The Missed Red Flags on Groupon
dealbook.nytimes.com
dealbook.nytimes.com
Come on. Online coupons. Groupon is the hype of boo.com, webvan, and Kozmo.com all rolled into one, with greedy investors hoping they can make a quick buck before people realized what happened.
Groupon is a glorified wordpress blog with 10,000 sales reps propping up the fake market with unsustainable or warranted demand. It's like watching Boiler Room play out in real life. There is no business process innovation here or technical innovation. The only innovation here is using huge marketing dollars to perpetuate a pump and dump ponzi scheme long enough for an IPO. Oh wait, that's not innovative, they did the same thing with dozens of companies a decade ago just before the first web bubble burst.
For all its faults, Groupon is on track for $1.5Bn in NET revenues (this doesn't include pass-through that they initially included in revenues) this year, and will probably still IPO somewhere around 10 billion dollars. All of the companies you mentioned only existed for 2 years before being liquidated.
As for everyone in the valley knowing Groupon was a ponzi scheme for the past year and a half - then the folks from Battery, Accel, Kleiner Perkins, Greylock, NEA, TCV, Silver Lake, etc (all of whom made investments in Groupon this year) would have to be complete idiots to invest in Groupon, and that is certainly not true.
Sidenote- a quick reminder on what it was like in the 00 bubble that you reference: http://feefighters.com/blog/ff_infographic/tech-boom-or-bubb...
June 2nd, 2011 "Groupon lost $456 million last year, and another $147 million last quarter." http://techcrunch.com/2011/06/02/groupon-growth-2-6-billion-...
PS: The #1 investing rule is the second a company starts playing games with their books avoid them.
The advertising is to acquire customers. But then it can obviously promote deals to existing customers for essentially no cost. This is also the reason it wasn't crazy to consider the mailing list an asset and account for it accordingly. Progress is only made when someone pushes.
At least those companies had tangible assets to liquidate (boo had inventory, webvan had a distribution network, and Kozmo had a stash of DVD's). Groupon has posted impressive revenue numbers (but still no profit) using an unsustainable model of aggressive spending on advertising and sales team headcount. With growth slowing, increasing backlash from merchants, and questions about their accounting methods, Groupon is on the decline. Maybe TheGlobe.com (http://en.wikipedia.org/wiki/TheGlobe.com) is a more fitting comparison.
1. These reputable VC firms have invested in stupid ideas before.
2. Ever heard of the "Greater Fool Theory"?
I'm sure Average Joe America drank the proverbial Cool Aid with respect to Groupon. We must remember that the vast majority of America doesn't care to do critical analysis of yet another hot internet startup; they're going to believe what's fed to them.
Average America is not the Valley. It's good that non Hacker News / Quora media resources are publicly criticizing Groupon now. I was terribly worried that the uninformed Mom and Pop investors would get caught up in the Groupon Ponzi scheme when they would IPO. For now, it seems that the likelihood and magnitude of this happening are much lower now.
From the owners taking 90% of the investors money for themselves, the fact their advertising costs almost match their sales, the fact that they make $270 million Q1'11 and still managed to lose $140 million... it all smells.
Groupon is a Ponzi scheme, and all the so-called smart investors and underwriters are just hoping to cash out before the pyramid collapses. There is nobody who seriously things this is a real long term sustainable business is there? Can't be.
All that said, however, there are still some interesting non-predatory wrinkles in their model.
The single deal at a time served to create consumer focus. The trigger threshold gave merchants confidence a deal would have a certain minimum impact. The time limit and trigger threshold served as an especially powerful call-to-action: now or never.
Though Groupon quickly tuned things (and grew) such that every deal was essentially guaranteed to 'tip', the group-threshold-mechanics were important for accelerating early adoption, overcoming vendor- and consumer- resistance to coordinated action. This mechanism, rooted in economics and game theory and related to the 'assurance contact' concept, still has utility for other endeavors, among them Kickstarter, even if that mechanic standing alone does not provide any sort of defensible advantage.
By all means, throw out the baby. But don't forget there's still something interesting in that bathwater.
It is true 'the valley' would seem to have caught on, but don't forget the sizeable period of time when Groupon was the darling of this very website.
If memory serves, HN opinion of Groupon didn't start to tank until the founders sold a big chunk of their shares, whenever that was. I'm pretty sure when the Google offer/rumor was afloat, everyone at HN applauded Groupon for rejecting.
That being said, the amount of money taken off the table was the first real warning sign.
1) "66% of Groupon deals are profitable for the seller, and 40% of businesses would not use Groupon again, according to a Rice University study."
http://www.quora.com/Groupon-IPO-S-1-Filing-June-2011/What-i...
