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Comment by goodweeds | Hacker News Reader

Who missed these red flags? Nobody I know in the valley. We've all been mocking @Groupon as an un-defensible and unsustainable ponzi scheme. For at least a year and a half there have been enough major news organizations backing this sentiment.

Come on. Online coupons. Groupon is the hype of boo.com, webvan, and Kozmo.com all rolled into one, with greedy investors hoping they can make a quick buck before people realized what happened.

Groupon is a glorified wordpress blog with 10,000 sales reps propping up the fake market with unsustainable or warranted demand. It's like watching Boiler Room play out in real life. There is no business process innovation here or technical innovation. The only innovation here is using huge marketing dollars to perpetuate a pump and dump ponzi scheme long enough for an IPO. Oh wait, that's not innovative, they did the same thing with dozens of companies a decade ago just before the first web bubble burst.

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Exactly my reaction. Even reading only the headline, "The Missed Red Flags of Groupon", my first reaction was "who missed them?"

From the owners taking 90% of the investors money for themselves, the fact their advertising costs almost match their sales, the fact that they make $270 million Q1'11 and still managed to lose $140 million... it all smells.

Groupon is a Ponzi scheme, and all the so-called smart investors and underwriters are just hoping to cash out before the pyramid collapses. There is nobody who seriously things this is a real long term sustainable business is there? Can't be.

Yeah - Groupon seems like it could be a semi-reasonable business, if they can get their customer-acquisition costs under control, but the sky-high valuations (Google's $3 billion and up) are completely ridiculous and buying Groupon's stock is a losing game at this point.

I think Groupon's model preys on small businesses unskilled in accrual accounting and pricing strategy. Also, both my readings and personal interactions have given me the impression that in their hyper-growth they have become a deeply dishonest organization.

All that said, however, there are still some interesting non-predatory wrinkles in their model.

The single deal at a time served to create consumer focus. The trigger threshold gave merchants confidence a deal would have a certain minimum impact. The time limit and trigger threshold served as an especially powerful call-to-action: now or never.

Though Groupon quickly tuned things (and grew) such that every deal was essentially guaranteed to 'tip', the group-threshold-mechanics were important for accelerating early adoption, overcoming vendor- and consumer- resistance to coordinated action. This mechanism, rooted in economics and game theory and related to the 'assurance contact' concept, still has utility for other endeavors, among them Kickstarter, even if that mechanic standing alone does not provide any sort of defensible advantage.

By all means, throw out the baby. But don't forget there's still something interesting in that bathwater.

Oh, sure, there's something in that bathwater... it's just not worth $30 billion. Not even close.

Who missed these red flags? Nobody I know in the valley

It is true 'the valley' would seem to have caught on, but don't forget the sizeable period of time when Groupon was the darling of this very website.

If memory serves, HN opinion of Groupon didn't start to tank until the founders sold a big chunk of their shares, whenever that was. I'm pretty sure when the Google offer/rumor was afloat, everyone at HN applauded Groupon for rejecting.

Prima facie, there's no reason to believe that groupon was unprofitable. And since there's no legal obligation to release their financials, we were left to trust Groupon's numbers.

That being said, the amount of money taken off the table was the first real warning sign.

> Who missed these red flags? Nobody I know in the valley.

I'm sure Average Joe America drank the proverbial Cool Aid with respect to Groupon. We must remember that the vast majority of America doesn't care to do critical analysis of yet another hot internet startup; they're going to believe what's fed to them.

Average America is not the Valley. It's good that non Hacker News / Quora media resources are publicly criticizing Groupon now. I was terribly worried that the uninformed Mom and Pop investors would get caught up in the Groupon Ponzi scheme when they would IPO. For now, it seems that the likelihood and magnitude of this happening are much lower now.

I am not at all a Groupon apologist (I think their base business is declining and doesn't make sense for most local businesses in the long-term), but you have gone way overboard by comparing Groupon to boo, webvan, and kozmo.

For all its faults, Groupon is on track for $1.5Bn in NET revenues (this doesn't include pass-through that they initially included in revenues) this year, and will probably still IPO somewhere around 10 billion dollars. All of the companies you mentioned only existed for 2 years before being liquidated.

As for everyone in the valley knowing Groupon was a ponzi scheme for the past year and a half - then the folks from Battery, Accel, Kleiner Perkins, Greylock, NEA, TCV, Silver Lake, etc (all of whom made investments in Groupon this year) would have to be complete idiots to invest in Groupon, and that is certainly not true.

Sidenote- a quick reminder on what it was like in the 00 bubble that you reference: http://feefighters.com/blog/ff_infographic/tech-boom-or-bubb...

You can call a loan Revenue that does not make it so. And when you need advertizing to sustain your business you don't get to call it revenue neutral, it's still just another expense.

June 2nd, 2011 "Groupon lost $456 million last year, and another $147 million last quarter." http://techcrunch.com/2011/06/02/groupon-growth-2-6-billion-...

PS: The #1 investing rule is the second a company starts playing games with their books avoid them.

Much of business consists of selling product before paying vendors. Have you heard of "Net 30/60/90" terms?

The advertising is to acquire customers. But then it can obviously promote deals to existing customers for essentially no cost. This is also the reason it wasn't crazy to consider the mailing list an asset and account for it accordingly. Progress is only made when someone pushes.

What, they are going to lay off their massive sales staff and the vendors are going to keep coming back to offer zero-margin daily deals because...? This company doesn't have a USP; its business model is being cloned left and right, and customers have zero brand loyalty to the coupon broker. I can't understand your unshakeable faith in it. Your pricetack.com project looks vastly more interesting to me than Groupon ever has.

Even then, Groupon was basically a modified rip-off of Woot.com and other deals sites. Bernie Madoff would be proud of Groupon.

but you have gone way overboard by comparing Groupon to boo, webvan, and kozmo.

At least those companies had tangible assets to liquidate (boo had inventory, webvan had a distribution network, and Kozmo had a stash of DVD's). Groupon has posted impressive revenue numbers (but still no profit) using an unsustainable model of aggressive spending on advertising and sales team headcount. With growth slowing, increasing backlash from merchants, and questions about their accounting methods, Groupon is on the decline. Maybe TheGlobe.com (http://en.wikipedia.org/wiki/TheGlobe.com) is a more fitting comparison.

> then the folks from Battery, Accel, Kleiner Perkins, Greylock, NEA, TCV, Silver Lake

1. These reputable VC firms have invested in stupid ideas before.

2. Ever heard of the "Greater Fool Theory"?

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