

Groupon’s Bad Deal - mitmads
http://www.newyorker.com/online/blogs/newsdesk/2013/03/groupons-bad-deal.html

======
paulsutter
Google offered $6B to buy Groupon.  Instead they took a private financing deal
which allowed the founders and others to take some money off the table and go
for an IPO. 

The $6B from Google was real.  The risk of proceeding was tempered by the
private money.  Nothing dishonest happened here.  All that happened was a little
overexuberance about the scalability of their business model. 

While it's true that some people (including me) thought their model non-
scalable back at the time, it's also true that a broken (analog) clock is
right twice a day. 

Everyone made their bets and they're all big boys and girls.  That includes the
public investors as well as the private ones. 

~~~
OGinparadise
_The $6B from Google was real_

Unless Google would have to agreed to a $6 Billion fee in the event of not
being allowed to buy them, it wasn't, there was speculation that it may be
blocked by the DOJ.  Imagine being in limbo for 18 months or so when you need
to grow.  They took a chance and lost.  Or some of them lost, execs did sell a
bunch of stock

~~~
aristus
Deals that large usually come with a "breakup fee" on the order of hundreds of
millions of dollars, precisely for this reason. 

~~~
OGinparadise
Yes, but the breakup fee for wasting 18-24 months at their stage might not
have been enough. 

------
antr
I genuinely do not understand US securities law.  One needs to be a "qualified"
investor to invest in startups; these investors trade shares among themselves
(no primary share issuance) at indefensible and unrealistic valuations, and
they are later allowed to sell their shares (secondary issue) in the open
market to "unqualified" investors. 

Shouldn't the SEC and a bunch of attorneys be investigating this? 

Congresses is having all kinds of hearings with banks for misselling mortgages
and a dozen other shenanigans.  Who is going to call on investors who
(literary) pumped-and-dumped Groupon? 

I still vividly remember watching Jeff Clavier defending the Groupon IPO
valuation on TC TV (<http://www.youtube.com/watch?v=MKrWtMmsl7I>), and I
couldn't feel more ashamed for all the unsubstantiated arguments he made back
then.  He wasn't the only one to do this. 

~~~
InclinedPlane
How about facebook?  That was one of the most artful manipulations of the IPO
system ever conceived.  They didn't even make a majority of the company public,
and yet managed to rake in a preposterous amount of money and cash out all of
the early investors to an absolutely ridiculous degree.  The stock is still
down nearly 30% from the IPO level. 

~~~
gus_massa
Facebook lost "only" a 27% of the initial price (maximal lost was 53%). 
Groupon lost 80% of the initial price (maximal lost was 90%)! 

------
MarcBodnick
My understanding (which I heard from a pretty reliable source at the time) is
that this deal was baked (both sides agreeing), but broke down because the
Groupon board insisted on a guarantee from Google that it would close over
anti-trust objections, and Google wouldn't give that term. 

Background: in a typical acquisition, closing is subject to HSR anti-trust
approval.  If the government doesn't approve, then the deal breaks up.  This
means that the target company is taking a risk that after announcing the deal
(and being paralyzed in a post-signing/pre-closing period that could last
several months), the deal could be broken up and the target company could be
left holding the bag and forced to get back on an independent path.  Which is
pretty rough. 

In this case, Groupon wanted Google to go long the anti-trust risk -> in other
words, Google would have to divest the asset if the government killed the
deal. 

I think (not sure) Google had given this term up on the AdMob deal, but
believed that it couldn't do it again on the Groupon acquisition (which would
have been the biggest deal Google had ever done), or it would have set a
precedent that every other company would have insisted on going forward in M&A
discussions. 

------
pg
FWIW, Andrew is one of the smartest founders I've met (and I've met a lot). 

~~~
joelhaus
'Smartest' in what way?  Is there a standout characteristic he has that other
founders should emulate? 

~~~
pg
I didn't mean "smart" in a way different than it's ordinarily used. 

