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On Grouponzi

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Re: On Grouponzi

#31

Post by pbreit »

I worry about Groupon but not for the reasons here. Regarding the financials, it could easily ratchet down acquisition and marketing spend and be very profitable. The barriers to entry arguments are very superficial. Sure, just programming a competing service and closing a few merchants is not that hard. But building an 8 figure mailing list is not easy. Finally, some suspected and I'm inclined to agree that the otherwise ridiculous payoff of early investors and employees might be explainable as necessary to turn down the Google offer.

My main concern about Groupon is the core proposition may not actually work in the long term. There are all sorts of problems with fatigue, inherently cheapskate customers, high rates of existing customers, worsening economics, etc.

Re: On Grouponzi

#32

Post by edanm »

po wrote: post #30

Yes, the amount of money they’re spending on customer acquisition and retention is absolutely insane. (And the amount owed to merchants is especially troubling.) But look at what they’re up against. Pretty much single major player is now coming directly at them — including the company that tried to buy them for several billion and was turned down, Google. Facebook is charging fast too. LivingSocial. Etc. They need to…

"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."

It's not one argument or the other - that's a false dichotomy. It could be that, right now they're still vulnerable, but are doing what needs to be done to build their "defensible moat".

And in fact, this makes perfect sense. They're a very young business, they're spending a lot of money building their economic fortress. The fact that they aren't profitable is surprising, but for such a young company not too surprising.

"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."

I agree, but I'm not sure I get this argument. Isn't this something that the investors decide? I mean, it's not like the founders were duping anyone. They went up to some VCs, asked them to buy a big portion of their shares, and the VCs agreed (after thoroughly looking at the numbers, I might add). The investors seemed fine with it and considered it a good investment nonetheless, so what does it prove? Nobody was duped here.

I think the only difference between what's happening now with Groupon and what usually happens with small startups is the scale of money involved. Groupon is similar to other young companies, but a lot more money happens to be involved.

Re: On Grouponzi

#33

Post by Super_Jambo »

stevenj wrote: post #26

This may not apply to this market, but I think it's still insightful: "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…

I think it all comes down to how effectively branding and marketing have destroyed the EMH. Airplane tickets are fungible they're easy to compare on price. They're also expensive enough that people take the time to shop around. However because of the regulators no brand of airline is unsafe.

Buying an expensive branded cereal is probably not a completely rational action IF you could identify equally good no-brand cereals you'd save money. But certainly in the west the cost is such a small part of most peoples spending that they don't bother.

Re: On Grouponzi

#34

Post by po »

edanm wrote: post #32
po wrote: post #30

Yes, the amount of money they’re spending on customer acquisition and retention is absolutely insane. (And the amount owed to merchants is especially troubling.) But look at what they’re up against. Pretty much single major player is now coming directly at them — including the company that tried to buy them for several billion and was turned down, Google. Facebook is charging fast too. LivingSocial. Etc. They need to…

"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." It's not one argument or the other - that's a false dichotomy. It could be that, right now they're still vulnerable, but are doing what needs to b…

They're a very young business, they're spending a lot of money building their economic fortress. The fact that they aren't profitable is surprising, but for such a young company not too surprising.

Ok, I'll give you that. Maybe this is money well spent. I think you will see arguments both way on this one. I personally don't think it is.

Isn't this something that the investors decide? I mean, it's not like the founders were duping anyone.

Even if you tell the public, "Full disclosure: I'm running a ponzi scheme, you want in?" it's still illegal.

The scale of money is disconcerting but the actual behavior that is being rewarded is what concerns me. If fully appreciate that I might be wrong here, but I need to hear a better explanation of why I'm wrong.

Re: On Grouponzi

#35

Post by cageface »

tptacek wrote: post #20
antiscam wrote: post #19

Earlier quoted context omitted.

It wouldn't be right to assume that because Google has many smart people, everything they do as a result is smart. Google is hardly an innovative company anymore. In fact, they seem mostly to be coasting on existing models and paying lots of people mostly just so that they don't work for existing and potential competitors.

I think this is a fallacy stemming from the fact that Google's initial products were so unbelievably successful and important that they are likely to be permanently hard to top. I do not agree with you that Google is no longer innovative, and I particularly disagree with the notion that they are so uninnovative that they'd believe they lack the technological prowess to compete with Groupon.

Google search and gmail are hard to top, certainly, but their product prowess doesn't seem to be scaling with their engineering resources at all.

Re: On Grouponzi

#36

Post by edanm »

po wrote: post #34
edanm wrote: post #32

Earlier quoted context omitted.

"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." It's not one argument or the other - that's a false dichotomy. It could be that, right now they're still vulnerable, but are doing what needs to b…

They're a very young business, they're spending a lot of money building their economic fortress. The fact that they aren't profitable is surprising, but for such a young company not too surprising. Ok, I'll give you that. Maybe this is money well spent. I think you will see arguments both way on this one. I personally don't think it is. Isn't this something that the investors decide? I mean, it's not like the founder…

I'll be honest, I'm probably much less qualified than you to say whether their money is being well spent. I'm just betting that the investors, who are pretty savvy, do know whether their financials are good. Of course, you're suggesting that the investors are in this because they believe future investors will pay them back, and so on, but I think the people investing in Groupon are doing so for solid reasons.

