What really happened at LivingSocial?
finance.fortune.cnn.com
finance.fortune.cnn.com
All kidding aside, it seems almost criminal that a company would create such damaging news as a way of generating publicity (speaking, of course, about LivingSocial). I just can't fathom what would drive someone to do this, unless someone who was leaving LivingSocial wanting to spread a lot of damaging news about their old employer.
we do not have the resources to sue. wish livingsocial and the other companies targeted by these pieces of shit would. it's all a giant scam.
what hurts the most is the pubs that parrot the 'research', like cnn did this time around, which gives it credibility.
edit: a16z and google pay them for their research. sad. http://www.privco.com/testimonials
[1] http://dealbook.nytimes.com/2012/11/26/after-regulatory-sanc...
This funding round is going to play out in a way that will make it very clear in a few months who nailed the story and whether this reporting is malicious. If PrivCo is guilty of systemic fraud or extortion, there are surely online discussions that can support the claim. As a web entrepreneur myself, I also find the anonymity here puzzling for another reason -- if I had a legitimate grievance with the company I would be doing everything in my power to inject my story into the national media at this point. Free SEO from CNN and other major news outlets? Sign me up.
* That the investors PrivCo mentioned as participants were participants or even investors in LivingSocial
* That it was a debt round rather than an equity round
* That the liquidation preferences on the deal came close to 4x
* That it repriced existing shareholders
* That quotes attributed to LivingSocial personnel were real
These are not minor details. They are major details. LivingSocial's CEO would have to be lying about very important facts that will inevitably be public. PrivCo, on the other hand, merely needs to claim they were misinformed by their source to extricate itself.
PrivCo is contextualizing an apparent leak with what it thinks it knows about the company finances and making a judgment call about the reliability of their sources. That isn't horrible journalism and if they are right this piece is miles above most of what passes for tech journalism online. And if it is wrong they have just tanked their reputation Judith Miller style and posters like the one above will be able to support their claims in the future.
In the meantime, dealing with this sort of thing is part-and-parcel of running a very public business that has taken nearly a billion dollars in outside investment. You are going to have aggrieved investors and employees when things go sour. They seem to be handling it professionally.
First, it bothers me that in this initial memo announcing the funding he said nothing but how terrific it is that their investors love LivingSocial's financial performance SO much that they doubled down with more money. NO mention that they were down to their last month of cash left. NO mention that they had to give up the farm to get the money. NO naming (as is the custom) of the investors who invested (i.e. hiding that some did not...usually ALL prior investors put in at least a nominal amount and a new lead investor "leads the round). Here it was very bizarre the investors weren't named.
And he doesn't say anything about this NOT just being a standard straight VC stock round, but only when pushed by PrivCo he coughs up yea ok the securities do "have some bells and whistles" that makes the employees' stock worth less. No mention of that on Wed. announcement (before privco forced the issue). Then he has the balls to suggest that don't worry if we IPO all of this won't matter. He the the guys KNOWS they'll never IPO.
So call me old fashiond but that just bugs me. And hats off to PrivCo or any other media/research firm that calls companies out (esp private ones you can't even short sell...they took all their time prepping their research and went out ona limn for what? Bunch of blog posts criticizing em b/c CEO who has no more credibility IMO just says so, and he's the son in law of the CEO of the Washington Post, so he can say whatever the f'k he wants and we're all just supposed to take it all at face value.
Obv PrivCo made every effort to get the facts right - they just even outed the sr. exec at Living Social to prove they didn't make up quotes: http://www.privco.com/livingsocial-receives-emergency-110m-c... (at the bottom) - nobody even the NYTImes bats 1,000, but this LIvingSocial CEO's arrogant dishonesty to those 4,000 employees while he cuts a side deal i'm sure so he gets some millions no matter how badly it tanks....well I just don't like it and I don't trust him one bit. It's drip drip drip with this guy. Spit it out: we basically borrowed money, we were almost out of cash, we call it equity but it has interest, loan's due in 4 yrs, we call it a "VC round" but look we had to do it. Now we need a new strategy and streamline.