2) Groupon has a hidden vat of PURE margin - breakage / un-redeemed deals that could be a shocking amount of money once financials are disclosed.
3) They have enormous growth potential in key markets which is why they are spending money like drunken sailors on customer acquisition. They can grow by 10x in the restaurant space alone.
http://answers.ask.com/Food_and_Drinks/Restaurants/how_many_...
4) Restaurants, spas, and other retail vendors have fixed (and perishable costs). This means that at particular times they can offer incredible deals as the alternative is burned or thrown out resources.
Groupon's team has indicated their #1 mission moving forward is to figure out this perishability equation.
Their VP says “If we can eliminate 10 percent of perishability, we can change the dynamics for small business owners,” he says. Small businesses would become more like airlines, matching supply against demand to maximize revenues."
http://moneyland.time.com/2011/03/18/impulse-shopping-2-0-gr...
Also: http://xkcd.com/951/
It's a cool idea from an engineering standpoint, but I'm not sure about whether it has the fun factor.
So: Impulse buying for Groupon customers, and a means for merchants to sell off their spare capacity, and, hopefully for Groupon, a big, untapped market in which to serve as the middleman.
Say we sell a groupon for cookies - $20 worth for $10. The customer pays $10 to Groupon, Groupon keeps $5.00 of it and gives the merchant $5.00.
Now, if the customer just does nothing, Groupon still has $5.00 in any case, the only winner here is the merchant, who got $5.00 and didn't have to provide any product.
So how is #2 pure margin for Groupon?
As for #3 - the problem I see here is that there are a lot of Groupon competitors in all the worthwhile niches - including the restaurant space you pointed out. Group-buying, in its current state, is a non-differentiated good. Which is to say, the barrier to entry is low, and customers have no loyalty since they're all peddling pretty much the same thing.
Groupon always allows you to redeem an expired voucher for the purchased value (e.g., $10 for $20, you can always get your $10 in credit from the merchant). I think the merchant must be able to keep the purchased portion of it or they'd be out a lot of cash over time if their Groupon was a particularly popular one.
1) The Rice survey regarding profitability of deals is based on anecdotal data only (it didn't crunch the numbers on the deals offered). The circumstances under which Groupon deals are profitable for merchants are very narrow and often difficult for merchants to measure, as they require tracking customers and referrals carefully over a period of months. How many businesses do you know of that could cut their prices by 75% (50% off list + 25% to groupon) and survive? Put another way, how many businesses have net margins > 75%? Answer: none. The profits to merchants are a mirage, as it's really future sales sucked into the present at a discount, not incremental increases.
2.) Not quite true. The current financial statements reflect the presence of breakage (for international), which is why the CityDeal acquisition actually saved Groupon's ass. The merchant agreement in the US says that unredeemed balances are split with the merchant after 60-90 days. Also, a customer's LTV goes down if breakage becomes too high--when customers don't use the coupons they buy, they tend to stop buying them.
3.) The latest numbers in the S1 show that the "backlog" of merchant deals in the US awaiting scheduling dropped in the most recent quarter. Given that Groupon has 900 employees in the US alone calling merchants all day every day, that's not a good sign. Sure, there are plenty of local businesses that haven't run Groupons yet. But that doesn't mean they haven't worked with a competitor or that they are good potential targets. Remember, Groupon has deliberately (per the S1) not repeated offers from the same merchant, and the pool of attractive restaurants/merchants is getting thinner. A 50% off coupon to a crappy restaurant isn't worth much if no one wants to eat there.
4) This is actually less true than you would think. Per the Deloitte annual restaurant surveys, food + labor (known as "prime costs" in the restaurant business) equal about 60% of revenues across all of the types/sizes of restaurants surveyed. These costs are largely variable, as it's easy to cut a server's hours on a weekly basis or put food in the refrigerator for a day and order less for the next delivery two days hence. Unlike hotels and airlines, where once the airplane takes off or once the hotel is built, there is no ability to easily adjust supply and significant costs are incurred to provide service to empty seats. Regardless, restaurant net margins (per the same annual study) are in the 7-10% range. Which means that a 75% discount to fill the empty seats would still be unprofitable.
5) Even if all of the above were true, that doesn't make it a good investment at the likely offer price. Assuming the offer price is $10B, the only question is, "if I had $10B in my pocket and someone offered me the chance to buy the whole company on the spot, would I take it?" Buying a single share at $10B/[shares outstanding] is the same question. Personally, I was eager to short it at $30B. (Sadly, the speculative bloom is off the rose, so while I still think it's a short, it's not a screaming short.)
