Groupon updates IPO filing, admits it's unprofitable | Hacker News Reader

Groupon updates IPO filing, admits it's unprofitable

money.cnn.com

183 pointssilvio85 comments

Groupon not selling to Google was the dumbest thing I've ever seen a company do.

Ever.

So, does that make Google offering to buy Groupon also one of the dumbest things you've ever seen a company do?

It's relative. Google has piles of money and the means of making more; if they make a mistake in spending their pocket change, it's no biggie. But Groupon has piles of debts, and their runway is getting shorter.

One goes be dumb and moves on, the other goes dumb and dies.

I think Google was willing to pay way more than they should have for Groupon, but I wouldn't call it anywhere near the dumbest thing a company could do.

Speculating here, but I don't think Google wanted Groupon as an immediate profit center. They wanted their considerable mindshare and ready-made sales and marketing team. I'm guessing that they felt they could merge Googles ability to optimize with that juggernaut and build something to just dominate the local marketing space (particularly the real time stuff).

This is pretty simplistic thinking. For all you know Groupon wanted the deal badly, Google walked away from the deal, and both parties agreed to go with the story that Groupon walked away so that it wouldn't kill their prospects of an IPO.

It's always nice to cushion your IPO with fraud...

Why would Google go along with a story that made it look like they were powerless to get what they wanted?

Maybe because Google can play the angle of "We almost got cheated, now we learn to become better" later on when Groupon crumbles...

That seems like a really complicated narrative for the two parties to fabricate. Isn't it just more likely that Groupon thought they were worth more than Google was willing to pay?

I don't think anyone had that feeling when the deal fell through. Many people were surprised Google was interested in the first place. Google had to consider the deal, after all Groupon was buying shit tons of advertising on Google at the time.

If you're company realizes a certain scale on the internet (i.e. a billion dollar valuation) there is a good chance the deal is going to get looked at by all the big consumer tech firms.

Groupon walked in to the negotiations with a publicly speculated valuation of 1B, and after the deal fell through they were being talked about somewhere greater than 5B, and got an extra investment from DST. Seems like negotiating with Google worked out well for them in that respect.

Notice how Andrew Mason never answers the question publicly about why they 'walked away' from Google.

Google's offer was $6B. The IPO is priced at $30B. I am scratching my head how that is the dumbest thing you have ever seen a company do. Ever. I can see the IPO valuation getting cut to a more reasonable $10B, but that is still more than the Google offer.

Who's to say the IPO will be successful? The suits will have to keep their shares for a bit, plenty of time for the whole mess to unfold. Plus, Groupon raised a ton of VC ($950M) after turning down Google's offer. Factoring in dilution, it won't take a drastically bad IPO to make $6B in-hand look like a steal.

Hundreds of millions of dollars already went to the founders. The only risk is whether they'll be super rich or ultra super rich.

There are more stakeholders in the company than the founders.

Sure, but the founders (and the rest of the board) made the decision not to sell. You can call them fools, but they're laughing all the way to the bank.

Possibly laughing all the way to the bank, it could end up that Google was a much better deal.

Incorrect. Tens of millions of dollars already went to founders. Only investors cashed out in the 9 figure range. [1]

That's a huge difference, especially considering that Groupon fancies itself a $30B company.

[1] - http://www.businessinsider.com/the-millions-of-dollars-group...

Nope. Groupon was started by Andrew Mason and Eric Lefkofsky (who also put up the first money). Eric Lefkofsky through his investment shells^Wcompanies took more money out than anyone else.

We'll see..

http://www.minyanville.com/businessmarkets/articles/web-ipos...

"Groupon is still effectively insolvent, and without capital infusions is unlikely to exist in 18 months."

In my opinion, valuing a company at $10B when they haven't ever shown a net profit is ludicrous.

Are they letting Goldman Sachs handle the IPO?

GS is pretty evil in pushing ridiculous IPO values in order to get their higher cut. Cant wait to see what BS goes on with GS handling Facebooks IPO.

That's an interesting point. GS has been having a rather lackluster year so far (by their own standards - many other firms would love to have their problems). The firm is caught between a rock and a hard place; it needs to demonstrate everything is above board and strictly in accordance with the law, but is also under pressure from investors to improve performance. Not that so much hinges on any one deal, but this IPO has become something of a barometer for the sector absent an announcement by Facebook.

Welcome to the 1990s!

It's speculated that Google's terms may have been less profitable for the early funders (ie, the controllers of the company) than the round G (which gave a LOT of money back to early investors) and subsequent IPO.

So it could be a case of the powerful people not making enough with a Google exit than going public, even though Google + Groupon might have been a powerful and long-term more meaningful exit.

