The founders and early stage investors build something semi-viable, then spend all their efforts on marketing. Some of helps to grow the product, but most to convince bigger investors to buy them out and assume the risk.
Why on earth would investors do this, you ask? Well, because they know that given the marketing, there will be other investors that will allow them to exit.
Repeat until IPO, then ride the wave until the explosion. Time it right you make a fortune.
Unfortunately, a minimum of effort goes into creating a lasting product with a proper valuation, so the moment that most investors realize that they aren't going to make their money back, ka-boom.
Dot bomb all over again. Groupon is not a billion dollar company.
I know nothing special about Groupon but this does look really bad.
It's akin to finding a greater fool down the road to leave the bag with. Normally that wouldn't bother me too much but given that they're going public the last fool who ends up holding the back may be your average, every day investor.
Maybe they'll put their personal money in it. Maybe the company managing their retirement account will buy it. Either way, it'll be out there in the public for less sophisticated investors to buy.
And, given that they've used such a high percentage of their latter investments to pay out early investors, always always looks bad. It shows low confidence in the company in the long run.
I think it would be wise to stay clear of Groupon.
When people saw Groupon, Twitter and Facebook taking those huge rounds did everyone think they were going to invest back in the business? I'm pretty sure most thought that founders and early investors were taking money off the table.
Though, the degree to which Groupon did is amazing. I can't believe any investor would have agreed to those terms. In the Groupon case as well, with 3000+ employees (which is, frankly insane), I don't know how anyone looking at the numbers, the terms, the business and the structure would have agreed to invest. Marketing be damned, unless someone blows this up it won't make money.
I'll never understand why they turned down $6B from Google.
The investors are tasked with making money. The investors are going to have made a lot of money after the IPO. It doesn't matter much to them whether the Groupon CEO took their money and rolled it up and lit it to make a really awesome bonfire, if the investors put in $1 billion and get back $10 billion they're happy. That's why they allowed it, and it's also why they turned down $6b. They're all acting in accordance with their financial incentives.
There's a big difference between private trading of already-issued shares and purchasing newly-issued shares. With the former, you know it's not going back into the company. With the later, the presumption should be that the money is being used to grow the business.
Nearly every investment agreement has a "how will this money be used?" section, and I can't believe a fund would give hundreds of millions of dollars to a company that was explicitly going to be put it to founders' pockets, unless they too are in on the scheme and are hoping for a quick flip.
They probably realized that Google would see through their scheme during due diligence. The investment banks that IPO'ed them, on the other hand, only made a big commission...
It is completely insane how much investor money went to founders and not the company in both the G round and the previous round. How could investors agree to that? Kudos to Mason & Co. for getting out while the going was good.
I remember reading a pretty nasty article about Eric Lefkosky.
"InnerWorkings goes to great lengths to obscure its ownership and control by a chap named Eric P. Lefkofsky who has a history of busting investors after promising to radically transform bricks-and-mortar industries. He seems to identify with Dr. Seuss's huckster: he called his last business Starbelly.com, a venture that rapidly went into bankruptcy and provoked fraud suits by investors alleging that Starbelly's software was never what Lefkofsky promised. "
One of the differences between now and the last dot com bubble is that these days, founders and early stage investors get their big paybacks before the IPO so have even more incentive to pump up unsustainable business models.
Yes, it is the one from 37 signals. He was on their board now an advisor.
It looks like he already made $557,721 by selling some stock during Series G. I think that left him with 414,690 shares worth at least $6.5 million and probably a multiple of that by the time he can sell them. I could be reading this incorrectly though.
He might end up making more off a dozen board meetings than 10 years of hard work at 37 signals. It's a crazy world.
Andrew Mason was fairly explicit that taking a recent huge round was designed to "permanently solve the money problem":
(from the article linked below)
“For me, the reason to do this was to solve a binary life problem,” he explained.
In life, Andrew says, “You either have enough [money] or you don’t.”
“When people came with a lot of money to buy a very small percentage of Groupon and it was enough to permanently solve the money problem, why would I not want to do that?
