Groupon is Effectively Insolvent
m.minyanville.com
m.minyanville.com
Groupon is balance sheet insolvent by definition. Their liabilities are greater than assets.
Groupon is cash flow solvent by definition. They are able to pay liabilities NET60.
In Q2-Q4 2010, Groupon had $669mm with a net loss of $398mm. That is a ratio of about -0.59. In Q1 2011, Groupon had revenue of $644mm with a net loss of $102mm. That is a ratio of about -0.16.
If you are long Groupon, then you are betting that -0.16 approaches zero and then turns positive.
The moral of the story is: haters gonna hate.
Seeing that the lion share of the two recent funding rounds were used to pay back investors, leaving very little on the table to fund their growh (this is when they are bleeding over 100 million per quarter) sounds unbelievably stupid or criminally insane.
Its one for the history books boys!
This was a risky investment, yes. But it is neither unbelievably stupid nor criminally insane to make a risky investment. High risk investments can be quite at home in a well developed portfolio.
Now, if Groupon deceived the investors about where the money was going, that would quite possibly be a criminal act. Literally. But that almost certainly didn't happen, or we'd be hearing about it.
And now, they are ready for the next round, and only this time, its the public who stand to get scammed.
More than that, you have a prospectus (or term sheet) that will specify those kinds of things. In this case, the Series G investors knew exactly where the money was going, and they were ok with that.
As for the public getting scammed, the SEC has a metric buttload of regulations aimed at seeing that that doesn't happen.
And I dont have to look that far back to see how effective the SEC has been, with their metric ton buttload of regulations. You dont live in the US, do you?
"For the remainder of the year they had $669 million in revenue (simply staggering), but had a net loss attributable to Groupon of $398 million. This year, Q1 results showed revenue growth continuing to soar, with revenues of $644 million, but a net loss attributable to Groupon of $102 million."
So the time periods were different, but the revenues were the same. They went from losing $400mil to only losing $100mil... That sounds to me like they are getting close to being profitable again... And in a very short timeframe.
As for it being like a Ponzi scheme, it's not. Ponzi relied on lying to the investors and telling them the money came from good investments. It wasn't sustainable, and nothing could fix it. Groupon is sustainable and hasn't lied (that I know of) to their investors, new or old. It doesn't even need fixing as it looks like it's already on the fast-track to profit, based on the numbers provided.
I'm curious what you base this assertion on?
Charles Ponzi arbitraged postage coupons (and resorted to selling ahead when that failed to turn profit). Strict application of your definition makes Ponzi's scheme not a Ponzi scheme.
As skeptical as I am about Groupon, it may work, in that it is not impossible by four orders of magnitude. Maybe they've got some brilliant pivot planned. Ponzi could never have made good using his putative business plan without fundamentally rewriting mathematics. But the real point isn't even that his plan was impossible, but that he wasn't executing the putative plan. Groupon is definitely soliciting businesses and issuing coupons.
[1]: http://www.mijiki.com/what-is-a-ponzi-scheme.html - I mean this to show my work here, I'm not sure that's a trustworthy site.
I'm not convinced that this follows from what we know about the numbers. It looks like one could just as easily make a case for the numbers indicating that the moment Groupon stops spending like crazy, their revenue will drop like a rock. What if they must cold-call dozens or hundreds of businesses in order to generate a sale? What if there isn't a way to sustain that without those aggressive sales tactics and the huge staff of sales people? What if they can't keep consumer interest without spending millions on marketing? What if there is a saturation point where people are simply bored of Groupon deals? (I unsubscribed after about 4 days, but I'm not much of a coupon kinda guy, so I don't know that I'm the ideal data point.)
I'm not saying it can't be true, I'm just saying I don't see that it is obvious that the hypothesis that there is a super-profitable business (or, at least profitable enough to justify their current valuation) underneath all the growth expenses is true.
It seems like a more crucial aspect of a Ponzi scheme is that you tell new investors that their money will go into the business, when in reality it's just paying old investors.
So, did the investors who put in a billion dollars realize that most of it was going to old investors?
If Groupon does go through with its IPO, expect those new investors to dump hard on day 1.
You can say all you want about their lack of differentiation from competitors, there huge debt levels, their dicey use of the series G funding, and what appears to be a poorly scaling business model.