I wouldn't say it's the dumbest thing I've seen but Google certainly moved on by acquiring Dealmap.

It was actually smart. Groupon wanted a hefty break-up $5B fee. Google refused. Groupon must have known that the deal would never pass muster at Google after real number crunching. Hence they refused. With the break-up fee they would have still made like bandits.

Source?

http://www.pcmag.com/article2/0,2817,2373870,00.asp

"I think the holdup on GOOG/Groupon deal is size of break-up fee if Gov't blocks deal," wrote Venrock venture capitalist David Pakman in a Twitter message early December 3.

The break up fee was to protect against the gov't blocking the acquisition due to antitrust concerns as far as I know. Pretty sure the business diligence was already complete by that time.

And how would you rank it with Yahoo not selling to Microsoft?

Groupon is a fundamentally bad business and I wouldn't touch it with a 10 foot cattle prod.

Some say that we know they're not profitable but that's really not the point. By counting customer acquisition as an extraordinary expense they are implying that:

1. The value of that customer is AT LEAST as much the cost of acquisition; and

2. That cost also accounts for the natural loss of customers.

This is shady because (IMHO) daily deals customers have very little loyalty to the providers of those services, there is no natural barrier to prevent customers moving to LivingSocial or whomever and the high margin on deal split is transitory because increased competition will reduce what is really nothing more than the artificial scarcity introduced by Groupon's one deal a day (per market).

But none of that is why Groupon is a bad business (IMHO). Consider: Groupon offers a deal, people buy it and Groupon and the provider split those proceeds in some fashion. I believe--but don't know--that the provider has to wait for some large part of those proceeds too. Basically that delay is Groupon's cash flow.

So what's the best outcome for Groupon and the provider? One of two things:

1. The customer doesn't use that coupon. Groupon and the provider pocket the free money; or

2. The customer spends above the coupon or is a repeat customer such that the "marketing cost" (to the provider) of the Groupon offer is amortized over multiple visits and/or higher spend such that they make a profit.

In the case of (1), many providers really don't want customers to use coupons. There are plenty of anecdotes from people getting bad reactions when they tell a proprietor or a waiter or whatever that they're using a coupon, particularly in restaurants.

Worse, coupon users may be people who are prepared to pay full price anyway or the influx of coupon users may prevent full-paying customers from being able to use your service. The propaganda is that you can sell unused capacity. While true for some businesses I think you'll find that many people try to use Groupons in, say, restuarants at otherwise peak or busy times.

There are some success stories of (2) but plenty of failures too.

What isn't built into Groupon's financial statements is account risk. There is a strong argument that a failing business can make one last roll of the dice with a Groupon offer. If they fail, they were going under anyway.

I actually don't know if Google (disclaimer: I work for Google) tried to buy Groupon or not and if we did, at what price. The press reports Groupon turned down a $6 billion offer.

My personal opinion is that Google dodged a huge bullet if this is true.

There are many of us who have always known groupon was a bad idea. My information comes from all my friends in SF who own businesses that Groupon attempted to solicit.

My friends cupcake shop in union square was asked to sell their cupcakes for 25% of retail and at a loss in a very pushy way by groupon.

I have been on groupon for pretty much since they launched. I have bought in total (1) groupon. And I forgot about it and it expired.

I am not interested in the things they have, which are typically things I would never frequently buy anyway (skydiving, spas etc). Thus, I have never seen it being a place I would spend much money. I haven't logged into it for nearly a year. I stopped all emails way back as well.

You might want to look into any class actions against groupon for expiring. California has very favorable gift card laws and I think the court would agree this is a gift card.

I believe Groupon's policy is that purchases don't ever expire, just the deal does.

If you pay $x for some deal, and expires, you still have a credit of $x with that business.

I think state law pre-empts groupon's policy (Ca's law states it cannot expire unless the card is to multiple retailers and then it must clearly list the expiration date on it).

Groupon's policy is in accordance with CA state law. I don't see how it's pre-empted.

> There are many of us who have always known groupon was a bad idea.

Weasel words.

> My friends cupcake shop in union square was asked to sell their cupcakes for 25% of retail and at a loss in a very pushy way by groupon.

While pushy sales people are annoying, they are hardly unique to GroupOn. I'm sure your friend turned them down. No harm done.

> I have bought in total (1) groupon. And I forgot about it and it expired. (...) things I would never frequently buy anyway (...) I haven't logged into it for nearly a year.

Good for you. But you communicate your argument that GroupOn is a bad idea in an incredibly weak fashion.

