[marvin]

Not going to make any predictions for the future here...but whether this should be characterized as a crash or not (at the present moment a decline from 24.5 to 18 over two days, about 27%) is a semantic question and open for discussion.

This is actually a very interesting question. Keeping the specifics of Groupon's business out of the equation at the moment, the pricing of growth companies is an incredibly inexact science. If most of these companies were publicly traded and liquid, you'd expect fluctuations of at least 30% a day during volatile periods. Just imagine the atmosphere in an average startup: One day you're going to conquer the world, the next day you're doomed...depending on prevailing conditions and random issues that pop up. This "atmosphere" (or expectation) carries over to the people who are attempting to determine the market value of your company. That's what the stock market is trying to: from moment to moment, determine the exact market value of each company.

The market still hasn't mastered pricing stocks like these (and it probably never will, potentially extreme growth stocks like technology startups practically by definition have huge volatility), but it is getting better. Look at the skeptics who try to price startups on revenue/profits alone. Obviously a bunch of really smart people in a garage with a sound plan but no revenues are worth more than $0. Some of these groups are bound to strike it rich, so average across all of them and you'll get a positive (perhaps very large) number. This is why we see large valuations of early-stage startups. But how large should the number be? The exact value of a company is the present-value adjusted worth of all its future profits. Determining this number is what everyone who does value-based investing attempts to do.

But finding this number is impossible, especially if you're investing in a very young company. I think that a lot of tech investors today are attempting to average the value across a large number of promising companies, instead of looking too much at the specifics of a single one.

Due to the inherent volatility, investing in potentially extreme growth companies like Groupon and LinkedIn is a _hugely_ risky business, unless you happen to be a genius who sees something about their business that no one else does. There were probably geeks who made these kinds of observations about Google in its early history.

[scottkduncan]

It is certainly an inexact science, but in this case the insiders tipped their hand ahead of the IPO about what they thought of Groupon's valuation. That the last pre-IPO raise went almost exclusively towards cashing out insiders and early investors rather than shoring up a pretty serious capital problem obviated the need for me to do speculative modeling of discounted cash flows. More so than any of the other recent high profile IPOs, this one just looked like passing the bag to folks with far less information about the company's actual prospects.

[harryh]

That's one way of looking at it.

Another way of looking at it is to agree with marvin's assessment that tech companies (like Groupon) are inherently volatile and for any individual it makes sense to diversify. The people that cashed out didn't sell all of their holdings, or even a majority. They sold a relatively small portion so that their entire net worth wasn't locked up in an extremely volatile stock. That seems pretty reasonable to me. They'd (at least in my opinion) have been fools to do otherwise.

[scottkduncan]

I definitely agree that it can make a lot of sense for founders and early employees to cash out a portion of their holding so their entire net worth isn't locked up in one company. Other threads on HN have covered how it can better help align founders' incentives with those of investors, likely leading to better long-term results. With co-founders cashing out a partial share, they can focus more on long-term growth rather than worrying about protecting their value in the short-term. That is good for everyone.

From my admittedly superficial knowledge of the Groupon example, it doesn't seem like that is what happened with their previous capital raises. They've distributed about 80% of what they raised from their Series C and D rounds to early investors at a time when the company has serious capital concerns. Lefkofsky took about $400 M from the last pre-IPO round and is reportedly focusing on other ventures now.

I don't blame any of them for taking the money (as you say, they'd be fools to do otherwise), but all of this makes me sure that Groupon is not a company I want to put my money in.

[iandanforth]

A very interesting point. Can you provide an example with numbers? Company X originally invested Y and since the IPO has sold Z%?

As a totally naive assessment it seems that if Z == 100 then you're shooting yourself in the foot by precipitating a crash, so the line of 'no confidence' would be closer to 50%.

[pbreit]

I've been a Groupon defender (lots of downvotes to account for it!) but would agree that while cashing out early is reasonable, the magnitude in this case was breathtaking and, as you note, probably indicative.

