You implied, Zynga isn't a pump-and-dump scheme because Mark Pincus still runs it, and nobody would inflict the management of a poorly-performing public company on themselves. Well, that's just not true.
There are better arguments against the assertion that Groupon is a pump-and-dump scheme than "it must suck to be Andrew Mason these days" (it does not suck to be Andrew Mason, by the way). For instance, Groupon was open about its liabilities and the enormous risks it faced, and its whole industry sector was very carefully scrutinized.
I'm done arguing this point. My nerdly brain just couldn't handle the idea that being Andrew Mason in Q4'12 is so painful that simply holding his job imputes him credibility.
Agreed. If Pincus and Mason are having a hard time now, I'm sure they can have a good cry in their mansion or on their yacht, weekends in Aspen, luge lessons in Zurich, private Zoroastrian monk mentoring, perhaps a custom birthday song written by the Rolling Stones -- you know, the typical way of handling such hard times as these.
I worked in business consulting for a bit. Part of what I learned is that at least some emperors have no clothes. There were really two main types I encountered:
(1) Extremely competent, hard-working executives who try their best to build real value.
(2) Fast talking dominance machines. Sociopaths, really. They make big promises, send a lot of primate dominance gestures, and generally build vapid unsustainable businesses that eventually fail. Yet the failure never sticks to them, and it often never sticks to their initial investors. Usually it's handed off to someone down the line (later investors, the public, employees, etc.).
When I see a resume that consists of a series of a series of unsustainable businesses where the early investors and executives made out well by handing a bag of flaming poo to later investors, I tend to suspect that we're dealing with category (2) players.
I also suspect that when I hear of extremely magnetic reality-distortion-field personality types. There is a certain kind of charisma that I take as a contrarian indicator.
The key point here, I think, is to be very careful to distinguish between a failure to build sustainability, and willful maneuvering for maximum personal gain at the expense of sustainability. The former is a noble failure, the later is deeply unethical (if not illegal) and ne'er the twain shall meet!
Because, at least in Pincus' case, he can't be removed. It would be pretty hard to argue that he wouldn't have been canned under different circumstances.
"Pump and dump" may be a bit much. But I'm glad that it's coming to light that business shadiness doesn't start and stop with the financial industry; it occurs everywhere there are substantial amounts of money changing hands. The Valley has some pretty serious scum-baggery going on. I hope we hold the people who promoted this stuff accountable in the court of public opinion.
My point is that "good vs. evil" style commentary is useless. It automatically lowers the commenters' mean IQ by 15 points.
This, of course, is the reason discussing politics (as opposed to policy) is generally a waste of time.
No one can force them to stay. They're already obscenely rich. Think about what their motivations must be.
Either way it's not a pump and dump, and their goal is to turn the company around.
They're alpha dogs in the absolute worst sense of the word. They thrive off ego, winning, power, greed, narcissism and all those other lovely traits most people pulling similar moves seem to have.
Think Gordon Geko. Remove the pin stripe suit, fast forward 30 years and change the modus operandi from cynical asset stripping to cynical stock hyping and you get...
Edit: a more charitable view, in Pincus' case, is he isn't THAT evil and instead simply made a hugely expensive mistake buying OMGPOP. That wrecked the balance sheet and he's holding in there trying to recover.
As Excutive Chairman in a non-operational role, Lefkofsky is under only a fraction of the unpleasant pressure Mason is under as CEO. If he were guilty of behaving in this way, that would actually jibe pretty well with pg's assertion about people not wanting to run struggling public companies if they can avoid it.
Personally, I am no expert on Groupon. I make no claims that Lefkofsky has behaved in that way, because I don't have any evidence to either validate or invalidate such a hypothesis. It's simply not clear to me that such an accusation is obviously false, as pg claims.
I would openly run a company into the ground if I got hundreds of millions of dollars in the process like they Zynga or Groupon guys did.
If the liquidity from large companies such as FB, Google, AOL, Yahoo, etc. disappears, the value of the above mentioned startups will collapse. A big part of the startup ecosystem is a house of cards, unfortunately many first time entrepreneurs did not experience the .com rise and bust to understand what a downturn really looks like.
Doesn't mean all their money making problems are solved of course, but they're further down the line than turntable.fm are, who continue to confuse me in terms of their lack of business model.
Gasp How could you forget Quora! :)
VCs fund many promising startups, often flooding them with money that can support the company for a long time, while maintaining a very active public image that perpetuates the sense that the company is successful. Not only is the actual business value hidden, VCs encourage the companies to not try to turn a profit, but to grow very, very quickly. This is, perhaps, what obscures the actual value the most.