~~~
joelhaus
Do appreciate the response and don't mean to press the issue, but guess I was
just curious about what gave you that impression... particularly because,
coming from you, it is an extremely high compliment that most on HN would be
thrilled to hear. 

~~~
djt
smart

/smärt/

Adjective

Having or showing a quick-witted intelligence. 

Verb

(of a wound or part of the body) Cause a sharp, stinging pain: "the wound was
smarting". 

Noun

Intelligence; acumen. 

------
PnuklOEvolu
Imagine that billion divided up as $50,000 seed money to 20,000 new startups. 
Don't just plunk it down on them set up an automated system requiring
justification for every expense.  Then have a contest over the year where the
earliest, best performers get to advance to another round of funding the next
year. 

~~~
lifeisstillgood
I've suggested something like this before - I think it's brilliant (obviously)
- although I truly would not bother with tracking the expenses (#) - at this
level it's just noise. 

I would suggest that this is the next evolutionary step for VCs - not managing
5m dollar investments but 100x as many 50k investments.  But I doubt anyone in
the VC industry wants to move from selling at Tiffany's to the KMart in
Tucson, Arizona. 

Luckily the VCs of Pune/Mumbai will have no such qualms.  SV may find itself
out-evolved quite quickly. 

(#) well you may have to to avoid seed money for drug deals but you get my
point

~~~
mertd
Isn't that what the banks and small business loans are for?  VCs are a playing
different game. 

~~~
wpietri
That's way too risky a game for banks.  Banks want to put in $1 and be pretty
much assured of getting $1.10 back next year. 

If you go to a bank and ask for a business loan, they'll say, "Great!  Let's
see the last few years of your financial statements."  If you say you don't
have any because you haven't actually started your business yet, they will
look at you funny and tell you to come back in a few years. 

That's as it should be.  We citizens guarantee that banks will always pay back
depositor money.  So they should only be allowed to make pretty safe loans. 

------
AznHisoka
"“I was fired today.  If you’re wondering why… you haven’t been paying
attention.” 

Or maybe they were paying attention to the WRONG people.. such as.. oh say, HR
and corporate spokespeople in Groupon who want you to believe Groupon is on
the rise and will be a great company to work for! 

Seriously, that statement is such an insult.  Sounds like someone who can't
admit he's wrong, by saying "Well duh!  Didn't you knew this was gonna happen"
to save face, rather than "Ok, I made a mistake by doing X, Y, Z"

------
InclinedPlane
How many people have been shouting about groupon being a BS company from day
one?  Sometimes I boggle at how dysfunctional this entire industry is. 

~~~
pyre
It just paints a picture of Fox Moulder's "I Want To Believe" poster, but with
a GroupOn logo instead of a UFO. 

I was particularly surprised at how their 'aggressive accounting' didn't get
them into hot water in the beginning. 

------
jamesaguilar
Title needs to be changed to reflect factual content of article: "executives
... and shareholders." 

~~~
mitmads
Done.  Used the second half of that sentence to make it more appropriate. 

~~~
lifeisstillgood
Title changed again, far less informative - is this you or a mod? 

~~~
mitmads
No.  The second mod is not mine. 

------
blahedo
Original HN title: "950 million of 1 billion of Groupon's funding wasn't used
to fund the company"

This also stood out to me as an interesting claim from the article.  Does
anyone have a perspective on how that can happen without raising some sort of
legal issue? 

~~~
wmf
This was pretty well documented when it happened in 2011.  You can do anything
you want in a private company if the shareholders agree.  In this case,
Groupon's existing shareholders agreed to roll around in big piles of money so
that new investors could get in at any price. 

~~~
Sujan
Came here to ask the same question as blahedo.  Especially as the claim in made
in the article, but not expanded.  Are there any sources for or reports on
this? 

~~~
wmf
Google for "Groupon series D" or "Grouponzi". 

------
coditor
Groupon was always a ponzi like scheme.  Once they ran out of suckers (err
businesses) their income dropped like a rock.  Everyone I know uses Groupons
but challenge them on actually visiting the Grouponee again and you hear
crickets. 

------
brown9-2
When people complain about how the $1 billion raised in 2011 just went to
insiders - did the investors who contributed that $1 billion know where the
money was going to go?  If they knew, then it's all their fault. 

~~~
paul_f
They knew.  And wrote the checks gladly.