Why Groupon is Worth $25 Billion | Hacker News Reader

Why Groupon is Worth $25 Billion

stevecheney.posterous.com

42 pointsjamesjyu25 comments

I have trouble with these sorts of arguments. Hopefully I'm not putting up a strawman, but this is what I read:

  1. There's a massive opportunity for *X*.
  2. Nobody is doing X, including business *Y*.
  3. Y is well-positioned to transition (or "pivot") to X if it chooses.
  4. ...
  5. Profit.

Even though I might agree with points 1, 2, and 3, there are a lot of moving parts and uncertainties between steps 3 and 5, what the fictional Reginald Jeeves calls "imponderables." I think that investing in a company on the basis of what it might do if a new market pans out is sound reasoning when making a VC investment. If you make ten such investments, perhaps one or two of them will pan out and you will make enough of a killing on them to pay for the others.

However, I do not think this is sound reasoning when picking stocks in the public market. I think you have enough trouble just trying to figure out if a public company can succeed doing the business they're currently trying to do, much less a whole new business they haven't tried yet.

Yes, somebody is going to make a lot of money. But Groupon? I don't think so. Merchants get burnt. Users get spammed. How many users stick with it for more than a couple of weeks?

Actually, this is first Pro-Groupon argument I found remotely convincing.

The point isn't so much that it shows Group will succeed, merely that it makes an argument that they could succeed. A Ponzi or pyramid scheme inherently cannot succeed. If an enterprise is Ponzi scheme, the smartness of the management, the prowess of the employees, the enterprises' momentum and everything else does not matter. But if an enterprise is not a Ponzi scheme, you can start looking at these factors.

Groupon may or may not succeed like Amazon. But if there is a massive opportunity "out there", this means it is not completely irrational for investors to give them rooting around in this market until they succeed or convincing fail.

I'm prepared to agree that the post makes an enthusiastic case for points 1, 2 and 3 with respect to Groupon :-)

And I think that the expression "Ponzi Scheme" is ridiculous, and you don't need this essay to know that Groupon are not paying dividends to public shareholders with money they raise selling stock to other shareholders.

The Ponzi moniker is somewhat relevant in the sense that existing investors (angels and VCs) could cash out to the next series of investors (public market) before the company turns a profit.

A Ponzi Scheme rests on misrepresenting new investments as income for existing investors. To date, I have seen no evidence of misrepresentation.

Cashing out before the next round invests is not a pyramid or Ponzi scheme, it's exactly what happens when you buy a public stock for $100 and sell for $200: Somebody else is willing to pay $200 and you sell your shares to them.

The fact that this happens before they make a profit and before they go public is irrelevant, that speaks to the mindset of the people buying the stock for $200, not to those selling for $200. Now if they lied about being profitable and were merely using invested funds to generate fictitious revenue that turns into fictitious dividends, you might have something.

During the last bubble, there were cases where investors put a bunch of money into a company and then demanded that it spend a bunch of that money on another company in their portfolio, effectively creating fictitious revenues. I'd go along with calling those deals "Ponzi Schemes." But this one? Not a Ponzi Scheme, just people who are willing to make a bet on Groupon's success.

p.s. http://en.wikipedia.org/wiki/Ponzi_scheme is instructive. Especially the description of "similar schemes" and the word "bubble." (I am not making any claim about Groupon stock being or being part of a bubble).

I agree. I was almost going to make a similar argument a few days ago, but ultimately decided not to because the masses have effectively redefined what that term means. At this point, "Ponzi Scheme" has become a general term for financial sketchiness.

The challenge becomes how to how to denounce the Ponzi term without also denying the presence of financial engineering. Your argument does this as well as possible IMO.

When a pundit claims that Groupon is a Ponzi scheme, he really means "Groupon is raising money and using the money to buy more revenue at more than face value". We don't really have a classification for what this is, and the proposed scheme seems somewhat scam-ish, so the Ponzi term is being used.