Now, why do VCs do that? Because they hope for a good ROI, and some of them do quite well (the entire portfolio taken together, of course). Some say that VC's true desired goal for a company is an IPO, but IPOs are rare, and, I think a good IPO (for anyone who's not Facebook) is only about 10x that of a good acquisition. So I believe, that it is the acquisitions (that outnumber IPOs more than 10x) that really drive the VC investments, and, in turn, the whole industry.
But how can acquisitions be the bread-and-butter of the industry if so many of them fail (for the acquirer, that is)? Because, on the whole, acquisitions are still much cheaper for the acquirers than funding their own technology - or market - research. Instead of throwing a lot of money on large, money-hungry research departments, Big Tech would rather let a ton of entrepreneurs and VCs fight it out, and award the winners handsomely. The price they pay is far less than what they would have had to invest doing independent research.
So, who loses? I'm not sure anyone does. Entrepreneurs get the independence, excitement, and the possibility of huge payoffs of a winner-takes-all market; VCs - well, some of them - do alright, and Big Tech saves a ton of money on thousands of employees they don't need to directly employ and manage. Oh, and bloggers and industry insiders get a lot of juicy gossip and cautionary tales.
The one remaining question is, how come so many companies seem very promising, get good indications from the market, and then slowly (or quickly) declines. I don't have a good answer, but I do have a hypothesis. Web companies mostly compete in a global market. That means that in order for them to succeed, all relevant consumers must learn about them, and must learn about them quickly (fast growth, right?). But this is just not possible, because the average consumer can only keep in mind a bounded (and rather small) set of vendors. So, not only is, say, Groupon competing with uhmm, I dunno, Amazon, maybe for the purchase of some items, it is also competing with Zynga over my time. And not only that, it's even competing with Salesforce because there are only so many products I can even remember to use on a regular basis. And when new startups are funded, they are encouraged to very quickly get global attention, and - out with old, in with the new - novelty seeking consumers forget about yesterday's big thing.
So all of these companies are competing with one another for attention, so the question is, how many fast-growth, global companies can even prosper at the same time?
Well, if you factor in the opportunity costs of the capital and talent allocated to unsustainable companies, then there's a good argument that the US economy loses. Every dollar invested in Zynga or Color is a dollar that could have been invested in something productive over the long haul. Every talented programmer that goes to work at a flash-in-the-pan, overhyped startup creates opportunity costs and economic inefficiencies by not working at more productive enterprises, creating real value. The wage and equity inflation created in the job market by overhyped startups leads to similar inflation across the industry, raising operating costs for everyone in the business.
All that hype-based investing does is swap money around between a relatively tiny cohort of people. It doesn't create real value over the long run, and all the real value that is foregone is opportunity cost.
I think this is an interesting cultural change rather than a loss. Engineers are willing to sacrifice job security for a small chance for a big payoff. The winner-takes-all approach has long been part of the American ethos, only now its working its way down from the capitalists to the workers. I just think it's interesting.
You could say, though, and I think I've written it before, that its the workers (i.e., startup employees) that lose. If the theory is correct, then Big Tech is exploiting the workers' naive preference for promises of big rewards over regular, secure, pay. But, again, I don't know if that desire is naive; most startup folks understand the chances well, and still choose as they do. Maybe the excitement and perceived freedom are worth more than money to them. They sure are to me.
But I do think that there's a major opportunity cost incurred when dollars and talent get shuttled into hypey, bullshit-driven companies instead of legitimate ones. Including legitimate startups.
Of all the risky startups who could potentially get funded and attract talent, it's better for the good ones to get the money and the talent if possible.
To put it another way: the VC system should be selecting for the next Google, not the next Color. But to whatever extent it's selecting for the next Color, it is sub-optimized. That degree of sub-optimization is the opportunity cost / inefficiency inherent to the system.
In other words: it's not simply betting at the track and ending up with the wrong horse. It's actively betting on what it knows to be the wrong horse, because the wrong horse pays off in the short term.
They may have grown too fast to do it under the Wall St microscope though.
Growing so fast is not only a problem of expectation, it's a problem of massive overhead that competitors don't have. That's going to harm their competitiveness in anything they do.
The company I was with failed because they bought into the "get big fast" meme that was driving consumer Internet companies. So they went on a acquisition spree, tried launching too many products when they should've just focused on their core, opened several international offices etc.
AND they were already public, so they had to deal with all the BS that comes with that.
The did all of this inside of two years. It was senseless. A company culture rarely scales that well.
And it turns out that in most B2B markets (except for commodities like bandwidth), you don't need to grow that fast. You need to grow in a way that makes your customers happy, yes, but you don't have to worry about everyone suddenly adopting a new competitor (i.e. switching from Yahoo to Google).
But when you have investors throwing money at you, it's easy to think that every decision you make is genius and that you can solve problems simply by throwing money at them.