What I don't see is how Groupon would hold on to a market like this. Where are the barriers? There's no reason n+1 Groupon sites couldn't exist. I also see no real need for Groupon to be big. If there is to be a leader in each market(city), why should Groupon be outcompeting local Tokyo, Paris or Tel Aviv Groupon clones? Groupon has its brand and experience and other little advantages, but nothing that outclasses whatever advantages the small competitors could plausibly bring to the table.
If someone told me this idea before Groupon, I'd think it was good, especially if they had demonstrated that businesses will bite, which Groupon has. It's a great idea for a business with value for businesses and customers. I really don't get the Groupon hate. I just don't see this as a winner take all market where a head start guarantees much. I don't think Warren Buffet would buy Groupon.
Come. On. Is it really necessary to ask questions like these about the motivation of Wall Street firms? They didn't miss it. They saw a trend that they thought they could exploit, namely, the growing tech bubble and its darling that they could flip (along with an eight figure underwriting fee). Although, I am surprised they didn't manage the process (and Mr. Mason) better. They let it get away from them, which is not like Goldman Sachs.
Truth.
Funding Total $1.14B
Series D, 1/11 $950M
Digital Sky Technologies
Morgan Stanley Venture Partners
Fidelity Ventures
Andreessen Horowitz
Battery Ventures
Greylock Partners
Kleiner Perkins Caufield & Byers
Maverick Capital
Silver Lake Partners
Technology Crossover Ventures
Funding Total $1.16B
How much hardware would it take to clone Twitter, if done efficiently?
A year ago they were at 1,000 tweets per second and 12,000 queries per second. http://engineering.twitter.com/2010/10/twitters-new-search-a...
The Steve Jobs news set a new record of 10,000 TPS. TPS Report: http://techland.time.com/2011/10/07/twitter-breaks-tweets-pe...
As of 7 months ago, they were at a billion tweets per week: http://blog.twitter.com/2011/03/numbers.html
If the average message is half the maximum length, then that's around 70 gigs/week naïvely (not counting multibyte characters or metadata).
Around 3.6 terabytes per year. Older tweets are probably almost never accessed so they can stay on mechanical HDs, and stuff that IS needed can get temporarily promoted to SSD storage which can handle all that random seeking. And older tweets can probably be nicely compressed.
Search is the only real challenge, but they "solve" that by not indexing most tweets. A subset of recent tweets, not indexed in real time, pushing out older ones.
However, I'm sure you're right in that someone could reimplement what twitter does more efficiently than they do it if they paid proper attention to all the mistakes twitter made along the way. Not sure it would be worth the bother though, because twitter's real win is having their company name define the action in much the way googling has come to define web search. You can't overcome that by being marginally better.. or, as it happens, even by being marginally better and giving away tons of free money (just ask MS/Bing).
Sending messages to recipients and load-balancing don't faze me. SMS gateway costs do.
I could have cloned it, web-only, missing out on what I assume to be the main userbase.
Of course now with smartphones, web-only is increasingly feasible.
Snappier performance, longer messages, and actually indexing them might make it worth a shot. Except it wouldn't make any money either (I refuse to inflict more advertisements upon the unhappy world).
From a merchant perspective, I don't see how using Groupon helps long-term profitability. Almost everyone I know who use Groupon regularly only visit the participating merchants when using a Groupon and never again. Furthermore, they are reluctant to pay full price at any merchant if they know that that that merchant has previously had a Groupon promotion.
So the merchant not only effectively spends marketing $$$ (since Groupon is supposed to be considered a marketing expense) for customers that will only use the loss-producing (likely) coupon, the merchant also devalues itself in people's (including those that did not previously use a Groupon) eyes.
Additionally, the daily deal industry itself doesn't have strong reasons to remain tied to a company (unlike social networking where people tend to stay where their friends are) and there are very low barriers to entry. Granted, if you're the biggest player in the market, you have certain advantages like economies of scale, brand recognition, but I don't know if that is sufficient to thrive in this industry where people jump from site to site depending on which site has the best deals for that day.
Add in pre-IPO accounting tricks and early cash-out (while the company is running hundreds of millions in the red)...well, you get the point.
But the idea that an underwriting firm such as Goldman or Morgan is some kind of arbiter of wholesome business fundamentals is ridiculous.
Sorkin knows better than to suggest that.
This is the $310M man? Are you kidding me?
Next he'll be off killing elephants with the GoDaddy guy.
Bob
The guy who took $319 million was Eric Lefkofsky (Groupon chairman). Nice pay day.
...are feeling pretty smart right now.
Andrew Mason is a cool guy and I loved his talk at Startup School last year, but his company is more into financial engineering than innovation, just like Wall street and the banks.
I love selling an alternative, because it sells itself. You're NOT like Groupon? SOLD!
http://feefighters.com/blog/who-groupon-benefits-the-contrac...