As a Silicon Valley native currently living in Chicago, I've always found it disappointing that Groupon is the poster child of innovation and entrepreneurship in Chicago. They seem to lack a solid business plan and have a history of deliberately misleading investors and businesses. Far more impressive companies, such as 37signals or GrubHub, are based here that deserve that kind of attention instead.
I very much doubt the legitimacy of this story, but I was in a barbershop a few weeks ago, where the owner told me about one of the Groupon executives who was in the shop earlier. He was saying we shouldn't expect Groupon to be around in 10 years because the company's plan is to collect as much cash as possible, fire everybody, and shut down, keeping the money for the investors. While I doubt a Groupon executive would have actually said that in a barbershop, I can believe that actually was their long-term plan, but if things keep up at their current rate, I'm not sure if Groupon will even last that long.
(Seemingly) explosive growth garners much attention, it's human nature. Tech 'reporters' Techcrunch, VentureBeat, Mashable, etc, like a good story.
Maybe I'm naive, but it seems like there's always been this question mark over their model being non-sustainable, and to those who are aware of 37Signals hold them in much higher esteem.
> He was saying we shouldn't expect Groupon to be around in 10 years because the company's plan is to collect as much cash as possible, fire everybody, and shut down, keeping the money for the investors.
Every bubble produces these, but usually the money is kept for the management-investors only. SCMR and Zhone from the tech bubble executed that plan spectacularly.
Groupon is the typical Chicago-based startup. After experiencing enough sleazy startups in the mold of Groupon, I decided I've had enough with Chicago. That type of business plan is typical of many Chicago startups.
The same investors behind Groupon are funding many other startups. They've got plenty more ponzi startups waiting in the wings.
The plan might be the most rational one I've heard regarding Groupon. Not the most moral strategy, but it's one that seems to factor in their vague value proposition.
I might disagree with you on that. I am not a GroupOn FAN but if that was their real intention, they would have sold the company to Google long back for $6 bn.
They should have unloaded this fraud on Google when there was a $6 billion cash offer sitting on the table (assuming that was true).
The fact that Google even offered that much leads me to believe that they have jumped the shark with that offer.
Anybody who knows anything about retail would have studied the business model and realized that this was not sustainable. Obvious red flags:
1. Heavy reliance on field sales (the largest expense), which is NOT scalable
2. Exclusive reliance on repeat sales as the key driver of sustainability: this being the obvious case, did Google not do its due diligence and actually surveyed past Groupon customers? Such a siimple survey would have easily revealed the issues of this "local deals" model.
3. Heavy reliance on "small business" owners as the driver of revenue. This is a sensitive and fickle market, where even slight movements in the general economy will cause huge moves in spending patterns.
These 3 points were readily available to anybody with some insight into this segment; Google with all its money must be surrounded by "yes" men, nothing else could explain it's willingness to part with $6 billion so quickly.
I'm not sure if they actually could have sold the company to google even if they wanted to. My understanding is that you must open your books to the prospective buyer after a certain stage and it is likely that once the google accountants had a look at Groupons books the deal would have fallen through.
That could have created negative press and damaged their pump-and-dump strategy for the IPO.
Why should they have sold for $6 billion? They're worth $9.6 billion today.
Groupon is not a bet on the coupons business--that doesn't justify the current valuation. Groupon is a bet that if you can reinvent the Yellow Pages, at scale and online, you can make a ridiculous amount of money. It's probably one of the largest companies around with such a high probability of failure, but their value if they end up being the winner in local is just staggering.
My perception is that these kinds of shareholder suits are trivial to file, and that they occur regularly any time the stock of any public company drops significantly after some event about them hits the news.
It would be interesting to see someone chart this.
(No comment about Groupon's long-term viability is being implied here).
Who would have imagined that groupon had a future? It worked on the novelty effect and it was doomed to fail.
On the other hand, Chicago business is full of bugs. Ghostery block 13 (!) calls to different websites such as: Quantcast, 24/7 real media, Outbrain etc... I won't visit this website again. I wish I was warned of that before hand not when I go to the website, I value my privacy more than going there.
The writing was also poor. The second paragraph starts saying "The first two lawsuits were filed..." without having given any context either in the headline or the first paragraph. The HN headline was better than the one at the site itself.
In theory, every "bargain" mechanism is doomed to failure as companies learn how to game it, returns diminish, and consumers fall out of favor with it.
Who would guess that there could be an integrity issue with a company that tried to invent new accounting rules where marketing costs don't appear on the balance sheet? You'd have a crystal ball or a brain to see this coming.
Marketing costs are not supposed to appear on balance sheet.
