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I'm glad you said this. I gave up on a reply yesterday to the initial story for lack of time, but basically it said "anyone that thinks that Groupon is like a Ponzi scheme doesn't understand how a Ponzi scheme works".

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.

I disagree. The heart of a ponzi scheme is continually securing new investments to pay out earlier investors--which is exactly how Groupon has operated up to this point. They're not alone in this concept; it's becoming increasingly common in the tech industry.

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.

"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."

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.

If the purpose of a business is to generate profit for its owners (investors), then the only business Groupon has successfully operated to this point has been a ponzi scheme.

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.

fwiw, I upvoted both of your comments. I think it's obvious this is a difficult subject based on how many intelligent people disagree on it. I very strongly disagree with your conclusion, but I respect it and disagree with the downvotes.

Totally fair to disagree. I've enjoyed the discussion. It's forced me to re-evaluate my thinking on the topic. While I still think there are strong elements of a ponzi scheme at work here and that there truly is a de facto ponzi scheme; Groupon doesn't really qualify as an de jure ponzi scheme.

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.

You're basically saying that any business that doesn't generate profits from day 1 is a ponzi scheme. This is a ridiculous position to take.

Really? That's what you concluded from reading my comments? I'm almost tempted to call "troll" and not respond; but against my better judgment, I'll bite.

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 heart of a ponzi scheme is continually securing new investments to pay out earlier investors.

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.

Doesn't this all fit into the category of a leveraged buyout?

Their strategy reminds me most of the telecom strategy in the 90's. Since as many have pointed out there are few barriers to entry, one possible strategy is to get so big so fast that your the 800lb gorilla before anyone realizes the opportunity.

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.

The major difference is that telecoms have at least some kind of user lock-in, so it makes sense to go after hypergrowth to get that user before your competitor does. Groupon has zero such lock-in - a user actually has an incentive to sign up for as many deal sites as they can, because a good deal could come from anywhere.

True, but vendors do have lock-in. If you get big fast enough and cover a metro area with in place agreements to couponize offerings that makes it harder for a new player to sell to the same business. Basically you're asking Joes Pizza Parlor and Nail Salon to send offers to two networks now. Unless Groupon completely screwed the relationship from the beginning this will be 'harder' (in the sense that small business doesn't really want to manage a bunch of vendors so there is natural resistance to taking on new ones).

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.

Actually, this is why I think Square is so well positioned. They're offering a full suite of merchant services, from payment processing to loyalty program management to proximity advertising, and there's nothing stopping them from joining the coupon space if they were inclined to do so.

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.

"Ponzi relied on lying to the investors and telling them the money came from good investments."

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?

I think it's generally accepted that yes, they knew where their investment was going. It would have been incumbent on an IPO, in which scenario they then hand off their stake in the company to the public with the expectation of making first-day LinkedIn profits.

If Groupon does go through with its IPO, expect those new investors to dump hard on day 1.

Inside investors (those who invested pre-IPO) cannot "dump hard on day 1." In all IPO cases, insiders have a lockup period, generally between 60-90 days before they can sell any stock whatsoever. The only stock being "dumped" is the block of stock being sold in the IPO.

Personally I find the booking of the face value of their coupons kind of questionable or at least unsustainable. Yes it is revenue, but a typical "coupon" business would probably only count the fees received from merchants as top-line revenue (because the merchants would collect the money directly). So it makes the business look more viable than it really is. I can't see merchants continuing to accept that, and I bet larger deals (i.e. with Expedia) don't work that way.

This is an issue that doesn't seem to be getting much play in all of the discussion about Groupon's financials - for every $2 that comes in the door as revenue, $1 of that immediately is booked as a liability as well. I am far from an accountant or all that familiar with GAAP but it seems somewhat disingenuous.

But if you take a look at their SEC filing, $203 million of their 2010 expenses were one-time acquisition related. So the operating loss isn't being reduced as quickly as one might think.

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.

You won't see me saying that I think Groupon is a great value or anything, but I think that you have to acknowledge the difference between the people Groupon is reaching and the people FB or Google is reaching: Groupon's audience is people who are actively looking to spend money, whereas most of the people who see Google or FBs ads are doing something else entirely (and would probably not notice if they just went away).

Groupon is sustainable

I'm curious what you base this assertion on?

I think it probably translates to "Groupon is sustainable relative to a Ponzi scheme", which, even as a big Groupon skeptic for a long time now, I wouldn't challenge. A Ponzi scheme has no business other than selling ahead; Groupon does have a model for revenue. It may not work, but it really isn't fair to call it a Ponzi scheme. Bad business maybe, but not a Ponzi scheme. Ponzi schemes really ought to be reserved for actual Ponzi schemes and not be reduced to a mere financial insult.

A Ponzi scheme has no business other than selling ahead

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.

All the sources I found online suggested that he started with the stamp selling, possibly legitimately, then transitioned into what we now call a Ponzi scheme, on a scale that could not possibly have been a result of the putative business. "It was uncovered that, in order to reach the level of investments that were made, 160 million coupons would have needed to be issued. In reality, only 27,000 had been. Soon afterward, Ponzi was arrested and indicted." [1] It wasn't a Ponzi scheme until he took the step into fradulent payouts.

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.

Based on the numbers provided. While they were doing their 'hypergrowth', they managed to improve their income/expense ratio. That's pretty impressive to me. When they stop spending so much money on growing, it should be easy to show a profit.

When they stop spending so much money on growing, it should be easy to show a profit.

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.