He doesn't mention the allegation that LivingSocial owes more to merchants right now than they have on hand. As others here have mentioned, that's going to hurt the quality of deals they're able to put together at a time when they need to be building confidence with customers and merchants.
He also doesn't mention the threat of more closures and layoffs. From a business perspective, it makes no sense to pay high salaries to college educated 20-somethings to do customer support from expensive downtown DC loft office space, but he never mentioned that in any of the all-hands meetings when he said we would be profitable soon.
The constant theme in communication from management at LivingSocial is always "don't listen to what others are saying about us; they don't know the full picture." I wonder how much longer they can keep that up.
If they do go under, there will be a massive rush on all the talent that will suddenly become available. The brain drain is already beginning. A number of very talented engineers (not just Chad Fowler) have already left. They've been diplomatic about it, but the fact is that they saw better opportunities elsewhere. Anybody who says that the tenuousness of LivingSocial's continuing existence isn't at least a small factor has a bridge to sell you.
People won't jump ship all at once, but this is going to be a huge problem for recruitment. Salespeople and customer support staff are a dime a dozen. No news there. But anybody talented enough to be a developer at LivingSocial (and the talent is considerable) would have to be quite desperate to come on board at this time. HN readers know that the caliber of developer they need can choose where they work. Would you sign on in this environment?
So true and the same comment I was going to make. I was in the Seattle office and thought the same thing 2 years ago.
We have no agenda other than to try and publish facts, and what LivingSocial announced yesterday immediately struck us as misleading and fishy based on everything we knew about the company and it's dire financials. The press release and memo to employees (imagine you are one of those trusting hardworking employees, or a local daily deals merchant they owe money to "soon") - over $300 Million worth actually, but have only $76 million - made it seem as if the company was doing so well financially that their happy investors who had invested at a $5.7 Billion valuation wanted to double down on their investments and bet even bigger. NOTHING WAS FURTHER FROM THE TRUTH. The company was NOT doing fine, lost over $400 Million last year, was running low on cash, and had to take a massive valuation haircut and grant all sorts of special preferences in order to get this last lifeline of cash.
Their financials can't be papered over...and they verified to the penny as public Amazon.com owns 31% now of the company. Look them up...if you know anything about finance or accounting you will reach the same conclusions as PrivCo did. LivingSocial will soon require mass layoffs, and will be insolvent or sold for pennies on the dollar by the end of this year is our prediction. (And we hope we're wrong, and don't make a dime either way, as we don't want to see 4,000 trusting employees lose their jobs).
But the numbers don't lie and we stick by our prediction.
The PrivCo Team www.privco.com
We're debating the veracity of all of the non-public details that made your report interesting. Well, in theory we are. Only one side of the debate seems to have showed up.
Do the math: looking at their 2012 financials on PrivCo: http://www.privco.com/livingsocial-receives-emergency-110m-c...
That is, LivingSocial's operating expenses are about $1.4 Billion/year (Revenue + Operating loss = about $1.4 Billion they spend a year). That's $120 Million a month of expenses. $4 million a day. MEANING NEW FORTUNE/CNN UPDATE to their story confirms LIVINGSOCIAL WAS DOWN TO JUST 7 DAYS OF CASH! How is that NOT the very definition of a "distressed financing" situation? Correct the record CNN and Fortune - shame on you - and admit when you're wrong - (and by the way they just deleted this posting from the article comments). LivingSocial was down to a dangerously low level of cash just as PrivCo's sources confirmed, only a week, maybe 2, left, before paychecks would start bouncing and the whole house of cards came down. This is the very definition of a "distressed financing."
But they have been trying to get profitable. So they have been cutting expenses and adding revenue. This deal would not be possible without that. Therefore they likely are not losing money as fast as in 2012. So a month or more of runway is perfectly believable.
Next, expenses and revenue tend to come in on different schedules. If that is cash right after you've paid employees, and you have revenue booked but not realized yet, you're in a much better position than if those two are reversed. That could easily add another month.