I'm not claiming that Groupon is simply raising money and buying revenue. But I do believe that's what the pundits mean to say when they call Groupon a Ponzi scheme.

Groupon is absolutely buying revenues. I read somewhere that $1.00 of revenue costs them $1.43. Given estimates as high as B$4 for 2011 revenues, if investors will value the company at B$15, it is clear that each dollar of revenue is worth $3.75 to investors.

Groupon's financing strategy exploits the difference between what an investor will pay for a dollar of revenue--$3.75--and what it costs to earn a dollar of revenue--$1.43.

Let's say they have a dollar of revenue in hand. They can sell $3.75 of stock based on that dollar of revenue. At $1.43 per, they can buy $2.62 more revenue. Which they can use to raise $9.82 from investors. Which buys $6.87 in revenues. Which they can use to raise $25.76, and so on and so forth, until they exhaust the market's capacity for buying Groupon stock or everyone tries to cash out at once.

Of course, this is not necessarily a bad thing. If a dollar of revenue is actually a dollar of recurring revenue, it could be worth much more than $3.75. It all depends... How much churn do they have? How much competition will they have? It costs $1.43 to get the first dollar of revenue. How much does it cost them to get a second dollar from an existing merchant?

I don't know the answer to any of these questions. If it turns out that these revenue dollars are not recurring and the participants in the business know this but are disguising the situation from investors and misleading them into thinking that these dollars are just like regular business revenue dollars...

If that were the case, maybe one day people would be on HN claiming that such-and-such a company is a "Groupon Scheme." But if it turns out that they have been spending $1.43 to buy a growing revenue stream, investors might end up looking exceptionally smart.

Bah. You don't know it's a Ponzi scheme until it collapses. Of course it sounds plausible. They all do. Just a little too good to be true.

I think the article makes a decent point to the value of Groupon (I think there's real value in Groupon's business). The issue I have with the article is how amorphous business relationship + ??? = $25 Billion Dollars[1]

[1] Must be said in your best Dr. Evil Voice.

It's a pleasure to see someone take the stand and go against the rash of blog posts and articles against Groupon.

The main point of this article is that Groupon has value in connecting the online and offline world. Even if people use Yelp to decide on a restaurant, or search Google to figure out where it is- those companies never get profits from that because the restaurant never knows what sent the customer.

Groupon is able to monetize the online to offline sale by clearly letting the business see that Groupon brought in a customer.

He also says that while the daily deal structure might be risky/dead they can easily pivot to other online to offline connections like instant deals to your phone while walking by a restaurant.

Personally, while I think that monetizing the online to offline transaction could be a huge business opportunity I don't know if I am willing to risk money on watching Groupon make the pivot. If daily deal as a model is crumbling (which many people have blogged about), then you are betting a whole lot that the database of merchants and customers can be leveraged in a new business model.

Yes, Groupon has potential value. My strong objection is to the fact that they are going public before proving that value. It used to be that you couldn't go public until you had at least 3 quarters of profitability. Sometimes our elders are indeed wise.

> It's a pleasure to see someone take the stand and go against the rash of blog posts and articles against Groupon.

Just because an argument is contrarian or counterintuitive doesn't make it right.

I don't think he implied that. And I agree with his sentiment - for those of us who haven't made up our minds on Groupon, it's nice to see a view from the other side.

That the possible market for Groupon is big is without dispute. The reason people aren't sure about its prospects is that their reach still pales next to that of Google, Amazon, eBay, Yahoo, etc., and they're still not doing anything that can't be copied.

Read the whole article, but wanted to stop after the second paragraph. Choice quotation:

"The real innovation Groupon brought ... was their ability to profit off of closing the attribution loop in online-to-offline commerce. And this is a huge land grab that others had completely missed."

That's funny, because I thought that Groupon showed just the opposite of that. How exactly has Groupon proved that there's a profitable business in hooking up customers and businesses with slash-and-burn deals? Even taking half of the revenue, Groupon is bleeding money and admits that it is going to have to invest even more to keep up the growth curve.

