parislemon

On Grouponzi

While I have an account, I’ve never actually used Groupon. And I may never use Groupon. It’s just not really my thing. But the massive backlash following the company’s S-1 filing (so they can IPO) strikes me as a bit odd.

The fast rising consensus now in certain tech circles is that Groupon is essentially a Ponzi scheme (Grouponzi, FTW). The fact that their net income is well underwater (and going deeper) has everyone freaking out. As does the fact that some of the original investors (as well as founders) took hundreds of millions off the table in the last huge round.

But I’m more with Joe Stump on this. You cannot overlook the fact that they’re also making hundreds of millions of dollars each quarter now. The run-rate for this year could be over $3 billion.

Yes, the amount of money they’re spending on customer acquisition and retention is absolutely insane. (And the amount owed to merchants is especially troubling.) But look at what they’re up against. Pretty much single major player is now coming directly at them — including the company that tried to buy them for several billion and was turned down, Google.

Facebook is charging fast too. LivingSocial. Etc.

They need to get out in front of this. And that’s what they’re trying to do.

If you look at the actual breakdown, most of the money is being spent internationally. In the U.S., they’re actually near break-even. If they can get a strong enough foothold and ensure Google and Facebook don’t run them over, they can pull back that spending substantially. And guess what will be left? A shit ton of money. Profit.

International is murkier because there are going to be so many clones. But if they can win there too, those profits will have exploded, and we’ll have a new mega-company.

There is no doubt that the spending is a very risky move. But the payoff is potentially massive. That’s why they’re doing it. They could have easily taken Google’s billions, but they clearly think they can be much bigger. And that’s what they’re aiming for.

Again, it may not work. It may end up being a complete and total failure. But it seems a risk worth taking. And the founders/investors taking hundreds of million off the table is exactly what allows them to take this shot with minimal downside.

The problem will be when they are public and if the strategy isn’t working. Then you panic.

But they obviously know that. Once you go public, you report numbers every quarter. If investors see these types of numbers each quarter, they won’t be investors for long. If it’s a Ponzi scheme, it’s a pretty awful one.

The fact that every major player is rushing to clone Groupon says all you need to know about the business itself. It may not work for me, but it works. And it will pay off big time — for someone.