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.
Revenue can be a very misleading measurement of success. I agree that $4 billion in revenue is very impressive, especially considering the rate of Groupon's revenue growth, but overall losses and no profit plans any time soon, leaves me disappointed. What impresses me more is a company generating $10 million in revenue with $7 million in profit. Will Groupon eventually make money...maybe, but I'm not sure it will happen any time soon nor with their current business model. Groupon has two very valuable assets that I believe will eventually be used as the reasoning for an acquisition by Amazon or Google: 1) a large and growing list of consumers and 2) their buying habits.
Groupon's expenses are larger than their revenue, and have been since inception. This is a Bad Thing.
You could make an exception if unprofitably is caused by re-investment into a model that is proven to profitable but requires a certain level of scale.
Groupon isn't doing that however. What they're doing is reinvesting the money into other people's pockets.
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.
Nope...I was responding to the OP's statement about not understanding how they could have turned down $6B from Google.
If they IPO and the company is worth $12B - $20B and all their investors get to cash out. As much of a shell game as it is, that would have been a fiscally prudent move by management.
This is correct. Though it's well over 3000+ employees. Nearly 7000 and most of them are sales people. I've been inside and interviewed at Groupon and it's rows and rows of people on the phone for as far as the eye can see.
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.
Whatever individual 37 Signals people's actual thoughts about VCs and valuations, don't believe that it's necessarily what they write in their blog. Their blog is not an informal discussion medium. They make it out to to be but it isn't. It's marketing. 37 Signals have a vested interest in creating an enemy and drama because that brings them exposure and sales.
For what it's worth I think you and 37 Signals probably do believe what you say in the blog but given how inflammatory it often is it sets of my inner cynic constantly.
For the record, I didn't invest any money in Groupon.
Groupon asked me to be on their board of directors. Compensation for that position was paid in options. That's why I have options/stock in Groupon, not because of an investment.
As far as angel investing goes, I have not made any angel investments to date. The only private company I've ever invested in is my own company, 37signals. That's not to say I wouldn't invest in another private company, I just haven't so far.
Honestly, having this post voted down into oblivion does nothing for newbies who may come here.
While his tone may not be the best, a simple explanation or example/link to why you have a reason to disagree would be helpful.
This would be doubly productive since a response to his comment went "you need better advisors", which is not the rebuttal we would like to see on HN.
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.
That's certainly why I'm surprised about it. Don't transactions of this size have to be okayed by the board of directors? And by series G shouldn't the original founders and early investors be diluted out of board control? Perhaps Groupon is special, I'm not familiar with these things.
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%.
Somewhat counter to the original comment in this thread's tone, this was an interesting piece in that the OP revealed little to me, but the comment thread was the most informative thing I've read here in weeks. Incredibly valuable.
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.