The result? I suspect CEO's claim of "several months" is possible, but likely optimistic. However I would be shocked if your "7 days" is in the right ballpark. But there is an easy way to check. If you're right, they should have run through this investment inside of 2 months, 3 months tops.
"Two of the three investors listed on the PrivCo site as participating in the round didn't participate, and one isn't even an investor in the company."
IANAL, but this doesn't seem like libel per se, so damages and malice would both need to be proven by the plaintiff.
(IANAL, and I am even less well-versed about tortious interference than I am about libel law.)
There is nothing livingsocial can do to revert its current trajectory. It's not about the company, but the very core of its business model does not work, not one but dozen of similar companies failed early, are livingsocial and groupon trying to run some sort of ponzi scheme on desperate investors and employees?
What groupon, livingsocial, et al assumed was that this was an endless market and would work for every type of business. This is clearly not the case. Whether these particular companies can get to the right size and find the right market remains to be seen - but I don't believe this is a "ponzi scheme" at all.
I don't doubt for a second that LivingSocial is experimenting with it's models, innovating and trying new stuff. It might not work out, but the investor clearly has enough confidence that it will to invest more cash.
But really, this is just a completely arguable point of view, sorry if it came out a bit despotic.
According to the PrivCo article, they got first rights on liquidation. So they'd be either getting a huge part of a miracle turnaround, or most of their money back when the company was sold off in bankruptcy.
Of course that article appears to be completely wrong, so I guess it doesn't actually matter. But there's your motivation for investing in a dying business.
"We are a company that does over half a billion in revenue. If we stay diligent, we hope to turn the corner to become profitable soon."
UPDATE: Just got off the phone with Hamadeh
[PrivCo CEO], who is standing by his original report.
He says O'Shaughnessy is misleading his own employees,
and that classifying the round as "equity" is a
technicality given all of the debt-like provisions
PrivCo continues to believe were attached. He also says
that PrivCo spoke with a LivingSocial spokesman prior
to publishing, and sent him a draft of the report with
a request for any needed corrections. When nothing came
back four hours later, PrivCo published.
With respect to the "4 hours later" I would like to know what the standard is in the news business before "going to press" with a story.
I'm not entirely certain that a news organization would wait more than 4 hours if they feel they are publishing information or trying to scoop someone. Each news organization is different of course and has different standards. I don't think this is as unusual as it sounds (I could be wrong of course).
I will ask a writer(customer we have) at the NY Times what the standard is for this (I'll be lucky if they reply to me within 4 hours of course).
The question I posed was:
"When a news organization has what they think is a "scoop" and reaches out to confirm info with a company what is the normal time to wait for a reply before running with the story? I understand each organization has different standards and each situation is different. What are the guidelines or standards that you have seen after a PR depart at a company has been contacted for comment?"
Here was the answer from someone at the NYT (for at least 10 years) that has done front cover pieces and covered startups (among other things):
"It really depends on the topic, the competition and who's being asked to comment. If I called someone like you (business owner) and you didn't at least acknowledge my inquiry within a day -- perhaps asking for more time -- and it was a big scoop, I might not wait much longer. But if I had big news about a government agency or large multinational corporation with many layers, then some topics would merit more time for a response. There are a lot of variables though ... if the CEO of a large corporation got busted for drunk driving and killing someone, that's more time-sensitive than asking for comment about a long-term investigation into fraudulent practices at the company. And as you said, different media outlets have different standards."
PrivCo saying they "...sent him a draft of the report with a request for any needed corrections. When nothing came back four hours later.." they assumed everything is true is a weak though.
I guess I will send LS an email saying I am the new CEO, please email back if this needs to be corrected...
...I will let you guys know if they don't respond, in which case, D.C. here I come!
I'm sure your out-of-hours deadlines were totally non-negotiable, and that holding off on the release til the next morning were absolutely essential, right?
The sad truth is that this down round will hurt the employees more than they know, or are being told. Down rounds aren't made under the same terms as up rounds where the company has the advantage. When the investor has the advantage the terms will weigh heavily in favor of the investor protecting their cash, so what looks like equity today may not be in the future.