Depends on your goal. If I own half of a maybe-fad company that is currently worth $1 billion, you can bet I am reducing my exposure to that and converting a lot of my ownership to other assets if I have the chance.
Isn't this a fairly common practice? Admittedly, Groupon's enormous employee base means they're going to burn through the remaining funds faster than an ordinary startup. Aside from that, this doesn't seem all that outrageous, at least not outrageous enough for the overall level of indignation in the comments here (accusations of it being a pyramid scheme, etc.).
I don't think it's that common for equity to be massively cashed out (to the tune of nearly $1b) before the IPO. Shows a pretty strong lack of confidence in not only the long-term viability of the business, but even its medium-term viability, or else the principals would be content with the normal practice of slowly cashing out with steady monthly post-IPO stock sales. As far as I can find, Google principals didn't significantly cash out before their IPO.
BUT ... other than those who directly benefit, who else would invest in something that might never pay a decent return on investment ???? To me it looks like throwing piles of $100 notes on a bonfire, nice flames, lovely crinkling sound.
Contrast this with what a bootstrapped business does with all its money:
After the inventory sold, it was a matter of repeating the process. “You take all the money you make and buy more inventory with it,” Seidle says. “You continue to do this until either you have enough inventory to cover the number of incoming orders or you want to eat. I think it was more than 3 years before I was able to buy a new winter jacket. A growing, bootstrapped business is a cash devouring machine.”
He didn't get shafted; he still owns a very significant portion of the business. He simply didn't take as much out with this round as others may have. He will have his payday, and it will make these others seem like chump change...
Google has the same thing. Larry, Sergey, Eric all have shares that carry 10x the votes of regular Class A shares so they can still exercise control if their holdings fall below 50%.
[+] [-] run4yourlives|15 years ago|reply
The founders and early stage investors build something semi-viable, then spend all their efforts on marketing. Some of helps to grow the product, but most to convince bigger investors to buy them out and assume the risk.
Why on earth would investors do this, you ask? Well, because they know that given the marketing, there will be other investors that will allow them to exit.
Repeat until IPO, then ride the wave until the explosion. Time it right you make a fortune.
Unfortunately, a minimum of effort goes into creating a lasting product with a proper valuation, so the moment that most investors realize that they aren't going to make their money back, ka-boom.
Dot bomb all over again. Groupon is not a billion dollar company.
[+] [-] freshfunk|15 years ago|reply
It's akin to finding a greater fool down the road to leave the bag with. Normally that wouldn't bother me too much but given that they're going public the last fool who ends up holding the back may be your average, every day investor.
Maybe they'll put their personal money in it. Maybe the company managing their retirement account will buy it. Either way, it'll be out there in the public for less sophisticated investors to buy.
And, given that they've used such a high percentage of their latter investments to pay out early investors, always always looks bad. It shows low confidence in the company in the long run.
I think it would be wise to stay clear of Groupon.
[+] [-] bcrescimanno|15 years ago|reply
[+] [-] narrator|15 years ago|reply
http://www.theonion.com/articles/recessionplagued-nation-dem...
[+] [-] jcmrgo|15 years ago|reply
About your comment on the way founders 'produce' with the only purpose of raising capital instead of building a lasting product, I agree.
[+] [-] ig1|15 years ago|reply
That's more than the combined revenue of Facebook, Twitter and Linkedin last year (which were around $2.5 billion).
Groupon is a huge revenue machine, like it or not they are clearly a billion dollar company in an enormous untapped market.
[+] [-] DanielRibeiro|15 years ago|reply
[+] [-] unknown|15 years ago|reply
[deleted]
[+] [-] fingerprinter|15 years ago|reply
Though, the degree to which Groupon did is amazing. I can't believe any investor would have agreed to those terms. In the Groupon case as well, with 3000+ employees (which is, frankly insane), I don't know how anyone looking at the numbers, the terms, the business and the structure would have agreed to invest. Marketing be damned, unless someone blows this up it won't make money.
I'll never understand why they turned down $6B from Google.
