventually.
Thanks for sharing what you have. It's been said before, but I'll say it again: HN is a remarkable place when intelligent people are having open conversations about the news that directly involves their own business.
And of course a board is made up of people with different strengths and experiences. My experience is not in massive growth, rapid growth, acquisitions, companies with thousands of people, etc. There were and are people on the board that are very experienced in those matters.
My experience is in product design and development. My advice on those matters was my main contribution to the board and the company. I continue to advise, when asked, on product design.
How often is that?
as some papers seem to indicate
If you did some work for someone, and they paid you with stock instead of cash, wouldn't you feel like converting that to cash the first chance you get?
especially would keep the shares of the "hottest" and "fastest growing" startup groupon
There are all sorts of reasons to sell stock at a particular time that have nothing to do with cashing out on a company one believes will flame out.
As if business partners can't have differing opinions about the business practices of other companies. If Jason's and DHH's opinions are indeed different, which I'm not convinced they are. Sheesh.
I was just speculating that these developments may have a nonzero impact on your brand, PR, image, etc. You've talked a lot about the 'bootstrap vs. VC' topic; insofar as people perceive that topic to be dichotomous and you as being "all-in" on one side of it, any involvement with the other side may create some cognitive dissonance.
Maybe I shouldn't speculate about people's personal brands and such (something I can't say I do often anyway), just so I don't rouse any sleeping bears, as it were. :-)
I cannot wonder thinking..if you were a board member, you had a duty of care to know all affairs of the company (within reason), especially under good corporate governance. If as DHH is implying that Groupon is misleading potential investors with CSOI (ok, they may have used this metric after you left - but I am just trying to make a point here), and if you believed this is incorrect, then you would still have a duty to point out as a board member, even if your responsibility is purely on product design. I thought this is how it works on large boards. Is this not the case in the USA?
I have made the assumption here that if DHH saw it, so would you! Of course, I could be completely wrong with this assumption.
I have only been on the board of small companies, so do not have any experience of how large companies split responsibilities.
Would be interesting to know your thoughts on this subject - this is not meant as a complain of any sort, just trying to understand how large corporates behaves with corporate governance.
thats a deep sentence
I've got some bad news for you, friend.
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?
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.
I know you're a careful, deliberate and consistent writer, so this is clearly intentional.
Any particular reason why?
My mind thought "Group Buying On _____," but now that you say it's actually "Group>o<n," I guess they mean "Group Coupon."
I've had an affinity for portmanteaus ever since I was 10, when I saw "portmanteau" in Through the Looking Glass and thought Lewis Carrol was talking about me. So I tend to be irrationally defensive of them.
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."
When the payout is a dividend, both the new and old investors feel that their principle is remains and they could cash-out at will.
What you have with Groupon was certainly bad PR to people like yourself and thousands of others who are tuned-in to this sort of news. But it most certainly was nothing like a Ponzi scheme.
First, it's not zero-sum. The "machine" of Groupon produces $1.x dollars in value for every $1 of capital.
Second, the new investors knew when they invested that many of the shares they were buying were being held by existing shareholders and did not come from the company's pool. They knew that to acquire the share of the company they wanted to hold, they'd have to buy-out these earlier investors and that it would of course be at a premium to their initial investment.
Finally, the early investors knew that they were being bought-out, that they were selling their shares to a 3rd party.
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.
These ideas about the difference between management and bankers made sense when IBM or US Steel went to the public markets to raise money in the old days, but where Tech Startups are concerned I am skeptical that founders are pulling the wool over the VC's eyes.
But I suspect we're quibbling over who gets the lion's share of the tar and feathers :-)
UPDATE: But yes, I agree about the word "value."
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....
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).
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?
If it was built to flip wouldn't they have accepted Google's offer?
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.
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?
My single biggest gripe with my 401k--a very poor selection of high cost managed funds.
Now I know their success is hype and creative accounting.
http://www.betabeat.com/2011/06/03/groupons-business-is-deca...
* 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.
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!
If I remember correctly, it sees its sales force as a competitive advantage.
"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."
Is something special about an IPO where you have to hold it for some time?
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.
And as you can see, the insiders, VCs, and their customers get to play first and leave the game before you get a chance to pull a piece out.
UPDATE: Man, I'm pessimistic today! Don't forget the converse side of the coin: The game may be rigged, but still you might have a good bet to make!
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."
The negativity surrounding Groupon isn't that they're boring; the negativity is that they're over-hyped.
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.
Based on nostalgic feelings about the 2000s?
Warren Buffet and his daughter wrote a whole book on how to go over a company's P&L statements line-by-line and determine whether or not it's a value. Groupon fails that test. That quote is about buying companies that are doing better than the market thinks they are -- and his methodology is a way to find and prove those cases on paper. Not with hunches.
Can you back this sentiment up with anything more than vague comparisons to Google?
"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."
or see my comments here:
http://news.ycombinator.com/item?id=2618080
and here:
"Rule No.1: Never lose money. Rule No.2: Never forget rule No.1"
At this point in the tech boom, an underwhelming IPO wouldn't be a bad thing.
I don't think Buffet advocates turning off your brain completely.
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.
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."
Warren Buffet doesn't invest in IPOs as far as I've read. It makes sense because these are very hyped events that are designed to be the opposite of boring or overlooked.
Investing in IPOs is very much a gamble over which the the investor has no control. It is like buying a lottery ticket in many cases.
Warrren Buffet buys into companies in such a way that he get's control and usually those companies are struggling and need a management overhaul in order to be successful and have a better long-term focus.
I can imagine Groupon crashing and burning and then someone like Warren Buffet or another takeover happening and then its rebuilding. But buying into a hyped IPO before a fall is not at all Warren Buffet's investing strategy.
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!
Still, VCs are supposed to be grownups who know what they're doing, if they got screwed it's their own fault.
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.
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
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.
Local deal sites are by defn focused on many independent local market. Their key promo channel is email to signed up users, since most people won't go to a website to look at deals everyday. What's the barrier to entry for another site - getting the same user signed up?
There will certainly be consolidation, there will be two or three local deals sites left over. They will certainly not enjoy the margins GroupOn currently commands.
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.
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.
- Fragmented and competitive market due to low barriers to entry
- High-maintenance, low-yield customers
Thank you for your reply and the food for thought.
Great Write-Up.
I have to imagine the wall in their office with biggest internet failure magazines is a self fulfilling prophecy.
Would like to short this IPO when it comes to the stock market.
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.
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.
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.