You can intend to short them, sell puts.... whatever. But stop calling them a Ponzi scheme. It's an insult to them, it's hyperbolic, and it's ignorant.
The only argument to say that they're not a ponzi scheme is that there's actually a legitimate business with revenue associated with it. It's a somewhat compelling argument--but I'd personally contend that the business, in this case, has really been nothing more than a front for the scheme (at least, historically speaking--though unlikely, Groupon may yet prove out to become a profitable business). No one has made a dime of profit off of the business that is Groupon--yet several early investors and the founder have made an absolute killing based on the "ponzi" side of things.
Dress it up however you want, people have made money hand-over-fist operating a de facto ponzi scheme; having a "real" business along with it has shielded them from the ire of the law.
That isn't a minor point. There is a big different between stupid investors with full information and a Ponzi scheme. It is not an abstract argument. The first is common, the second will land you in prison.
Just because it's common doesn't mean it's not a ponzi scheme. It's just a ponzi scheme in a pretty dress. I'd be willing to go further and say it's just as bad because if you read their S1 and their made up accounting "principles," they're actually attempting to deliberately mislead people into thinking the business is in a much better state than it really is.
Again, it may be possible to transform Groupon into a legitimate business going forward; however, to this point, it's been anything but that.
That said; what's more important than the vocabulary is understanding the total lack of ethics happening here--and the fact that (unlike the early investors who are now going to make their big bucks) the general public who are foolish enough to buy into Groupon will likely never see that investment returned and the only reason the early investors will get money is the investment capital from the IPO will be funneled to them.
Any business that does not generate profit is NOT a ponzi scheme and I did not even begin to imply that was the case. Any business which pays out dividends to their investors based ONLY on money secured from later investors is operating a de facto ponzi scheme.
[edit] It's fine for early business to operate at a loss; it's not ok for an early business to funnel money to early investors while still operating at a loss.
The difference is the nature of the deception. In a ponzi scheme, you accept an investment, buy yourself a new house, and then tell the investor they're earning 10%. You flat-out lie about what you did with the money, and year after year you you keep enough cash around to make incremental pay outs as necessary to maintain the illusion of a stable, well-performing portfolio.
It's 100% deception and the element of theft is obvious.
With GroupOn, the risks may be downplayed and the potential benefits exaggerated, but certainly right now no one should invest without understanding that investing means significant risk. Furthermore, it's been published what money has gone to cash out early investors, and what money has been invested into the company.
The ethics are definitely questionable, but then the ethics of a casino are questionable, too. The ethics of a ponzi scheme are not questionable-- it's straightforward lying and stealing.
Other warning signs. Working capital deficit was larger at the end of Q1 '11 by about $32 million and free cash flow is going down.
Plus, since all the costs are sales & marketing related, they're not boxing anyone out by building large-scale infrastructure (Amazon, Google) or making customers sticky (Facebook).
I would hazard a guess because they own ad-delivery systems, Facebook or Google could reach the number of people Groupon reaches for a lot less marketing dollars.
That said, their losses do seem to be coming down relative to their revenue which would imply they have some idea of the 'recipe' that would make money in this space and are spending capital on growth.
But the really egregious thing that stands out, is that if the "early investors" had taken only a third of the billion dollars off the table, rather than the 80% or so they did take, we probably wouldn't be having this discussion. Rather they would have enough money in the bank to fund this growth rate and converge on an operating profit (see point above) at or just before going public.
If this kills them, and startups are full of the 'one decision' that in hindsight took them from the launch rail to the fail rail, they will have no one to blame but their investors.
That being said, it creates an opportunity for an 'offer market maker' which is to say a clearing house which can put your offer on various channels (via Groupon via CloneOn or whatever) offer enhanced analytics about how well it does and let you slosh around your limited advertising/marketing dollars.
To lock in the vendor that doesn't want to deal with multiple companies, I think you're going to have to provide a lot more than occasional access to an email list.
Groupon is raising money, spending like crazy to be the top dog. When the other "coupon" companies can't keep up, Groupon will buy them, retaining their #1 position. Once all of the others are gone or reduced to a tiny size, they'll go back to a sustainable model. This explains why they have a focus on hyper growth.
What do you think?
Has that really worked out for us so well over the long term? Certainly we can't pin our all of our current economic issues on Reagan as we've done a lot of spending and borrowing long after he left office, but once you get the snowball rolling down the hill very fast it becomes increasingly difficult to slow it down or stop it even after it has served whatever its original purpose was.
