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Comment by raganwald | Hacker News Reader

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.

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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.

I disagree that the founders somehow have a higher and nobler responsibility to retail investors than VCs. The VCs are the professionals, they sit on the board and direct its activities.

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."

Yes, 'rotten core' was a bit strong. :P I don't know anything about Groupon's specific case, and it's certainly true that in many cases the VC's will be the more experienced and better informed, and therefore more culpable party. Comity!

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."

A ponzi scheme is, by definition, zero sum. And it is, by definition, opaque. New investors pay-out old investors. This was a buy-out of early shareholders. If you expand buy-outs to be considered a "ponzi scheme" than so is anything where somebody buys an asset from somebody else aided by a broker.

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.

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?

Oh!

My mind thought "Group Buying On _____," but now that you say it's actually "Group>o<n," I guess they mean "Group Coupon."

It's intended to be a portmanteau of Group + Coupon, pronounced \ˈgrüˌpän

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.

That's one of the funniest things I've ever read on HN

Is that why your user name is an abbreviation of portmanteau?

No, my first name is actually "Portman".

That makes for a nice coincidence then!

Or is simply the underlying reason why he thought Carrol was talking about him.

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