I don't really watch this company but if I remember correctly, their way of doing accounting was to show all received money from customers as income instead of liabilities since they were collecting half of it on behalf of vendors.
They were simply inflating their revenue but it's not like it matters, because profit (loss) would be always the same regardless.
Goldman Sachs - for starters. They set up the deal - and let their "muppet" clients get their eyes ripped out. Business as usual for them.
This is not surprising to me - I did say that they were going to "ladder" the price and pocket a huge chunk of money - then watch everyone else get screwed.
People I know who currently work for Groupon say that the culture there is falling apart. To get the numbers investors expect the sales people need to reach unrealistic sales numbers. Management is grasping at straws, trying every trick in the book to not let the whole thing fall apart. The Groupon model is simply not sustainable, it was a onetime gimmick.
As someone who lives in Chicago, I am worried about its failure and with that the future of the tech scene in Chicago.
Groupon is a large part of the tech scene here in Chicago, contributing a lot to the scene.
But they're not our sole pillar any more. I think we all know that pillar is going to come crashing down in the near future, and we're ready.
Groupon helped propel us to where we are, and we're standing on our own now. In my opinion, the future of tech in Chicago will not solely depend on Groupon's activity.
I, too, live in Chicago, and I don't think this matters one bit. If you think Chicago should live and die by the same rules as Silicon Valley, then that's your first problem. Native mid-westerners live by the philosophy of "Show Me", which is apt for Missouri's slogan. If Groupon, or any other company, can't show real results then let the chips fall where they may. I ran into a few Groupon employees at a bar on the northside a few months ago. They (the man, not the women with him) were bragging about Groupon and the fact that he was in the "sales" dept. at the company. This was before any shit hit the fan. And all I could think about was, "I hope you have other job prospects." I didn't think this because of some hatred toward Groupon, but rather the naivete of making such a statement. So, the fat salesman wandered off with the cute salesgirls. And I wonder what they're life is like now.
My impression from working in their building (at a different company) is that they really don't have that many tech people. From what little one can divine from elevator conversations, it seems like far less than 1/10 have anything even remotely technical in their conversations.
Those that are sent packing when Groupon shuffles off this mortal coil will get snapped up in a hurry. The other 5k+ twenty-something sales force will be much more problematic. If you're under 35, you know at least one person who works there, so it's going to be a real horror show when all those people get tossed out on their collective asses.
Since SOX successful tech companies have been avoiding going public for as long as possible (ie Google, Facebook).
I wonder if there was some pressure from investment bankers who want to encourage more IPOs as well as government types who want the law to seen as a success.
The first two shareholder lawsuits were filed Tuesday in federal court in Chicago after the markets closed, seeking class-action status for people who bought stock before the company restated fourth-quarter financial results on Friday.
Perhaps those people should have been reading Hacker News:
Anecdotally, the first generation of sales rep have nothing but depressing things to say about this entire market segment now. The first year sales numbers were gangbusters, until their clients called back complaining, swearing never to do another Groupon deal, ever again.
It's not just Groupon, this entire business model is unsustainable: asking a retailer to discount his products for a fee in the hopes that he will attract new "local deal" customers willing to pay full retail next time, when the ONLY reason these customers came in the first place was because of the discount.
And this is what happens when inventors invest in a company they know noting about. This is what happens when you listen to the hype, and the street and NOT do your own due diligence. There's a reason why the big banks backed the IPO but didn't take a percentage.
When it all comes down in flames, (I think it's already begun - if you haven't gotten out, get out now) the only saving grace is that the CEO and board will be embattled in court for years. The investors might get a few pennies on the dollar.
"There's a reason why the big banks backed the IPO but didn't take a percentage."
Morgan stanley has 19 mil shares. Goldman has 2 mil shares. They backed the IPO and took a percentage. Am i misunderstanding your statement?
The problem with Groupon and other local deal companies is that they have to manage fluctuations on both the consumer as well as the merchant side. Even if one side of the equation wobbles a little, Groupon will feel the impact. I think at this stage, Groupon is fighting a dual (losing) battle:
1) Merchants perception of the whole daily deal market is very negative. Repeat business is quite low and it mainly attracts the spendthrifts who are looking for a deal. Given the margins that most local businesses have, running a daily deal means taking a hit on those margins.
2) From a consumer perspective, the novelty of the daily deals market has really worn off. Consumer fatigue has set in and more and more people are tired of having their inboxes flooded with emails. Personalization is still a joke and ticks people off even further.
It wont be long before the whole local deal market implodes (think of it -- the 2nd largest player - LivingSocial is not yet profitable). Groupon is well aware of this and so is trying to ramp up its technology platform via acquisitions to eventually evolve into something more. Its just a matter of time that the whole thing comes crashing down.