'Even if you tell the public, "Full disclosure: I'm running a ponzi scheme, you want in?" it's still illegal.'

Someone mentioned in another comment that a Ponzi scheme, by definition, means that people don't know it's a ponzi scheme. The commenter contrasted this to a pyramid scheme, where everyone can know. Is that true?

In any case, I thought it worthwhile to copy this form Wikipedia:

"A bubble: A bubble is similar to a Ponzi scheme in that one participant gets paid by contributions from a subsequent participant (until inevitable collapse), but it is not the same as a Ponzi scheme. A bubble involves ever-rising prices in an open market (for example stock, housing, or tulip bulbs) where prices rise because buyers bid more because prices are rising. Bubbles are often said to be based on the "greater fool" theory. As with the Ponzi scheme, the price exceeds the intrinsic value of the item, but unlike the Ponzi scheme, there is no person misrepresenting the intrinsic value. With the greater fool theory in mind, some may invest even though they believe the securities are overpriced due to a bubble."

In other words, the only thing that really changes between a Ponzi/Pyramid scheme and a bubble, is that investors think there is actually something of value underlying the investments. Obviously, many people disagree, but I'm not sure that we shouldn't give savvy investors the benefit of the doubt. Especially investors who have a lot more access to proprietary information, and who have had a lot more time to look over Groupon's terms.

* Note: I wrote a lot of things about the definition of a Ponzi scheme which are probably obvious to you. But I'm just now, with all this talk, starting to dig into what these mean exactly, so all of this is new to me.

Re: On Grouponzi

#37

Post by _delirium »

sgdesign wrote: post #25

"You cannot overlook the fact that they’re also making hundreds of millions of dollars each quarter now" I don't understand this "oh but they're making $4 billion so they must be a great company!" argument. If my business plan is to pay people $2 and have them give me $1 back, I could also make $4 billion (and I'd be loosing $4 billion in the process, but that's just "marketing expenses"…).

It's not the usual use of the term "making money" in business, either. If you run a restaurant that has $5m in expenses, and $5.5m in revenues, you're making $500k, not $5.5m.

Re: On Grouponzi

#38

Post by tptacek »

lotusleaf1987 wrote: post #29
tptacek wrote: post #17

Earlier quoted context omitted.

That's a little weasely, because the people calling Groupon a Ponzi scheme tend to talk about how minimal their competitive advantage and technological "moat" is. Google can build stuff. Why'd they try to buy this?

Simple, Google is worried Groupon theoretically could get a huge share of local advertising like they were with Yelp. Google isn't infallible, they are mortal. I think most likely they were willing to overpay because they could afford it and are desperate to get into "social". Also, Groupon is a ponzi scheme because they use new investor money to pay old investors--not because they don't have a moat, which they dont-…

The new investor money was overtly premised on paying old investors. The new investors were buying the risk from the old investors, who had just been asked to turn down $6bn. I think you're oversimplifying a bit.

Re: On Grouponzi

#39

Post by ssharp »

In reference to this part:

"Yes, the amount of money they’re spending on customer acquisition and retention is absolutely insane. (And the amount owed to merchants is especially troubling.) But look at what they’re up against. Pretty much single major player is now coming directly at them — including the company that tried to buy them for several billion and was turned down, Google."

Wouldn't a proper business model dictate just about the opposite? When trying to build a profitable customer base, you should focus on keeping customer acquisition costs DOWN, not spending 3x revenue on it. For example, Super Bowl ads just don't seem like an appropriate way to spend money for them right now.

This is nearly identical to what happened in the last dot com crash. Sure, Groupon does have significant revenues, but they haven't proved (to me anyway) that these revenues are sustainable without their massive expenditures.

We've heard numerous times that Groupon considers its sales force to be a major asset, partially justifying its valuation and forthcoming IPO. Maybe. However, unless that sales force proves to be a strategic asset to a customer-facing feature, whether it be cheaper or more interesting deals than the competition, I don't see a multi-billion dollar value there.

Re: On Grouponzi

#40

Post by ceejayoz »

christopherslee wrote: post #7

I'm pretty sure there are "Groupon for X" companies in YC. So clearly people see that there is money to be made. I'm not exactly sure why everyone is hating on Groupon. Why not hate on Zynga for coping other games? Why not hate on Linked In's 500 P/E IPO that has already lost 25% off it's high? The daily deal marketplace may not end up being a winner-take all market. But will having the biggest subscriber list give G…

> Why not hate on Zynga for coping other games?

This is quite common.

> Why not hate on Linked In's 500 P/E IPO that has already lost 25% off it's high?

This too.

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