I get that Groupon is popular, sure, but they'd be even more popular if they didn't take 50% of the coupon revenue. Of course, they'd be out of business sooner, as well. The "naysayers", like myself, are pointing out that Groupon (willfully or otherwise) hasn't found a balance that allows them to grow and actually turn a profit. What they have done is grow their userbase at an astonishing rate by raising and spending huge chunks of cash. That's not a business, that's a party. And parties, while fun to attend, are a bitch to clean up.

Even taking half of the revenue, Groupon is bleeding money and admits that it is going to have to invest even more to keep up the growth curve.

I live in a moderately large regional area - Raleigh/Durham - close to a million people in the metro area. I've gone to groupon.com several times, and each time it doesn't seem to remember me - I end up putting my email in again each time, and then I'm shown a few 'deals', but nothing to suggest they're 'daily' (maybe they are, but I can't easily tell).

When I hear 'daily deal site', I'm sort of expecting to get emails daily with a deal. I've given my email address. I want these things. If they can't make that happen in a metro area with nearly a million people, and having a large org (8,000 people?!) I just don't get how this will survive long term, other than perhaps by name recognition (it's a damn catchy name).

The same can be said for services like Yelp. Yelp might drive people to restaurants, but it doesn’t benefit Yelp if merchants don’t attribute the new customer to Yelp. And how would they know? It’s not like you walk in the door and tell the restaurant owner you just located them on your iPhone via Yelp’s app. Foursquare hasn’t solved this either, despite having 250K merchants signed up and literally inventing the act of announcing your presence to the world. Both are great companies solving problems, but only Groupon has closed this attribution loop.

Hrm... maybe because most service companies that care ask how you found out about them in the first place? Well, most should. The fact that most companies don't try to determine that source when they're serving you (restaurants, haircuts, pet spas, printers, etc) is more an indication of really not understanding business and marketing in the first place. Outsourcing some of that - in this case, to groupon - may be a short term win, but you've just handed over your customer relations to a third party who has no real incentive to get those customers back to you any time soon.

Small service businesses need a strong CRM process. I don't think groupon is it, although it could morph in to that.

So the $25B number is entirely made up then? There seems to be nothing in the article to justify this number.

One thing that was in the article is this...

"The real innovation Groupon brought to the table wasn't in advertising deals per se, it was their ability to profit off of closing the attribution loop in online-to-offline commerce."

To paraphrase Inigo Montoya, I'm not sure that "p" word means what he thinks it means.

They have a list of some ~60,000 merchants, email addresses in the tens of millions, no patents or 'moat', and they're trying to sell a dollar for fifty cents and make a profit. Also, how do you scale when you have 8,000 employees? That's a huge fixed cost. And these aren't huge barriers to entry for your competition--Twitter/Facebook/any website with an audience can basically do this.

I don't see how their model is sustainable and the entire premise of their success seems wrested on Groupon succeeding at things they haven't demonstrated yet.

Also, I see Groupon as a sales company, not a tech company.

Salespeople are marginal costs, not fixed costs, and that is why they do not scale. (Unless those salespeople are converting prospects into long-term renewal sales) Engineering and design is a fixed cost.

Again, if this really is a 'land grab' as he claims, why did they pay out hundreds of millions to early investors? Why not spend that money grabbing more land? Assuming he's correct, the returns would be several times greater if they continued investing rather than issuing huge payouts. It seems like a huge red flag to me -- a sign that even the earliest investors see Groupon as a big risk and want to hedge their bets.

Does anybody remember how Yahoo/Google/Ebay handled this? I know their early investors got rich, but were they cashed out before the IPO?

For Google and EBay, they were making money hand over fist (the main problem they had when Meg Whitman joined was opening envelopes full of cash fast enough) and growing rapidly. Nobody wanted to cash out.

I don't know what the story was with Amazon.

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