Sounds good Henry but how much money do they have in the bank and how much in unpaid liabilities to merchants do they have for deals that have already been done. That is the Ponzi part of this scheme.
Bernie Madoff commenting on Henry Blodget’s blog post HEY, GROUPON HATERS, ANALYZE THIS: Groupon Breaks Even In Q3
Right off the bat I have not been able to confirm to this point in time if this is indeed the real Bernie Madoff. I will keep working on this to verify one way or the other, and get back to you with an update on my findings.
That being said, even if it is not Madoff the reference to the Ponzi scheme seems both reasonable and appropriate given the following:
- The fact that Groupon’s Chairman Eric “Lefty” Lefkofsky had, in a pre-IPO round earlier this year, distributed $810 million of the $950 million that was raised to Groupon insiders (keeping $319 million for himself and his wife)
- While underwriters were heralding Groupon as a $30 billion bonanza, the company was in reality a bust, losing $102.7 million in the last quarter on revenue of $878 million. The icing on the cake or pièce de résistance is that the balance sheet indicates the the company has $681 million in current liabilities (more than half of that total owed to its vendors), with only $376 million in assets.
- Let’s also not forget the FTD story where the florist boosted prices for Groupon customers so that there was no real saving . . . perhaps a tip of the iceberg problem?
Conversely, and putting aside for the moment that outside of his “one hit wonder” prediction that Amazon’s stock would ascend to a pre-split price of $400, catapulting Blodget to fame and fortune, Henry’s track record is less than stellar in the financial advice department. In fact I would go so far as to equate an endorsement by Henry with George W. Bush endorsing John McCain during the 2008 election (anyone remember the SNL skit?) . . . it’s pure poison.
Now I am not saying that the Groupon concept is in and of itself an inherently bad idea or model. Quite the opposite in fact as the appetite for savings and coupons has never been more voracious as it is today. You merely have to look at the advent of shows such as TLC’s hit Extreme Couponing, to recognize what is rapidly becoming one the year’s hottest trends.
Even I have been drawn into the couponing craze, at first as a moderate cynic and then, after knocking more than 40% off my grocery bill in the first month, an avid fan.
Like the Titanic, the problem with Groupon is tied predominantly to the individual or individuals at the helm. Specifically Lefty Lefkofsky, and his apparent greed versus having a true desire to actually build something beyond a what’s in it for me attitude.
The evidence of Lefty’s avarice comes through loud and clear in that rather than distributing the pre-IPO funds to Groupon insiders on a more modest level, and then taking the bulk of the money to wipe out the company’s debt (at least in part) while retaining a certain percentage as a reserve or emergency fund, he saw an opportunity to cash in big and took it.
I can still remember the early days of my negotiation to sell my software firm to a company whose stock traded on the TSE. At the time, we were bringing in hefty profits to the tune of generating $2.1 million GP on just over $3.1 million in sales. Hungry for our cash flow, the CEO of the company that eventually did acquire us originally talked about offering $15 million in cash up front, but was met with such resistance by his board that the deal had to be modified. The reason for the board’s resistance was pretty straight forward . . . getting that kind of cash up front, they wondered if our management team could remain motivated enough to continue to make a meaningful contribution on a go forward basis. To a certain extent they had a point as I was already contemplating my exit strategy, albeit 2 to 4 years down the road.
The big difference between my little software company and Groupon is that besides being a closely held, self-funded private enterprise, our success had already been firmly established with a proven cash flow and corresponding profitability.
Groupon’s success is nowhere near that level of certainty and as such why would anyone invest in the company, especially after the management has already achieved an exit strategy pay-day?
At the end of the day the true value of any company is not just linked to the timeliness of its products or services relative to the market’s needs, but is ultimately based on the ability and integrity of its management team. While a strong team can make a good idea great, a bad or questionable team can ruin even a great idea.
As it stands now, Lefty and his crew fall into the latter category.
Special Bulletin Update: The Office of Fair Trading (OFT) has launched an investigation into Groupon after the firm broke UK advertising regulations 48 times in 11 months.