The Russians were done before Reagan was even elected. Google "Brehznev", or "Afghanistan". The rest of the line is just stupid hagiography from people who loved the way Reagan gave a speech.
And the reason they lost Eastern Europe was because of artists and hipsters in East Germany.
It wasn't from reverse-psychology mind control forcing them to spend money, it was because they had a crap economy and needed a military to suppress internal dissent.
So Reagan decreased the price of oil in the mid-80ies? :
http://www.wtrg.com/oil_graphs/oilprice1947.gif
Calling an evil empire an "Evil Empire" has especially dramatic effect when the evil empire is just plain running out of money :)
The "other" coupon companies probably have profitable business models, not based on market-share, but profitability.
It depends what each company's exit strategy is.
The barriers to entry to this type of business are not that difficult, particularly on a local level (which is where the business activity takes place). Show a deal of the day, take payment, print coupon, have a way for merchant to verify coupon, and have a sales guy getting new deals of the day.
This is probably the type of business that does worse at scale.
Here's the key: Make the deal relevant to the city you are spending a shit-ton of advertising in, not some business 40 miles away.
... Reagan Russia deficit spending comparison. Is this what Bush II and Obama are doing to China, too?
I always thought Reagan single-handedly ended communism, simply by saying, "Tear down this wall!"
Who knew deficit spending was they key to defeating communism?
It must be working in China. We finally have the youth engaged in free-market capitalism, selling their own human organs to purchase iPads.
U S A!
I'll start by tipping my hat to Andrew Mason. He caught social mood just right, creating a coupon/local/flashmob hybrid business model at the perfect time, and has created the fastest-growing company on a revenue basis in American history. That being said, it's operating like a Ponzi scheme that needs constant infusions of cash to stay afloat as it's hemorrhaging money.
We'll start by looking at the balance sheet, which is typically a waste of time for hypergrowth companies. However, for Groupon there are all kinds of red flags. They have $290 million in current assets ($208 million in cash) and $520 million in current liabilities -- current assets minus current liabilities puts them $230 million in the hole. This wouldn't be a problem except for the fact that they're wildly unprofitable, which we'll get to in a moment. Another concerning part of their current liabilities is that $290 million of it is "accrued merchant payables" -- in the US they take up to 60 days to repay merchants. So that $290 million is merchants who have rendered services waiting to get repaid by Groupon. Not exactly the best merchant experience. Oh, and by comparison, LinkedIn (LNKD) has current assets well in excess of current liabilities, and isn't losing money.
The income statement is even worse. In Q1 of last year they had net income of $8.5 million on $44.2 million in revenue, for a profit margin of nearly 20%. Not bad! At some point around that time, they decided to abandon a profitable growth strategy and went for the hypergrowth revenue strategy. For the remainder of the year they had $669 million in revenue (simply staggering), but had a net loss attributable to Groupon of $398 million. This year, Q1 results showed revenue growth continuing to soar, with revenues of $644 million, but a net loss attributable to Groupon of $102 million.
They lost $49 million in Q3, $313 million in Q4, and $102 million in Q1, with revenue leaping from $185 million to $396 million to $644 million, so it's incredibly difficult to have any idea what Q2 will look like let alone what the business will look like 6-12 months from now. That being said, the most likely reason why they're going public now is because they desperately need the cash, plain and simple.
There are all kinds of questions about the business. How can they possibly sustain this kind of revenue growth? Can they get costs under control? What about merchant and customer fatigue? How about deep-pocketed and savvy competition, either doing exactly what they're doing (LivingSocial) or coming to the table with a ton of customer data, i.e., Facebook and Google (GOOG)? The Daily Deal I got offered today was for a restaurant 30 miles away: how does that make sense either for the customer or merchant? How can you possible build a sustainable business by going from 0 to 8,000 employees in two years? Why did the COO and CTO both leave the company in late March, barely two months ago? How do you value a business that could do $3 billion in revenue this year but might not be able to keep the lights on in 12 months?
Most concerning of all, however, might be how their most recent capital raises have been handled. Their Series F and G capital raises, which occurred in April and December of 2010, raised a combined $1.08 billion. Of that $1.08 billion, $150 million went to the company for working capital purposes. The other $930 million? Paid back to founders and early backers by buying their shares from them.
