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The Fall of Groupon: Is the Daily-Deals Site Running Out of Cash?

theatlantic.com

31–40 of 77 posts

Re: The Fall of Groupon: Is the Daily-Deals Site Running Out of Cash?

#31

Well its a good thing $810M of their $946M round paid out the founders and early investors. Now no one but the late round VC's and the 5000 employees get stuck holding the bag if this thing implodes. This is the problem with those early payouts (I don't mind these in theory but this case was egregious). There's not a lot of incentive anymore for the people running the company to do anything but what they're currently…

100% correct and it really makes me wonder what the late round VCs were thinking. The only I can come up with is pure greed - willing to take an enormous risk for future IPO (above and beyond typical VC risk)

Well, If we're wildly speculating, we could also imagine kick-backs and money laundering.

I know nothing of Groupon's financing. I know Digital Sky was a large, late investor in Facebook. And they are controlled by a Russian oligarch.

Wealthy criminals are sometimes willing to invest in unprofitable businesses to launder money, buy influence and hope that a bigger fool will follow them.

Re: The Fall of Groupon: Is the Daily-Deals Site Running Out of Cash?

#32
post #18

The problem with all of these analysises is that they focus on rather meaningless things. Lots of companies operate with bigger debt than assets, as long you have incoming cash you can just get a bridging loan against it. What profitability comes down to is what the lifetime value of a user (in this case we have two types of users, consumers and providers) is and the cost of acquiring a user. Nothing else really matt…

Cash flow management is really important to the long term. Actually, if you run out of money in the short term, there is no long term at all...

Re: The Fall of Groupon: Is the Daily-Deals Site Running Out of Cash?

#33
post #28

Earlier quoted context omitted.

I don't understand, from Blodget: ". "As of June 30, Groupon had $680 million in current liabilities -- bills the company has to pay,".... "Meanwhile, Groupon only had $376 million of current assets with which to pay them." " If they pay their merchants faster, where would they get the money? I just checked at Wikipedia, and, "A Ponzi scheme is a fraudulent investment operation that pays returns to separate investors…

Calling this a ponzi scheme is a mistake. If you consider coupons merchandise and Groupon getting net 60 day terms it's just like any other retailer.

No, paying off earlier investors with later investor's money is a Ponzi scheme.

Re: The Fall of Groupon: Is the Daily-Deals Site Running Out of Cash?

#34
The competition for most outlandish criticism of Groupon is getting really boring. All of these articles ignore the same basic facts.

Groupon is spending a huge amount on customer acquisition. They've stated numerous times that this is a short-term competitive play, to try to create as much of an advantage as possible to counteract the dozens of clones by building up their brand awareness and subscriber list. The idea that they are a ponzi scheme or the next Madoff because they are choosing a fast-growth strategy is absurd. I might disagree that this is a smarter strategy than growing more slowly, but this doesn't prove that they're insolvent or something. Existing customers don't stop spending after one purchase, so the idea that they have to spend on acquisition in order to make money to cover operating costs is nonsense. They have total control over how much they spend on customer acquisition, and at a certain point will have to slow down. Again, you can disagree with their strategy, but there's no scam here.

Likewise, there is no evidence that any majority of businesses who work with Groupon, or customers who purchase Groupons, are overwhelmingly dissatisfied with the value they get. Tons of business still agree to run groupons every day, including businesses that have run groupons many times. Obviously, it's not a great experience for everyone, and I'm not even arguing that in the long term this model will do well. But to say that Groupon doesn't do anything or provides no value just isn't backed up by any credible evidence, at least that's been present in all these threads.

Boston is not Groupon's oldest or largest market. And the numbers in that article are to be expected, and aren't really "troubling" as the BI article's source states. Groupon is spending money to acquire more subscribers because the initial trove of low-hanging fruit has already been acquired. They're trying to keep a big market from rival companies, so they're going after people who are more difficult to acquire (and obviously therefor less likely to spend). Anyone who expects these more difficult acquisitions to spend the same amount per user as people who found their way to Groupon more easily is ridiculous.