"That same source insists LivingSocial was not days or weeks away from a bankruptcy filing, adding that it had around $28 million in cash at its February low point and was on plan to steadily increase that number even without the new financing. Had that figure not increased, and had no new investment been forthcoming, it still could have survived for several more months."
Regardless of Privco, not exactly encouraging for employees and prospective merchants. I also wonder how much of the $110 million will actually be used for growing the business versus covering current liabilities, such as those due to existing merchants.
Their operating expenses are about $1.4 Billion/year (Revenue + Operating loss = about $1.4 Billion they spend a year). That's $120 Million a month. $4 million a day. THEY WERE DOWN TO JUST 7 DAYS OF CASH! How is that NOT the very definition of a "distressed financing" situation? Correct the record Primack and admit when you're wrong - there's no shame in that - that you were a bit hasty at first, but yes they were down to a dangerously low level of cash and regardless of the financing terms or structured as technically debt or technically equity, that yes this was a distressed financing situation.
Mind you, I don't trust anyone's word on this.
A lot of times these writers are on the hunt for sources for their articles, and making yourself available to answer questions or give quotes, whether you're the founder or someone in the PR/Marketing dept, will go a long way down the road when you're looking for coverage on a new feature or want to clarify some bad press.
Edit: For the record, I read the article, I forwarded it to colleagues interested in the space, and the only thing worthy of it for me was my comment -- don't start one of these without a business model.
All this PR commentary about misunderstandings about finances, funding all ties back to one thing -- they don't make money. Companies that make money don't hide it, and have a hard time hiding it.
Whether a PrivCo is funding them or not -- my original point stands.
This place for me is about learning to create a real business and not the lame bantering about distractions from this one requirement of any successful startup.
I hope the whole "daily deals" fad dies soon, along with all the shitty companies (LivingSocial, GroupOn, etc.) that promote it. There is nothing more frustrating than getting consumers in the mindset of "I want to try it, but I'm going to wait until a daily deal comes along."
A cursory glance at the original article makes it obvious that his comment is irrelevant. It's just pithy snark against a company already dealing with false "news" reporting.
How did it apply to the article? Everything they did, didn't ultimately find a sustainable and repeatable business model. Instead theres all this perceived market validation of "oh look, investors say we're valuable", instead of market validation that's sustainable and repeatable.
I don't know anyone there and mean no one ill will, but without this, it certainly makes people wonder how making businesses lose money with deals for people who never come back is something you want to repeat, or how it can educate customers to become better customers (and pay full price).
I appreciate your judgement of me to be "pithy", but it's not. Snarks annoy me just as much. You can jump to the conclusions that you want but it's often fair to ask what someone meant instead of deciding what I meant in your positive and constructive open-mindedness.
This place for me is about learning to create a real business and not the lame bantering about distractions from this one requirement of any successful startup.
[1] http://articles.washingtonpost.com/2012-10-25/business/35501...
My guess though is that their major cost is customer acquisition. That seems to be the norm in this space. They're buying customers for $5 and making $2.50 off them (numbers theoretical, as an example) hoping to make the rest back later when they've won the market.
Living Social is private and can do whatever they want, but they probably are using net if they're comparing themselves to Groupon. Otherwise they're making themselves look half the size when they are really a quarter, which I suppose could be purposeful.
Earlier in its existence, marketing was also a huge cash sink for Groupon. This has improved for them as their product matured, but it's likely that Living Social is still spending a huge amount here, too.
http://investor.groupon.com/releasedetail.cfm?ReleaseID=7002...
1. Many here seem to feel that taking 50% is unfair to their merchant partners. Yet, they are nonetheless struggling to turn a profit
2. Like any other coupon, LS deals run the risk of un-use. Speaking for myself, I have forgotten about at least 4 separate deals, and am not an active "daily deals" consumer.
How can LS ever be profitable? It feels like they are already absorbing as much net revenue as they can, and have the deck as reasonably stacked as possible. Is it a question of needing to run leaner (they do spend hand over fist, in my experience)?