So to my original point. I think Groupon has multiple strategic options, but it may take them 3-4 years to see them through and in the meantime they have to justify their valuation to angry investors every 90 days. This would not be necessary if they hadn't bought into the "get big fast" mantra.
However, I believe they do have lots of cash in the bank so they may still have time to turn it around. It will be painful and take years.
Even if most companies lose their shirt on that, there are going to be some industries and situations where infinite customers at a temporary loss makes business sense, and once the market for it becomes rational again someone will be able to do it better than they could internally and make a profit on it.
a) It was the first big success in its space b) at its peak, hired dozens (hundreds?) of actual employees, even copywriters from journalistic institutions. c) Had a huge, huge base of customers
Groupon's leaders should be faulted for the various strategies and actions that have put the company where it is. But Groupon did create a vibrant service out of something that seemed quite pedestrian (can't you just get coupons from the weekend newspaper?)...and a lot if its downfall comes from how easy it is to copycat it.
Color, in contrast, had none of the above.
Success that is not sustainable is not success.
>>and a lot if its downfall comes from how easy it is to copycat it.
No, I don't think so. The real (and perhaps the only) reason Groupon is not sustainable is because the fundamental assumption that the business model rests on turned out to be false. Let me explain.
The original idea was that Groupon would team up with a business and provide deep discounts to consumers to encourage them to try out that business. The assumption, which Groupon's sales folks used aggressively to push sales, was that a significant portion of those consumers would like the business so much that they would become repeat customers, thereby (in the long run) offsetting the cost of the original discount. In the end, the business would turn a profit.
Except it didn't work that way.
What ended up happening instead is that the vast majority of consumers never actually went back to the business. The reason is simple: while they could justify paying X dollars for the business's product or service just to try it out, they couldn't justify paying X times three or four. Because of this, most Groupon clients (the businesses) end up losing money, and never offer a second or third discount via GroupOn.
This is why GroupOn has such a huge number of sales reps: they need an ever increasing number of clients in order to postpone the inevitable sinking of the ship.
That's false.
in Q3/2011, 33% of Groupons merchants were people who were doing it for a second time. That number was up to 56% in Q1 of this year.
The deals are getting less lopsided-- $12 for $24 at a restaurant where it's challenging to eat for anything less than $50 is a pretty good buy for a restauranteur. With most of their costs tied up in fixed costs (real estate, etc), they aren't losing much (if any) on this a deal of this size.
You're also somewhat wrong when you say, "The original idea was that Groupon would team up with a business and provide deep discounts to consumers to encourage them to try out that business."
That was part of the original idea, but there are a few other benefits. 1) Filling empty seats for businesses whose costs are largely already incurred 2) It's an effective cash advance for the business- they recognize the revenue quickly (it's like a Kickstarter campaign).
http://venturebeat.com/2012/05/07/groupon-tightens-its-payme...
Another thing to realize is that they get the money REGARDLESS OF WHETHER YOU REDEEM IT. EVER. Depending on the type of Groupon, upwards to 20% of them are never redeemed (this is a dirty secret of gift cards, too).
I guess you think everything ever invented is a failure then?
You're confusing the product and the company. iPod in your definition is not a success, and neither is Sony Walkman.
I probably gave more than $200 to Groupon during the time that I found it useful. I checked into Color over a period of weeks and never stayed on for more than a minute.
So while both are money-losing ventures, I think Groupon should still be ranked higher than Color.
Well I don't think anyone can successfully pitch investors and take millions of dollars of their hard earned (sometimes) money, but agreed on the other points.
Really when it comes to coupons there are three options that actually work. You can always have a sale, you can make it a pain to use, or you can limit yourself to 10 to 15% off.
Giving discounts may induce the most price sensitive to use your service. They will continue to be price sensitive, and stop using your service once the cost returns to normal.
If the opposite were true, and if business actually did profit from this approach, then it is likely that Groupon would be killing it.
At the end of the day, some types of retailers find ways to profit even off of the price sensitive, but it seems to be the case that the same is not true for most Groupon-trying businesses.
This has been a key part of the mailing list business for many years -- lists that target people who have recently moved, gotten pregnant or had a baby, gotten married, and so on. Special offers with unusually good deals are then offered, because the chance of converting a percentage of the recipients into long-term customers makes it worth it.
If this kind of business model has been translated to online effectively, I'm not familiar with it. Certainly some of that effect can be achieved with the right search keywords or the right websites to advertise on (e.g. baby name sites), but businesses like Groupon and Living Social have brought in many more price sensitive customers than actual long-term business prospects, which is one of the big reasons why they are not more successful.
VCs do due diligence - success for them isn't just funding a real business, but more along the lines of cashing out at the right moment.