Its called a personal anecdote. There is plenty of mounting empirical evidence of how bad groupon is, thus I dont feel I need to make a strong case on my personal opinion.

While I appreciate articles and analysis of their filings, revenue etc... I did not require it to make a gut feel for what was really going on.

Groupon has done an amazing job at what they do - even though history will tell how far they really go, I am free to express my opinion in whatever form that may take, however, and I have never felt they were seriously viable in the same way other tech giants of this era are. They are simply a coupon site which, based on direct information from business owners I know, requires said businesses to sell at a loss in the name of brand recognition/volume that groupon claims to bring - but has thus far fallen short of delivering the marketed value of their service.

I completely agree, I have been a "subscriber" for months and I am borderline considering it just another piece of spam. But the real point here is how bad it is for so many businesses. I am not saying it is not great for some as well, I just have heard too many stories of groupon trying to hard sell small companies that don't fully realize the impact these "deals" can have. That is just a business model that scares me!

Not only is their accounting on customer acquisition bogus, but how do they possibly value these customers? FTA:

Groupon's subscriber count -- the one Mason says it is spending aggressively to beef up -- now stands at 116 million, up from 83 million at the end of last quarter. Among those subscribers, 23 million have purchased a Groupon at least once.

So they have 116 million "customers," but less than 1 in 5 of those have ever actually purchased a deal?

Plus aren't Groupon's customers really the businesses paying for the Groupons, not the millions of subscribers to their e-mail list that apparently don't even purchase anything from Groupon? Seems to me that the "customers" they're referring to is really the product they're selling, and at a huge loss apparently.

Exactly! Subscriber != customer. These are the exact kinds of statistics and statements that companies made in the first tech bubbble.

To be fair, Groupon calls them "Subscribers" and "Customers", defining both, in the report. It's not terribly misleading.

No. The email subscribers are Groupon's customers - if you define "customer" as "where the money comes from".

Every day Groupon sends out a daily deal to their email subscribers. Some percent of those subscribers opt to purchase the deal and go to Groupon's website and pay with a credit card. That's where the money comes from. Groupon then distributes some of that money at a later date to the merchant offering the deal.

So their success is very much dependent on the size of their email list, because that is the maximum number of potential customers (payers). Zero subscribers means zero money. If all the merchants dropped out that subscriber list could still make money via affiliate or other partner revenue.

I don't understand your argument. If customers are "where the money comes from", then 1/5 of the subscribers are customers.

People who don't pay are not customers, they are part of the let's call it the "marketing audience".

He's replying to the idea that Groupon's customers are the merchants. If anything, the merchants are Groupon's partners.

This thread from last year makes for an interesting read in the light of the numerous accounting revisions. Of course, we doubters might to turn out to have egg on our faces yet.

http://news.ycombinator.com/item?id=1967975

After the IPO happens... this will quite possibly be the best or worst post that ever occurred on HN. I can't wait to come back to this in a year.

If the IPO happens.

You're spot on. Groupon and the hundreds of other daily deal copycats out there are going to implode. It's not sustainable. It's an incredible deal for the customer (no doubt about that), but the business loses money.

We're in the process of creating a solution. If you're a business owner and are interested in being in the beta test group or would like to know more please visit the following link:

www.PaidPunch.com

If you are interested in Groupon's actual performance rather than a reporter's linkbait, see the filing. I find the table on page 57 rather informative about the current state of the business.

http://sec.gov/Archives/edgar/data/1490281/00010474691100717...

Revenue per subscriber has absolutely tanked. AKA - people become stale and aren't buying so those marketing costs they were trying to hide as one time subscriber costs are going to be around forever.

I think that would be revenue per customer, which has been pretty steady at around $40/customer/qtr, for the past year. The reason revenue per subscriber has dropped is because the ratio of subscribers to customers has fallen. That is a different problem that they are now signing up people who aren't really interested in buying a coupon.

I'm lost at what you're saying. It clearly states revenue per subscriber has dropped off a cliff to $9.

A subscriber is someone that is signed up for emails. A customer is someone that has ever made a purchase. The number of people that have made a purchase is growing, and the amount they buy per quarter has been steady at around $40 for the past year. The number of people that get the emails, but don't buy has been exploding so revenue per person on the email list has been steadily decreasing. You reached the conclusion that they will require more marketing spend based on a decreasing revenue per subscriber. I draw the opposite conclusion, that spending money to get more people to signup for the email list is probably counter productive becuase incremental customers are unlikely to purchase a groupon, and thus marketing expense should reduced. Same data, opposite conclusion.

"That is a different problem that they are now signing up people who aren't really interested in buying a coupon."

If that's true, then they will have a hard time bringing their marketing costs down later.

