How To Earn $4 billion From Coupons
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Could someone explain to me why someone who stands to turn $1,000,000 into $4,000,000,000 would ever find it wise to cash out a measly $300,000,000 out?
The only thing I can think of is the following thinking. If Groupon isn't that successful, I'll be very rich. If Groupon is successful, I'll be very very rich.
My problem is that I still don't see why someone with intimate knowledge of the company wouldn't believe in the concept hard enough to justify a little patience for a much higher payout.
Series A-G investors cashing out might make sense - with funds having time limits, investors selling small shares, or other reasons - but I don't understand company insiders and co-founders (Andrew or Eric) cashing out tens of millions and hundreds of millions respectively.
They know the company. They've worked there. Do they sincerely not strongly believe in its success? And, if that's the case, why are they asking the public to believe?
"Why were you going 20 miles per hour over the speed limit?"
"As you can see, my wife just went into labor and I'm driving her to the hospital."
"Good point. Also, you might be escaping from a bank you just robbed."
I mean, S-1's are notorious for how much detail they go into, in terms of all the ways things can go wrong. Groupon's "Risk Factors" section is 13,000 words long. I presume that everyone who thinks they're hiding something has read it. When you read it, what did you notice was missing?
If he's already wealthy - why would he care about diversification?
(Someone with Internet access, posting to YC, is probably going to have a lifetime income in the top 1% of the world's population. So keep in mind that most people could ask a similar question of you.)
If based on his inside knowledge he believes he can make 100%+ in a year, it would be silly to diversify that investment into other stocks with less than 10% yearly return.
On the other hand if his inside knowledge is telling him that company is going to file for bankruptcy protection in the next couple of years - it makes sense to sell all his holdings ASAP.
But it's like any other edge. It can still make sense to diversify. That's empirically true; even Boesky put most of his money into stuff he didn't have an insider edge in.
In this case, it all depends on what kind of edge Lefkofsky has, what kind of liquidity discount he's willing to deal with, whether he and his investors have different time preferences, etc.
It would be truly odd if the rise of the fastest-growing business in history and the rise of the first fairly liquid pre-IPO market and a massive increase in the US money supply didn't lead to this kind of change in investor and founder behavior.
Perhaps someone remembers how many paper millionaires got their houses repo'd the last time the market got very exuberant in Silicon Valley.
I get a sense that people want Groupon to lose, largely for the reasons that crabs like to pull down any crab attempting to leave the bucket. Groupon was the hottest game in town, based not on whimsy but on demonstrable revenue growth to hundreds of millions of dollars (!) in a brief period of time.
Everybody wanted in on that deal. If a condition of that was that founders/employees/etc walked away rich regardless of what happened to the company, oh well, capitalism happens to investors, too. "You make us all rich then you get rich, or you end up in the poor house" is not a law of nature or moral arrangement we should aspire to, it is a market condition caused in one time and place by the market favoring people with lots of money instead of with growing companies. With regards to Groupon, the market swung in the other direction.
Everyone knows that if a VC invests several hundred million into a company and that company blows up, the VC still walks away rich, right?
No, really: you all know this, right? It's absolutely true. Not because they were already rich. No, because the usual arrangement is, they get paid either way.
If a VC pours $100 million into a company and, four years later, it blows up, the VC has moved about $110 million from the investor's pockets into a) $100 million into the company and b) $10 million into their own pockets. (Less their operating expenses, which are not nearly on that level. Often times their operating expenses get paid out of that $100 million, too -- e.g. VCs charging the company they invest in for the legal expenses associated with doing the investment.)
Groupon figured out a way to sell a dollar for $.50, and they use money from new investor's to pay the old-- just like a ponzi scheme.
Also what does Groupon have? A few thousand merchants, a few million email addresses, no patent portfolio, no moat so to speak-- and the fact they need 8000 employees mostly dedicated to sales means they can't scale well--ever.
Most likely Groupon has 6 months to a year before the money evaporates. If not then they end up like Avon or Snap-On tools at best.
Perhaps he's just hedging his bet.
This money should have been spent on funding Groupon, hiring people, improving their tech, infrastructure, etc. Have there been other companies in the past where someone cashed out $300 million and is then using an IPO with the guise of raising money for the company?
"How do you get $1 million? Start with $10 million and open a restaurant."
Groupon's business model is to get retailers to discount their product by 75% - sell to the end user through groupon for 50% and groupon takes 25% of the original retail cost.
My friends in SF who own restaurants, bars and shops all refuse to work with groupon as the costs to them just dont make sense.
As far as I am concerned, even though their revenues are staggering - the model is flawed and not sustainable. The only thing to do is to hype the fuck out of the company and cash out big - the revenues will plateau and the model will need to pivot/evolve in order to return value to the businesses.
The problem is that the massive hype that groupon has will continue and far too many VCs and SV elite will be sucking the groupon cock for years...
Personally, I actually dont have much respect for the model. As a groupon user - I havent bought a thing now in 11 months and as I mentioned the businesses my friends own here in SF all refuse to participate.