[antr]

It wasn't a difficult task for some funds/investors to do the maths: the cash yield of Groupon was lower than US 10y govt bond, blue chip dividends plays, etc. This implied that (i) either Groupon was a safer investment than the above, or, (ii) that Groupon was completely mispriced. By method of elimination we are left with the later one. Groupon has HUGE execution risks, facing large and tough competition, image deterioration, reducing margins, etc, while still needing to achieve espectacular growth to deliver such value. How can you price something at such a ridiculous valuation when its equity risk is way higher than those other safer investments? To price Groupon at 20usd/share was just wrong. Some of us know how much did Groupon+investors push the underwriters to make this possible, and how many sales calls the equities' desk had to do to get this thing going. No surprise this is going underwater.

[cbr]

> the cash yield of Groupon was lower than US 10y govt bond, blue chip dividends plays, etc

What do you mean by their "cash yield"?

I thought people investing in Groupon were doing so because they thought it might continue to grow as it had been, and potentially be absolutely massive.

[antr]

cash yield = cash flow from operating activities / fully diluted equity value

[marvin]

Cash yield doesn't tell the whole story for startup companies, in some cases it doesn't even factor into the equation. YouTube is a perfect example back when they had a monopoly on online video, were growing at 100% a year and were using up their cash at an incredible speed.

A pure cashflow analysis would indicate that YouTube was worthless. But if YouTube stock had been offered on the market at this point, you can be certain that it would have been given a considerable positive value. This is due to the chance that the company would become profitable or make a large exit in the future. You need to also take future revenues (or a chance of future revenues) into account when making a guess at the market value of a company.

[antr]

You are right, cash yield doesn't tell the whole story BUT it is the only data available to public investors. No public investor has had access to any projections, detailed operating metrics, access to growth drivers and no real information on the use of the IPO proceeds. The stock market is not a place for pure startups. Startups is an asset class that should only be for angel investors, VCs, and other niche funds. If you are selling me the startup story, I want startup returns, i.e. for each $20/share I buy I want to have the "certainty" I will be able to make $200/share in 3 to 5 years. Consequently $200/share is an implied $127bn market cap. Can you see how weak that "Groupon is a startup" argument is?

Having said that, Groupon is not a startup: 7,000+ employees, over $500m in revenues, considerable international presence, large M&A transactions, etc. This kind of company should be be valued using a DCF. Growing at 100% per annum is no excuse to be able to perform such exercise. The devil is in the detail, and trying to find excuses to argue that Groupon is a startup, and consequently valuing it by god knows what random vanity metric is not a valid argument.

Can you give me a data based argument/point that shows that Groupon is not overpriced at $20/share? I have given you one.

Bottom line: all I'm saying is that Groupon should be valued fairly, $20/share is not a fair value, it's overpriced. Investors are left with no upside. I'm not saying that Groupon hasn't got a valid business.

[marvin]

I haven't looked at Groupon's numbers in detail, but yeah, I'm inclined to believe that they are overvalued. I certainly wouldn't buy at this price, the downside seems bigger than the upside.

My original comment was a general comment about startup valuation. I've heard so many arguments on HN that seem blatantly incorrect about the valuation of companies that don't have positive profits or revenues, and I wanted to start a proper debate.

[kingcub]

You're right but the only way to make that important number better is with growth or cutting expenses.

[critter0x]

Good eye for catching that bit of nonsense. Someone commenting like they know what they're talking about. If potential investors valued Amazon based on its 'cash yield' at the time of its IPO who would have invested.

[Ninja_Wombat]

critter0x == marvin

[jfoutz]

Writing a compiler is hard. One day, you're sure it'll be the fastest thing in the world, the next day there's sheer terror because no object code will run.

I'll grant you there could be 30% fluctuations from one given day to the next, but the months of work determining an accurate valuation should smooth out a lot of that noise.

I'd guess a hundred man years of effort went into the deal. Furthermore, this isn't grad-student eating ramen effort. This is high finance. Smartest guys on the planet and all that. Sure, you can't think of everything, but there must have been some underlying value that everyone believed in.

Any other process - highway throughput, software memory usage, year over year daily sales, cancer survival rates, just about anything getting 30% worse in two days would be a pretty pathetic failure.

Perhaps it is just noise, and it'll bounce right back to IPO valuation. I'm skeptical that that price was reasonable.

[sunchild]

If there's one thing I've learned about "the smartest guys on the planet", it's not to listen to what they say to the public. If you're on the front desk, you might get the real story behind the news.

[rapind]

Agreed. Reminds me of all the smart people claiming there's no housing bubble back in 2005.