The local deals is analogous to department store clearance sales. Retailers have perfected the art of the sale and they know that clearance sales are a different animal. If someone comes into you store and heads straight to clearance they can't be upsold. Don't waste your time on them.
This is different from your event sale, which are an excellent way to gain repeated customers (and upsell them). There is a future for local deal sites but it needs a different hook with customers.
I think there are so many ways technology can help mom + pop type small businesses inexpensively stay competitive with the numerous forces working against them (including retail giants with substantially better technology), and the huge interest in daily deals justifies this assertion--at least in some small way.
But the technology needs to help the small business actually improve. Groupon doesn't do this. For the most part, it plays smoke and mirrors with revenues and the costs or profits are not entirely known because the small business cannot measure them.
A TV network is going to Pilot with a new fictional sitcom -- called "Friend Me" I believe. It's about a man who packs-up and moves so he can work at Groupon (not made-up). Perhaps making it a comedy isn't such a good idea. ;-)
[+] [-] guptaneil|14 years ago|reply
I very much doubt the legitimacy of this story, but I was in a barbershop a few weeks ago, where the owner told me about one of the Groupon executives who was in the shop earlier. He was saying we shouldn't expect Groupon to be around in 10 years because the company's plan is to collect as much cash as possible, fire everybody, and shut down, keeping the money for the investors. While I doubt a Groupon executive would have actually said that in a barbershop, I can believe that actually was their long-term plan, but if things keep up at their current rate, I'm not sure if Groupon will even last that long.
[+] [-] pbreit|14 years ago|reply
Great source!
[+] [-] brandall10|14 years ago|reply
Maybe I'm naive, but it seems like there's always been this question mark over their model being non-sustainable, and to those who are aware of 37Signals hold them in much higher esteem.
[+] [-] joezydeco|14 years ago|reply
Every time someone says this, the neck-hairs of every Orbitz employee (current and former) stand up on end and twitch a little.
[+] [-] jpdoctor|14 years ago|reply
Every bubble produces these, but usually the money is kept for the management-investors only. SCMR and Zhone from the tech bubble executed that plan spectacularly.
[+] [-] knows_chicago|14 years ago|reply
The same investors behind Groupon are funding many other startups. They've got plenty more ponzi startups waiting in the wings.
[+] [-] johnrob|14 years ago|reply
[+] [-] islander|14 years ago|reply
[+] [-] unknown|14 years ago|reply
[deleted]
[+] [-] Quizzy|14 years ago|reply
The fact that Google even offered that much leads me to believe that they have jumped the shark with that offer.
Anybody who knows anything about retail would have studied the business model and realized that this was not sustainable. Obvious red flags: 1. Heavy reliance on field sales (the largest expense), which is NOT scalable 2. Exclusive reliance on repeat sales as the key driver of sustainability: this being the obvious case, did Google not do its due diligence and actually surveyed past Groupon customers? Such a siimple survey would have easily revealed the issues of this "local deals" model. 3. Heavy reliance on "small business" owners as the driver of revenue. This is a sensitive and fickle market, where even slight movements in the general economy will cause huge moves in spending patterns.
These 3 points were readily available to anybody with some insight into this segment; Google with all its money must be surrounded by "yes" men, nothing else could explain it's willingness to part with $6 billion so quickly.
[+] [-] nakor|14 years ago|reply
That could have created negative press and damaged their pump-and-dump strategy for the IPO.
[+] [-] byrneseyeview|14 years ago|reply
Groupon is not a bet on the coupons business--that doesn't justify the current valuation. Groupon is a bet that if you can reinvent the Yellow Pages, at scale and online, you can make a ridiculous amount of money. It's probably one of the largest companies around with such a high probability of failure, but their value if they end up being the winner in local is just staggering.
[+] [-] tptacek|14 years ago|reply
It would be interesting to see someone chart this.
(No comment about Groupon's long-term viability is being implied here).
[+] [-] bhousel|14 years ago|reply
Public companies are sued all the time for this kind of stuff. These lawsuits often allege misrepresentation in a company's SEC filings.
[+] [-] victork2|14 years ago|reply
On the other hand, Chicago business is full of bugs. Ghostery block 13 (!) calls to different websites such as: Quantcast, 24/7 real media, Outbrain etc... I won't visit this website again. I wish I was warned of that before hand not when I go to the website, I value my privacy more than going there.
[+] [-] zaidf|14 years ago|reply
A little premature to write an obituary of a company that finished 2011 with 1.6B in revenue.
