On Grouponzi

It is usually easier to modify working code than to write something from scratch, if my suspicion is right, I expect Google will launch its own Groupon-like service integrated into its other offerings eventually.

"Here's a model that we've had trouble with. Maybe you'll be able to figure it out better. Many markets get down to two or three big competitors—or five or six. And in some of those markets, nobody makes any money to speak of. But in others, everybody does very well.

Over the years, we've tried to figure out why the competition in some markets gets sort of rational from the investor's point of view so that the shareholders do well, and in other markets, there's destructive competition that destroys shareholder wealth.

If it's a pure commodity like airline seats, you can understand why no one makes any money. As we sit here, just think of what airlines have given to the world—safe travel, greater experience, time with your loved ones, you name it. Yet, the net amount of money that's been made by the shareholders of airlines since Kitty Hawk, is now a negative figure—a substantial negative figure. Competition was so intense that, once it was unleashed by deregulation, it ravaged shareholder wealth in the airline business.

Yet, in other fields—like cereals, for example—almost all the big boys make out. If you're some kind of a medium grade cereal maker, you might make 15% on your capital. And if you're really good, you might make 40%. But why are cereals so profitable—despite the fact that it looks to me like they're competing like crazy with promotions, coupons and everything else? I don't fully understand it.

Obviously, there's a brand identity factor in cereals that doesn't exist in airlines. That must be the main factor that accounts for it.

And maybe the cereal makers by and large have learned to be less crazy about fighting for market share—because if you get even one person who's hell-bent on gaining market share.... For example, if I were Kellogg and I decided that I had to have 60% of the market, I think I could take most of the profit out of cereals. I'd ruin Kellogg in the process. But I think I could do it.

In some businesses, the participants behave like a demented Kellogg. In other businesses, they don't. Unfortunately, I do not have a perfect model for predicting how that's going to happen.

For example, if you look around at bottler markets, you'll find many markets where bottlers of Pepsi and Coke both make a lot of money and many others where they destroy most of the profitability of the two franchises. That must get down to the peculiarities of individual adjustment to market capitalism. I think you'd have to know the people involved to fully understand what was happening."

-Charlie Munger

http://ycombinator.com/munger.html

They need to get out in front of this. And that’s what they’re trying to do.

If your explanation for why they are losing money is that they're doing what needs to be done then that's fine, but you're forfeiting the 'defensible moat' argument. They're losing money because a bunch of established businesses could come in and take over if they don't. That part doesn't make them a ponzi scheme but it does make it a bad business to be in.

The part that makes it a ponzi scheme is that they are now seeking more investors even though the vast majority of the money from the last few rounds went to earlier investors. That's pretty much the dictionary definition of a ponzi scheme:

A Ponzi scheme is a fraudulent investment operation that pays returns to separate investors, not from any actual profit earned by the organization, but from their own money or money paid by subsequent investors http://en.wikipedia.org/wiki/Ponzi_scheme

There is nothing wrong with taking some money off the table so the early investors/employees aren't operating under undue risk, but the scale of cash-out at Groupon is more than a bit fishy.

edit: As a side-note the actual original Ponzi scheme was supposed to be profitable through arbitrage of buying and selling Postal coupons: http://en.wikipedia.org/wiki/International_reply_coupon