Comment by teej | Hacker News Reader

Comment by teej | Hacker News Reader

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I think you've woefully misunderstood the issue at hand here.

No one is claiming that Groupon isn't a real business. They've made a household name and their reach is undeniable. Many of us have paid out of our pockets to buy from Groupon. I know I have.

No one is saying that investing isn't dangerous. The market has always worked this way and Groupon is no exception.

Recognizing & reporting revenue for software and virtual goods is a -solved problem-. Take a look at EA's earnings report or Zynga's IPO filing if you want to understand how the big boys do it. The accounting required is certainly tricky, but it's also widely accepted and tied to reality. While Zynga's profitabilty in the future is uncertain, their profitabilty right now is NOT.

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There are two core issues with the Groupon filing:

* Their use of ASCOI grossly misrepresented their profitability -right now-. They may have an innovative business, but the way they handle money isn't that different. Certainly not different enough for them to invent new ways to report earnings. Thankfully, the SEC agrees with me here and has asked Groupon to redo some of their funny math.

* Their last round of financing almost ENTIRELY went to cashing out previous investors. That has nothing to do with "taxes being hard". It has everything to do with sketchy business practices.

In conclusion - Groupon's filing isn't scary because IPO's are hard. Groupon's filing is scary because they were a little TOO creative with their math and they've done some undesirable things with their cash in the last 6 months.

To put it simply, Groupon provides a service which is essentially customer acquisition. In order to report a profit, they use unconventional methods of accounting that imply costs of their own customer acquisition are irrelevant to their profitability. It's not esoteric or one-off costs they're eliminating from their "profit" figure.

Given that Groupon have attracted attention more for their claims of profitability than any particular novelty or technical superiority it's more than a little concerning that using conventional accounting methods they're making a loss, and it's ongoing marketing expenses rather than one-off acquisitions and compensation schemes that are to blame.

I personally don't have such a problem with eliminating some customer acquisition costs from the picture. If you are rapidly expanding, and spending $100, to acquire a customer that is worth $300 over the next two years, then clearly the business is going to be profitable. If the buiness is in the early phase of rapidly expanding, and building the brand with super bowl ads, the core business could be really profitable, but just be on a point of the growth curve where it is not profitable. The ACOSI metric was designed to give a flavor of the run-rate profits assuming the company was no longer in hyper-growth mode. It actually makes some sense.

I think that the essence of Groupon's value comes down to whether you believe that the $100 cost to acquire can in fact be consistently converted into the $300 at a rate that beats customer attrition, inflation, and interest rates.

Many of the stories in the media seem to indicate that businesses are getting burned by Groupon and that indicates that attrition is going to be a problem. Only Groupon themselves have a real idea of how large an impact this is having and how it will affect their business.

Early investors are cashing out pre-IPO which seems to indicate that insiders might have information that outsiders do not.

If I were a betting man I would bet that the insiders know that customer retention is an issue and the uncertainty is causing them to lock in more modest profits now instead of rolling the dice with everything post-IPO.

I agree that the valuation may be high, but their filing is no more problematic to me, than zynga's. Zynga failed to detail just how much of their revenue is coming from 1% of players who actually pay. They merely alluded to it as a risk factor, but I think is is a pretty important piece of information as a potential investor. I found filing Groupon's to be adequate. One bonus to a made up accounting metric is the SEC requires a GAAP reconciliation to be included, so you tend to get more details about the business than if the whole thing used GAAP numbers.

I don't agree that ACSOI makes sense. Marketing isn't just the initial customer acquisition cost. It's also a substantial expense that keeps existing customers active, engaged and profitable. If it was just about customer acquisition then we'd never see an ad for Tylonel, Coke or Budweiser.

Fortunately Groupon is issuing a new S-1 tomorrow, so it's likely that those who are looking for more information will get it.

"Their last round of financing almost ENTIRELY went to cashing out previous investors."

Sounds a bit like a Ponzi scheme.

Sounds almost entirely like a Ponzi scheme.

For a Ponzi scheme to work it's important that the early investors not cash out for a long time. They see their investment rise in value and talk about it but don't cash out until almost the very end.

Sounds to me more like Groupon is going down already, at least it's being talked down. I could be wrong but I'm wouldn't buy any shares even if I could.

So what does it tell you that the earliest investors are all cashed out already?

The Groupon IPO could easily not happen, given the current market turmoil and the SEC scrutiny. If forced to wait several months before the IPO, the company may need to raise more money privately, or could basically fail and fall into the arms of a suitor like Google.

Groupon is not a Ponzi scheme. In the process of raising money from late stage investors, Groupon has to say what the funds will be used for, which includes paying off earlier investors.

Using investment money to pay off earlier investors while claiming to be profitable to drive further investment is the definition of a Ponzi scheme.

They probably don't mean for that to be their business model, but it is what it is.

Groupon is making a fist ton of cash. If they stopped spending money on hiring and marketing, they'd be wildly profitable. Investors have access to all this information.

Also, Groupon has a clear formula for growing and how long it takes that new business to become profitable. That is why they can raise so much investment.

If you can come up with a convincing argument why Groupon is a Ponzi scheme, then call the law enforcement. You'll get on the news for sure!

@watchandwait: They could also stop customer acquisition temporarily to get costs in line at the risk of not growing. Better than going BK which seems possible given how much they are spending for each customer.

Other companies have already gone public that filed around the same time as them (although raising less $) - which may hint that institutional investors aren't buying their story (the SEC making them disclose their actual losses instead of a BS metric certainly isn't going to help either).

A Ponzi scheme uses investors' money to disguise a complete lack of legitimate revenue. Groupon really is doing business, though it's trying to make its subscriber value vs. cost structure look less fatal than it may be.

They're doing business at a loss— they're doing negative business.

So, okay, maybe they're going to become profitable (in real life) at some time soon in the future and we'll all feel a bit silly. But if that's the case, then why would they be using investment capital to pay off early-stage investors now— when they're just on the brink of profitability, starting an IPO, their value sure to skyrocket? What employee decides to cash out under these circumstances?

sounds like the investors already knew what we are starting to figure out; it isn't going to last.

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