[+] [-] itsmequinn|14 years ago|reply
[+] [-] dclowd9901|14 years ago|reply
[+] [-] snorkel|14 years ago|reply
[+] [-] lubos|14 years ago|reply
I don't really watch this company but if I remember correctly, their way of doing accounting was to show all received money from customers as income instead of liabilities since they were collecting half of it on behalf of vendors.
They were simply inflating their revenue but it's not like it matters, because profit (loss) would be always the same regardless.
[+] [-] rprasad|14 years ago|reply
[+] [-] bfrog|14 years ago|reply
[+] [-] sc68cal|14 years ago|reply
This is not surprising to me - I did say that they were going to "ladder" the price and pocket a huge chunk of money - then watch everyone else get screwed.
== Sources ==
My previous comments on Groupon: http://news.ycombinator.com/item?id=3139614
Groupon Chooses Goldman Sachs & Morgan Stanley as the underwriters for their IPO: http://www.bloomberg.com/news/2011-04-15/groupon-said-to-cho...
Goldman calls their clients "Muppets": http://www.nytimes.com/2012/03/14/opinion/why-i-am-leaving-g...
[+] [-] dantheman|14 years ago|reply
[+] [-] fasteddie31003|14 years ago|reply
As someone who lives in Chicago, I am worried about its failure and with that the future of the tech scene in Chicago.
[+] [-] timjahn|14 years ago|reply
But they're not our sole pillar any more. I think we all know that pillar is going to come crashing down in the near future, and we're ready.
Groupon helped propel us to where we are, and we're standing on our own now. In my opinion, the future of tech in Chicago will not solely depend on Groupon's activity.
[+] [-] cpher|14 years ago|reply
[+] [-] davidmr|14 years ago|reply
Those that are sent packing when Groupon shuffles off this mortal coil will get snapped up in a hurry. The other 5k+ twenty-something sales force will be much more problematic. If you're under 35, you know at least one person who works there, so it's going to be a real horror show when all those people get tossed out on their collective asses.
[+] [-] diogenescynic|14 years ago|reply
[+] [-] wmil|14 years ago|reply
I wonder if there was some pressure from investment bankers who want to encourage more IPOs as well as government types who want the law to seen as a success.
[+] [-] gammarator|14 years ago|reply
[+] [-] edw519|14 years ago|reply
Perhaps those people should have been reading Hacker News:
http://www.hnsearch.com/search#request/all&q=groupon&...
(The first post is rather long and fairly neutral, but check out some of the posts (and their dates) right after that.)
[+] [-] api|14 years ago|reply
[+] [-] Quizzy|14 years ago|reply
It's not just Groupon, this entire business model is unsustainable: asking a retailer to discount his products for a fee in the hopes that he will attract new "local deal" customers willing to pay full retail next time, when the ONLY reason these customers came in the first place was because of the discount.
[+] [-] walru|14 years ago|reply
[+] [-] crag|14 years ago|reply
When it all comes down in flames, (I think it's already begun - if you haven't gotten out, get out now) the only saving grace is that the CEO and board will be embattled in court for years. The investors might get a few pennies on the dollar.
[+] [-] ironchef|14 years ago|reply
[+] [-] unohoo|14 years ago|reply
1) Merchants perception of the whole daily deal market is very negative. Repeat business is quite low and it mainly attracts the spendthrifts who are looking for a deal. Given the margins that most local businesses have, running a daily deal means taking a hit on those margins.
2) From a consumer perspective, the novelty of the daily deals market has really worn off. Consumer fatigue has set in and more and more people are tired of having their inboxes flooded with emails. Personalization is still a joke and ticks people off even further.
It wont be long before the whole local deal market implodes (think of it -- the 2nd largest player - LivingSocial is not yet profitable). Groupon is well aware of this and so is trying to ramp up its technology platform via acquisitions to eventually evolve into something more. Its just a matter of time that the whole thing comes crashing down.
[+] [-] MatthewPhillips|14 years ago|reply
This is different from your event sale, which are an excellent way to gain repeated customers (and upsell them). There is a future for local deal sites but it needs a different hook with customers.
[+] [-] ssharp|14 years ago|reply
But the technology needs to help the small business actually improve. Groupon doesn't do this. For the most part, it plays smoke and mirrors with revenues and the costs or profits are not entirely known because the small business cannot measure them.
[+] [-] smoody|14 years ago|reply
[+] [-] mleatherb|14 years ago|reply
[+] [-] taphangum|14 years ago|reply
[+] [-] nateberkopec|14 years ago|reply
[+] [-] unknown|14 years ago|reply
[deleted]
[+] [-] silentscope|14 years ago|reply
[+] [-] renatomoya|14 years ago|reply