After that they have a "team of more than 4,500 employees includes LivingSocial professionals in every city where we offer deals"[1], 19 offices[2] plus another office/shop thing called 918F Street[3] and they have a 5 month training program[4] which adds costs to their hosting, software design etc.
Once they've paid out for its 4,500 employees, offices, hosting, software design, training programme, legal costs etc they also have significant marketing costs as well. Although companies like Ampush have helped them to lower it recently[5]
[1] http://corporate.livingsocial.com/bythenumbers
[2] http://corporate.livingsocial.com/ourcompany
[5] http://ampush.com/ampush-lowers-livingsocials-cpa-costs-on-f...
UPDATE: Just got off the phone with Hamadeh, who is standing by his original report. He says O'Shaughnessy is misleading his own employees, and that classifying the round as "equity" is a technicality given all of the debt-like provisions PrivCo continues to believe were attached. He also says that PrivCo spoke with a LivingSocial spokesman prior to publishing, and sent him a draft of the report with a request for any needed corrections. When nothing came back four hours later, PrivCo published. As you might imagine, now I've got a new call into LivingSocial.
What's different after this followup is that now CNN/Fortune is suspect too, because repeating this verbatim is unethical.
You trusted them before?
My interest in following this story is personal as I live in DC and have many friends still employed at the company.
I'd disagree that CNN is being unethical here, their story/angle is about the process and getting to the bottom of the PrivCo report.
It's actually even worse if underlying trend they're "reporting" on is true, because they've poisoned the well.
"I don't think the real story here is the details of the financing," Hamadeh [PrivCo CEO] said. "It's what's going to happen to the little guys, all of the merchants who are really the company's unsecured creditors, if LivingSocial goes bankrupt... You'll see that we were right in six or nine months."
Sure, they come off as slimy (and maybe they are - I have no idea). But the details matter less than the overall story here.
It is especially easy to pull this off when the topic is a company we don't like.
Because I actually do think that the untrustworthiness of this report, and, more importantly, the implications of that untrustworthiness is underrepresented and is worth talking about more. Whereas a chin-wagging circle of commentary about how unsustainable daily-deals sites are does not seem particularly valuable.
(This comment reads meaner than I intend it to be.)
LivingSocial's business, though, changes over time, and is worth discussing from time to time. Down rounds are always interesting to me. The decreasing margin in the deals business is interesting to me. That LS still apparently plans an IPO, in the face of a fairly brutal down round is interesting to me. That they think they can be worth $1B is interesting. (As is the current valuation when you read between the lines). The sliding liquidation preference is whole discussion unto itself. But yes, it's a pretty well trodden topic when reduced to "LS's business model is flawed". So I'm guilty there.
He can't say "Groupon?" Seriously?
(I think that mind-share being important is a sign you are in a risky business, but that's neither here nor there.)
Their operating expenses are about $1.4 Billion/year (Revenue + Operating loss = about $1.4 Billion they spend a year). That's $120 Million a month. $4 million a day. THEY WERE DOWN TO JUST 7 DAYS OF CASH! How is that NOT the very definition of a "distressed financing" situation? T
hey were down to a dangerously low level of cash and regardless of the financing terms or structured as technically debt or technically equity, that yes this was a distressed financing situation.
A lot of successful innovation today is about eliminating middlemen. Local deals companies do just the opposite. They are a new middleman that tries to cut a large percentage from local businesses income. I don't think this is sustainable.
Well, not in any simple sense since apparently LivingSocial is not public yet. But a short position on a related company?
While it might be theoretically possible to short something using a company like SecondMarket, the prevailing wisdom is that if it's not public it's probably not being shorted.
The letter was full of possible half-truths(eg: 'There is no "4x liquidation preference"' does not preclude 3x or 5x or any other number besides 4), so smart employees should be looking until they see the docs.
I chose a phrase as an example (hence the abbrev "eg"): You chose a different phrase.
If you want to instead parse the phrase you chose for half-truths, we can do that. It will not change the substance that there is all sorts of potential for half-truths.