I'm not arguing that Groupon isn't overvalued, or that their model doesn't have problems. But the arguments that Groupon is a scam or not a real business or that they're going to have to close up shop any day now range from unsophisticated to dishonest.

Re: The Fall of Groupon: Is the Daily-Deals Site Running Out of Cash?

#35
post #18

The problem with all of these analysises is that they focus on rather meaningless things. Lots of companies operate with bigger debt than assets, as long you have incoming cash you can just get a bridging loan against it. What profitability comes down to is what the lifetime value of a user (in this case we have two types of users, consumers and providers) is and the cost of acquiring a user. Nothing else really matt…

Lots of companies operate with bigger debt than assets, as long you have incoming cash you can just get a bridging loan against it. Thats not the problem. The problem is greater expenditures then income. Very few companies survive long in this position.

They aren't planning to operate with greater expenditures for long, as they've stated. The plan is fast-growth in order to compete with clones to establish market dominance, and then to drastically cut back the marketing expenses.

Re: The Fall of Groupon: Is the Daily-Deals Site Running Out of Cash?

#37

The competition for most outlandish criticism of Groupon is getting really boring. All of these articles ignore the same basic facts. Groupon is spending a huge amount on customer acquisition. They've stated numerous times that this is a short-term competitive play, to try to create as much of an advantage as possible to counteract the dozens of clones by building up their brand awareness and subscriber list. The ide…

Why is a good post like this downvoted? I know HNers tend to disagree but the sentiment is for the most part spot on. Groupon is not a ponzi scheme. It operates like any other business that buys from vendors on net 60 terms. It can obviously dial down on acquisition spending and be left with a fabulously valuable asset of 100+ million opted-in subscribers/accounts. A list that it can market to very inexpensively.

Re: The Fall of Groupon: Is the Daily-Deals Site Running Out of Cash?

#38
post #14

Earlier quoted context omitted.

Groupon's cash flow is just like any other business: it buys merchandise (coupons) from vendors (on a net 60 basis), marks it up and sells it to consumers. How is that a ponzi scheme? I think you might be confused since many news outlets are making it sound like today's Groupon buyer's are funding yesterday's vendors in some sort of mischievous way. But that's how all businesses work.

The Ponzi scheme allegation isn't about the cash flow model, it's about the investment return model: Groupon used money from the late investors to pay back the first ones with a profit, even if for now their business is losing money - and it isn't clear if they will start making real money from their business model. Or at least enough money to make the total investment worthwhile.

I've typically seen "ponzi" referencing Groupon's business model, not it's financing activity. Having a late stage investor payoff earlier investors/shareholders is not uncommon. IPO investors then payoff those investors and so forth. Is that what you mean?

Re: The Fall of Groupon: Is the Daily-Deals Site Running Out of Cash?

#39
post #33
post #28

Earlier quoted context omitted.

Calling this a ponzi scheme is a mistake. If you consider coupons merchandise and Groupon getting net 60 day terms it's just like any other retailer.

No, paying off earlier investors with later investor's money is a Ponzi scheme.

Are you referring to the last funding round where a portion of the financing went to shareholders? That's not uncommon and I'm not really sure where you would draw the line. There's a buyer and seller on every stock transaction.

Re: The Fall of Groupon: Is the Daily-Deals Site Running Out of Cash?

#40
post #14
post #2

it's increasingly clear that groupon is essentially a ponzi scheme with some graphic design. can't wait for the post mortem documentary a la "the smartest guys in the room".

Groupon's cash flow is just like any other business: it buys merchandise (coupons) from vendors (on a net 60 basis), marks it up and sells it to consumers. How is that a ponzi scheme? I think you might be confused since many news outlets are making it sound like today's Groupon buyer's are funding yesterday's vendors in some sort of mischievous way. But that's how all businesses work.

if groupon is losing money on every customer, adding more customers actually exacerbates the cash flow problem, and every time those customers buy a deal, groupon goes farther in the hole. they use the cash to pay their oldest debts but eventually there will be a reckoning.

it's unfathomable to me that it would be an attractive investment.

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