Why Groupon Is Poised For Collapse

The bottom line is I have yet to hear Groupon share any metrics with the public on how much their product is, you know, actually successful. Regardless of the reason, be it that they can't measure it, or, more sinisterly, don't want to share it, you have to assume their business sucks or elthey're incompetent or else they'd be trumpeting the upside for businesses everywhere.

As sensational as your statement is, it has absolutely no relevance to the analysis of Groupon as a business.

Groupon believes they have a reliable fix on the Customer Lifetime Value. Some very smart investors who have done _actual_ analysis of Groupon (including the team that did due diligence for Google when they made the buyout offer earlier this year) clearly have at least some faith in these CLV numbers.

All of the "armchair analysis" you see here -- including your opinion on the subject -- is looking at a snapshot of Groupon from their S1 backward. That's fine but if you want to leave pro forma out of it, but then quit making pro forma statements about the failure and decay of the business!

All businesses are a money-multiplier machine, right? What you're complaining of is that by your analysis, that multiplier for Groupon is 0.72. Not a very good money machine at all really.

Suppose that when you factor in the CLV, that multiplier falls into the range you'd expect from a company that has low variable product costs and a large sales team: 1.21.

If you run that company, once you have enough data to really believe in the efficacy of those numbers, then you're going to do everything you can to purchase as many customers as possible. And if you're an investor, you're going to encourage management to do just that.

I mean, this is the very handbook on non-seed startup investing. Find a profitable CLV model, and scale it out.

But I'll give you this: you did a good job creating some outrageous, tongue-wagging scenarios.

I don't think it's too outrageous a scenario in response to a claim that Groupon is interesting because it's "become the fastest growing company by revenue in history". The point is that becoming the fastest-growing company by revenue in history is not an independent accomplishment, because all it takes to do that is a large amount of money and a willingness to burn it. It is a measure of their ability to attract funding that can support spending, but not an independent measure of success, since, given sufficient funding, you can always buy revenue, e.g. by selling $100 bills for $50. To show that Groupon is more interesting than the money-burning scenario requires some metric other than revenue or revenue growth.

take another look at that recipt.

1. veggie scramble: at costco, you can get a 50 pack of eggs for less than ten bucks. round up and call it ten cents worth of stuff. Veggies aren't free, but they are pretty cheap in bulk.

2. bagel with cream cheese: at costco, I think it's two dozen bagels for five bucks. round up and call it a quarter. Cream cheese in the giant tubs is similarly cheap, call it another quarter.

3. o.j. I don't know the bulk price for O.J, but I know I can get a flat of cans of o.j. for fifty cents per.

4. Coke. figure a quarter. (I can get a can of coke in a flat for about that, I figure there are some savings using a fountan. call it a quarter for two glasses of diet coke syrup.)

so we're at a buck thirty five in materials at costco prices. Of course, you have to pay the rent, and you have to pay some kid to assemble it, you have to pay for insurance, etc... but as a business owner, I'm not going to go with groupon unless I'm in a situation where I've overinvested in fixed costs.

I mean, renting buildings isn't like spinning up a cloud server; Usually, you've gotta sign a multi-year lease, and usually you've gotta pay for expensive cooking equipment; equipment that costs you the same regardless of usage.

Employees are a little bit more flexible, but there is a training period. New people provide negative productivity for a time, and if you don't give your old people enough hours, or if you jerk them around on what hours they work too much, your people who are good enough to get work elsewhere will do so.

Further, I think most valuations of groupon are assuming that groupon will provide some 'this deal only good during the less busy times' solutions. If I'm paying all my fixed costs and the building and employees are idle, the marginal cost of another customer is not very much more than the cost of the food, and in this case, the cost of the food isn't much at all. Heck, I know times in my business when I overbought capacity when it would have made sense to take a 75% price cut to move product and salvage something from the situation, rather than just paying for capacity I wasn't using.

Now, personally, I still think the groupon is massively over valued. I'm just saying, it's not any more massively over valued than linkedin or facebook. All of these companies are being evaluated in unrealistically favorable light; I think if you shine that same light on groupon, it looks pretty goddamn good.

What I find scary about the groupon hate is that a lot of it seems to be because the founders cashed out early; this means that cashing out early will be more difficult for founders the next time around.

And it's not even the founders who cashed out early, it's the investors! Andrew Mason only cashed out $10m, which is probably under 1% of his stake in the company.