So a company that owes $230 million more than it has, and appears to be burning through $100 million or more a quarter, is using money raised from later investors to pay back early investors? Sounds vaguely familiar. I'm not accusing Groupon of doing anything illegal or unethical. Ponzi, Enron, and Madoff all swindled their investors by misleading them about the financial health of their enterprises. As Minyanville's Todd Harrison likes to say, "The only difference between intervention and manipulation is communication." Groupon is telling you exactly what they are in their filing forms and by their actions. Invest at your own risk.
Bad, very bad. Don't do this, ever. You don't know what my monitor's resolution is. You don't know if I have left my glasses in the car and need to make the text huge to read what you have to say. You don't know if I have my glasses but I'm reading your words on my television across the room. You don't know if I'm using a tablet or phone and I need to pinch and zoom to navigate.
Set a default design and let me decide what to do with the page and its elements. Thank you.
The text does not grow in size at all in Chrome for me (while the other page elements do... the text gets squished which gives it some illusion of growing).
I tested it in Firefox 4 and increasing the font size works fine... So, I know you've been downvoted to oblivion but it is at least partially the browser's fault in this case (vendor-specific css extensions).
And, as I mentioned: Yes, I know about the CSS problems that prevent text resizing. I've just always thought it should be considered a browser bug if it doesn't work. After all, if the UI gives you the option to increase the size of the text, it should increase the size of the text regardless of the CSS on the page.
http://code.google.com/p/chromium/issues/detail?id=84888
It will probably get marked Wontfix but hey I tried!
Though, I'm a FF4 user. =)
At the bottom there is a link to the "desktop" version of the article but if you click that you will quickly realize the reason the link goes to the mobile version: the desktop version is too noisy.
Somebody probably just copied a script from w3schools and smashed their face into it for a few hours until it did some approximation of what they might have maybe wanted it to do.
Unfortunately, the buckshot approach to software development leaves a lot to be desired. Especially when you start with such a horrible original product as w3schools.
Edit: I just found this excellent SO link on the topic: http://stackoverflow.com/questions/4662304/online-html-css-j...
Edit: Well now I get the Apache Tomcat default page so it may be impossible to answer this question.
>JavaScript for Mobile Safari is currently turned off.
Eh? I'm running Firefox 4 on Windows XP...
Everything they have done so far indicates great competence in what they are doing. There are numerous companies that have blown hundreds of millions of dollars on advertising and ended up with a tiny user base (I can think of a particular MVNO a few years back.) Then you have failed acquisitions such as Cisco buying Flip, where the buyer ends up shutting the company down.
Neither Groupon's customer or business acquisition strategy is a coin flip. They know very well what these users and business's are worth and they have all of the tools in place to monetize them.
Without an extremely aggressive and hyper growth strategy, Groupon stands little chance against Google or Facebook. If they wanted a path on easy street, the original investors could have sat around pocketing millions of dollars a month for years. Once Groupon decided to go big or go bust their profile was raised to the point that ceased to be an option.
The real wild cards here are not so much what Google and Facebook do but rather what the business clients do. There is a very fine balance between delivering great value to both sides of the equation. Tipping too far in one direction destroys their brand. I've heard plenty of complaints from users about the quality of Groupon's deal offerings.
If Groupon can continue to demonstrate an ability to successfully overcome these challenges while staying a step ahead of Google and Facebook, they might be around for a while.
Will they deliver fantastic returns for shareholders at a mature $20 billion valuation over the long term? That is a completely different question, but if you think that an answer of no equates Groupon with a ponzi scheme, all financial markets are ponzi schemes.
Instead they cashed out for hundreds of millions of dollars with subsequent investor money.
Up until just a few months ago, we were finding Groupon ads at a rate of 5x the next largest advertiser on the network (US data only). Google itself was the next largest, 2nd to Groupon.
5x the reach of the next largest advertiser on the largest ad network in the world is remarkable to say the least. I haven't seen anything like it in the 2+ years that our service has been operational
Hell, does the federal budget qualify as a Ponzi scheme?
How is transferring money from workers to non-workers is reminiscent of a Ponzi sceme in any way? There's no imaginary wealth being created, it's just a transfer of wealth from younger to older generation. I wouldn't bet that future young will be as silent about it as we are, but I wouldn't completely discard it as a "Ponzi scheme" either.