Actually - I think if that is their problem it would be easier. Just stop marketing... new customers aren't worth anything. I, however, think it IS the new customers bringing in the revenue and the old customers not buying anything. They need to keep the marketing up to get the new customers who are new to the fad and buy stuff.

as revenue has come from "customers" and not "subscribers", it sounds especially stupid to report falling "per subscriber" revenue vs. steady and larger "per customer" (why not, for example, report "revenue per cubic foot of hot air produced by the CEO" ?)

What stands out to me: Cost of Revenue is consistently 60% and admin consistently 30%. Judging from the comments I've been reading about the hit merchants are taking, I doubt the CoR% will change, and admin sounds about normal so unlikely to change much either.

That means even if they cut their marketing budget down to 0% they're still only looking at 10% profit BEFORE taxes. I really don't see how their business is going to be profitable in the short or long run, given the losses they've run up getting to this point.

Does anybody think these things are not really about the fundamental business at all but rather just a very impressive performance designed to make a few people rich from IPO/mergers?

I'm going with very impressive performance designed to make a few people rich from IPO/mergers?

On the up side we can take our shot at making some money shorting the stock if it sells at these planned inflated values.

The juice that we're all looking for:

> On that basis, Groupon incurred a $420 million operating loss for 2010 and a $117.1 million loss in the first quarter.

So they had a slightly worse amortized 1st quarter this year than last.

MarketWatch puts it succinctly: 'the bigger Groupon gets, the more it loses'. Although it's not the firm's fault, the timing of this filing amendment couldn't be worse - investors are likely to psychologically associate it with the market instability. Not that I'm qualified to dispense investment advice or anything, but my bet is that this offering will either be under-subscribed or the firm will end up under-capitalized and the founders will get ejected within a year of being listed.

http://www.marketwatch.com/story/the-bigger-groupon-gets-the...

No worries:

We exclude those costs because, unlike our other marketing expenses, they are an up-front investment to acquire new subscribers that we expect to end when this period of rapid expansion in our subscriber base concludes

See? Once they acquire all of their subscribers, they will never have to acquire subscribers again. Then they can just rake in the dough.

I'm surprised so few people are familiar with the "land grab", it seems to me that's what they are attempting. In the early days Amazon was spending something like $20 on average per customer acquired and was losing money hand over fist. That's not to say I think Groupon will be the next Amazon: This is a risky strategy. But it can pay off massively if you cement yourself as the only big player in an emerging market.

The differences are that 1) Amazon was selling a tangible commodity and 2) they weren't doing it at the expense of the other side of the transaction (i.e. the companies Groupon is selling coupons for).

That isn't to say that they won't find a happy medium where they can balance the need for their customers to get massive discounts without pissing off the businesses, but I'm having trouble seeing it.

A land grab only makes sense if you have constructed or inherited barriers to entry... what are their barriers? They're grabbing land that will be stolen the next day from them by LivingSocial or Google Offers...

Exactly. Amazon's acquired land was defensible, so to speak. Once it acquired a customer, that customer was likely to stick around.

As the numbers show, Groupon can only get 20% of all first time users to buy something. And yet, it counts all prospects as "customers." And even for those who do buy a groupon or two, what reason would they have to stay loyal to Groupon? At best, Groupon is poised to become one of many big commodity providers in this market.

(Speaking of Amazon, btw, what's to stop them from getting into this market eventually?)

Amazon's acquired land was defensible, so to speak. Once it acquired a customer, that customer was likely to stick around

Why?

Because they built up a heap of infrastructure required to consistently offer some of the best prices for goods online. Competitors could only really compete in niches because the startup costs to get to amazons scale would be massive.

With group deals, all someone has to do is setup a basic website and start calling up companies to find better deals than Groupon is offering, the customer doesn't care which deals site is offering a deal as you can signup to a new one in about 5 minutes.

With the deals site I've found aggregators to be more useful than the individual sites as the one which has the deal doesn't matter much. If I was looking for a book I wouldn't worry about an aggregator but head straight to Amazon or Book Depository which is also now Amazon owned.

Former Amazon employee, my comments do not necessarily reflects the views of my (former) employer, yadi yada.

Amazon's fulfillment infrastructure is the best in the world, bar none, full stop. It is so far ahead of every other online retailer that it's pretty sobering to think about.

Amazon can get items to you faster, more reliably, more cheaply than just about anyone else, by a pretty ridiculously wide margin. There is a tremendous amount of extremely non-trivial know-how within Amazon that permits them to operate like this. Even if you had access to all the money in the world you'd still have a hard time cloning Amazon's infrastructure... and at this stage, even if you had the know-how, the amount of money required is not within the realm of a startup's reach.