[+] [-] marcamillion|15 years ago|reply
With all the frothiness happening now, it actually makes sense - because they are doing the fiduciary responsible thing for their shareholders.
[+] [-] akronim|15 years ago|reply
[+] [-] hnsmurf|15 years ago|reply
[+] [-] omfut|15 years ago|reply
[+] [-] edw|15 years ago|reply
Nearly every investment agreement has a "how will this money be used?" section, and I can't believe a fund would give hundreds of millions of dollars to a company that was explicitly going to be put it to founders' pockets, unless they too are in on the scheme and are hoping for a quick flip.
[+] [-] webmat|15 years ago|reply
[+] [-] pbreit|15 years ago|reply
[+] [-] far33d|15 years ago|reply
[+] [-] maxdemarzi|15 years ago|reply
"InnerWorkings goes to great lengths to obscure its ownership and control by a chap named Eric P. Lefkofsky who has a history of busting investors after promising to radically transform bricks-and-mortar industries. He seems to identify with Dr. Seuss's huckster: he called his last business Starbelly.com, a venture that rapidly went into bankruptcy and provoked fraud suits by investors alleging that Starbelly's software was never what Lefkofsky promised. "
http://notablecalls1.blogspot.com/2007/01/inner-workings-of-...
[+] [-] jdp23|15 years ago|reply
[+] [-] ojbyrne|15 years ago|reply
[+] [-] staunch|15 years ago|reply
It looks like he already made $557,721 by selling some stock during Series G. I think that left him with 414,690 shares worth at least $6.5 million and probably a multiple of that by the time he can sell them. I could be reading this incorrectly though.
He might end up making more off a dozen board meetings than 10 years of hard work at 37 signals. It's a crazy world.
[+] [-] jaxn|15 years ago|reply
[+] [-] antidaily|15 years ago|reply
[+] [-] unknown|15 years ago|reply
[deleted]
[+] [-] kanamekun|15 years ago|reply
Andrew Mason was fairly explicit that taking a recent huge round was designed to "permanently solve the money problem":
(from the article linked below)
“For me, the reason to do this was to solve a binary life problem,” he explained.
In life, Andrew says, “You either have enough [money] or you don’t.”
“When people came with a lot of money to buy a very small percentage of Groupon and it was enough to permanently solve the money problem, why would I not want to do that?
“Now I can focus on making Groupon great.”
http://blogs.forbes.com/velocity/2010/04/19/groupon-ceo-andr...
[+] [-] MatthewB|15 years ago|reply
[+] [-] jamesaguilar|15 years ago|reply
[+] [-] 9999|15 years ago|reply
[+] [-] _delirium|15 years ago|reply
[+] [-] CyberFonic|15 years ago|reply
BUT ... other than those who directly benefit, who else would invest in something that might never pay a decent return on investment ???? To me it looks like throwing piles of $100 notes on a bonfire, nice flames, lovely crinkling sound.
[+] [-] revorad|15 years ago|reply
After the inventory sold, it was a matter of repeating the process. “You take all the money you make and buy more inventory with it,” Seidle says. “You continue to do this until either you have enough inventory to cover the number of incoming orders or you want to eat. I think it was more than 3 years before I was able to buy a new winter jacket. A growing, bootstrapped business is a cash devouring machine.”
From the Sparkfun founder Nathan Seidle's interview - http://37signals.com/svn/posts/2896-bootstrapped-profitable-...
[+] [-] marcamillion|15 years ago|reply
He got 10M from the 950M raised. That just seems wrong. Lefkowsky & his wife got at least $310M.
Wow....talk about being shafted.
[+] [-] fido|15 years ago|reply
[+] [-] hessenwolf|15 years ago|reply
Why the hell would I buy into the company and still not own it?
[+] [-] stewiecat|15 years ago|reply
[+] [-] ariels|15 years ago|reply
[+] [-] Vencent|15 years ago|reply
[deleted]
[+] [-] theklub|15 years ago|reply
[+] [-] ChuckMcM|15 years ago|reply
I like GroupOn's concept but I share the sentiment that some of the folks in the inner circle are taking advantage.