There is no guarantee that there will be enough workers in the next generation to cover the workers who are paying today. Without new recruits, the system fails to meet it's promises.
I'm not sure what an unknown lady or gentleman thinks is wrong with this, but I wish he or she would tell me. These things (subprime MBS and Social Security) are Ponzi schemes in the sense that they are paying out more to participants than the participants put in, and not providing anything of value or performing any investment by which to make that process sustainable. In the case of subprime MBS this action is obscured by the fact that some participants have collected "promises" on the parts of borrowers who cannot possibly meet their obligations. Social Security is much more straightforward, however.
I am not a Republican and I consider the word somewhat insulting, much like the word Democrat.
Presumably Groupon has actual plans for becoming profitable, but big IPOs of companies with dubious fundamentals does sound like a description of a bubble to me. (Linkedin's stock was briefly over $100 - crazy!)
Google was willing to pay $6 billion more than the book value of the business. Google aren't that stupid - I'm guessing that Groupon owns billions of dollars worth of intangible assets which are not listed on their balance sheet. (The biggest such asset is probably their email list).
Effectively, all these IPO/overvaluation bubbles are meant to steal from (mostly public) pensions of older investors. So the next time you see your uncle or grandpa, buy them a nice bottle of wine! They're paying for your startup (while losing their retirement money), don't you know.
"Right now our desk is seeing something they’ve never seen before. It currently costs roughly 100% annualized to short LNKD. So put in monthly terms, if you borrowed $20,000 of LNKD to short, each month you would have to pay an 8.3% borrowing charge (100% / 12 months = 8.3%) or $1667 per month. That is absolutely unreal.
Of course this charge amount can change, and it probably would decline if/when LNKD becomes easier to borrow. But right now is virtually impossible to borrow, so the charge is off the charts."
Go long, buy some out of money puts, and write calls against your long position, hoping that you get to write enough calls that the cost of the puts is covered?
"The Daily Deal I got offered today was for a restaurant 30 miles away: how does that make sense either for the customer or merchant?"
but still did not score the points:
The statement is a starkly clear illustration of a big, HUGE fact about GroupOn's business:
It's heavily just a LOCAL business.
So, even if they are in Chicago, New York City, San Francisco, and parts of Argentina and Australia doesn't cut much ice in Podunk. Instead, to make it in Podunk, they just have to be the best in Podunk, and the rest is irrelevant.
For the best 'coupons' in Podunk, customers and merchants in Podunk can go to a GroupOn competitor in Podunk who can be someone on the bank board and the school board, a former mayor, and known very well to all the merchants and most of the customers. This competitor in Podunk can be trusted in Podunk much more than GroupOn by both the merchants and the customers and, thus, get more deals and revenue, can have much lower overhead per dollar of revenue, and can undercut the GroupOn prices.
Such a local competitor has close to a 'geographic natural monopoly': In Podunk, the local guy can sign up several leading merchants just because they know him and trust him (and maybe invest with him); then he can get a lot of local customers signed up because he is well known and has the leading local merchants signed up. Then the rest of the merchants sign up not to get left behind. Then all the customers sign up because all the merchants did. Then all the merchants keep offering deals because all the customers are signed up. And there is no competition more than 60 miles away.
E.g., maybe the guy in Podunk also runs the popular local shopping center based on much the same mechanism of a 'geographic local monopoly'.
A Web site for the Podunk competitor? If that is a problem, then HN developers listen up: Develop a suitable general purpose Web site and lease it to the competitors in each of Podunk, Peoria, Poughkeepsie, Pleasantville, etc.
For the guy in Podunk, maybe there is another little town, Parsonville, 15 miles away: Okay, the guy in Podunk can use his success to expand to Parsonville.
More generally, if there are competitors in other surrounding towns, then he can, one town at a time, use his earnings from his natural monopolies in Podunk, Parsonville, etc. to undercut the prices in these other towns, buy out the competitors, raise prices, and repeat. Relevant terminology includes 'predatory marketing practices' and 'roll-up'.
I don't see how GroupOn can be successful for long with their current business model.
All of these giant companies trying to serve individuals at the local level seems a bit complex.
A franchise model for a local operator would be a win-win situation.
The franchisee doesn't have to worry about servers or infrastructure, only sales and marketing.
I feel this web franchise model can be applied to many online "social" business models.