Compared with Groupon, whose uniqueness is entirely public knowledge, who have no capital infrastructure that is hard to clone. Who have no trade-secret business processes that give them a leg up over the competition. You can do exactly what Groupon does with a trivial amount of cash and know-how (and people do, see the ridiculous number of Groupon clones).

Amazon's acquired land is defensible, Groupon's is... really not.

Amazon is already sending out "deals" emails from LivingSocial.

Well, it's plausible, right? The users they have will stick around, and if they stop spending so much on customer acquisition they might be able to reduce their cut and make a profit, meaning even better deals. It could happen.

Or does this not pass the sniff test for some reason I'm missing?

I'm no longer a customer of Groupon. The plural of "anecdote" isn't "data", but I don't know of any company where customer acquisition isn't a major cost. The traditional business school number touted is that is costs 10 times as much to acquire a new customer as it does to maintain an existing customer.

EDIT: I know I may have counteracted my own argument, but my point was that customers are expensive, and the costs don't go away, even if they lessen.

If you look at many subscription-based businesses (newspapers, cable providers, mobile voice/data companies), you'll often see businesses where the cost of acquisition is pretty low compared to the life-time value of a customer. Newspapers (pre-Web) are a particularly good example of this - most of their costs were in production/distribution. Acquiring a customer was relatively cheap and churn relatively low.

So anecdotally, there are historical business models that feature low acquisition costs & low churn.

There will always be people who scour coupon sites for deals, even taking into account natural customer churn. It's conceivable that Groupon could be the Google on coupon hunting.

However the number of coupons available isn't going to increase forever, and may well already be in decline (for some measure of businesses using Groupon compared with deals offered).

This is because those businesses see Groupon as a way to infrequently attract a large number of people to try their products at a price that they would not be able to sustain for other marketing models such as advertising.

The only way Groupon can "grow" is to continually reach new businesses to ensure that the number of coupons available is high. However, eventually the well will run dry.

What I don't understand is that Google Offers has essentially mimicked the same type of "deals" that Groupon is offering ... usually NYC restaurants I've never heard of, or activities I'm not interested in. Today's offer is "$15 for a tour of the Ground Zero Museum Workshop (up to a $25 value)". So I unsubscribed.

I feel like Google had/has a tremendous opportunity to do what Groupon does, but do it with offers that their users will find valuable. Instead they're just trying to recreate the same cut-rate nail salon discounts and arguably exploitive 9/11 museum "deal".

Well I think what you're describing there is exactly the reason Groupon isn't making a profit- they have to spend a ton of money on marketers, reaching out to businesses in order to secure deals. Google appears to not be doing that, and suffers as a result.

One interesting number for last quarter, from total sales of $878 million, $341 million or 39% was actually Groupon's. Which definitely seems to be proof that the days of 50/50 splits are over, if any merchant prospects about to talk deal terms hadn't already gotten that memo.

frankly with the status of the current stock market, I don't see Groupon actually doing an IPO.

I mean today, the market tanked another 519 points. Everyone is busy taking their money out, not putting it in. And groupon doesn't exactly have the reputation as being a high quality IPO

So, my question is, did Groupon turn down Google's acquisition offer because they knew it would probably fall through in the due diligence stage? Whereas, they could then use the hype from the offer to somewhat inflate an IPO?

It would be interesting to find out how other coupon sites with similar business models are fairing--as much as the land grab theory makes sense, I actually wonder about the current system of offering stuff I normally wouldn't want for cheap being a viable business.

A little off topic but I've been noticing a lot of "TeamBuy" ads on TV (I live in Canada)--one can't help but think that until competition like that is settled there will continue to be tremendous growing pains for Groupon and company.

I think groupon has gotten a huge boost from retailer desperation since the 2008 crash. They haven't existed in a normal economy. Not only might businesses decide they are not a good solution in hard times, but in the longer term as the economy recovers, they'll likely have less interest as well.

It has always admitted it's unprofitable - they dropped their BS accounting metric trying to show that with some magic they were making a profit.

To be honest their filing reeked so bad and them trying to slip in that crap and not account for marketing expenses - I wouldn't trust their executive team at all.

I'm left wondering why you can still find the word "ACSOI" in the document -- it's right there in the "We don't measure ourselves in conventional ways." section of the letter to investors.

They do seem to have removed the metric from other places...but is it really that hard to do a search through the document before filing with the SEC? The mind boggles.

I think them using that stat in the first place is at best extreme arrogance or total cluelessness and at worst outright fraud.

Groupon=Bubble

Reply on news.ycombinator.com