[api]

This is diplomatic and charitable. When I see a repeat pattern of GroupOn and Zynga type companies I see someone who knows how to pump and dump. It's not quite fraud but it's getting close, given how loose these sorts of people typically play the truth.

[pg]

Calling Zynga and Groupon pump-and-dump schemes is a mark of one's one's understanding of business in much the same way that believing vaccines cause autism is a mark of one's understanding of science. Mark Pincus and Andrew Mason are both still running these companies. Running a public company that's doing badly is extraordinarily painful. No one would bring that on himself.

[tptacek]

I am with you on how misplaced the enmity towards --- well, at least Groupon. But there have been well-known public companies that did badly that were essentially scams, such as during the channel stuffing scandals of the late 1990's. So while I sympathize with your irritation at the "Groupon is a Ponzi scheme" meme, the last sentence of your comment is simply wrong; it's wrong directly (a counterexample would be Sanjay Kumar) and it's wrong in what it implies.

[pg]

If anything that supposed counterexample supports my point that the accusations these people casually make in HN comment threads are so much more drastic than they realize that they're their own reductio ad absurdum. Running a public company that's a scam tends to entail criminal behavior. Especially nowadays.

[tptacek]

CA didn't start out as a deliberate scam, and continues to run today despite being essentially a scam for many years. The companies we're talking about today --- Groupon, Zynga --- don't have long enough track records as publicly traded entities for us to presume they're run in good faith; variants of the things that got Kumar sentenced probably aren't even crimes when they happen during mezzanine funding, when the people being "scammed" are sophisticated investors.

You implied, Zynga isn't a pump-and-dump scheme because Mark Pincus still runs it, and nobody would inflict the management of a poorly-performing public company on themselves. Well, that's just not true.

There are better arguments against the assertion that Groupon is a pump-and-dump scheme than "it must suck to be Andrew Mason these days" (it does not suck to be Andrew Mason, by the way). For instance, Groupon was open about its liabilities and the enormous risks it faced, and its whole industry sector was very carefully scrutinized.

I'm done arguing this point. My nerdly brain just couldn't handle the idea that being Andrew Mason in Q4'12 is so painful that simply holding his job imputes him credibility.

[mkramlich]

> My nerdly brain just couldn't handle the idea that being Andrew Mason in Q4'12 is so painful that simply holding his job imputes him credibility.

Agreed. If Pincus and Mason are having a hard time now, I'm sure they can have a good cry in their mansion or on their yacht, weekends in Aspen, luge lessons in Zurich, private Zoroastrian monk mentoring, perhaps a custom birthday song written by the Rolling Stones -- you know, the typical way of handling such hard times as these.

[mlchild]

I believe PG's point is that creating a company as successful as Groupon or Zynga from scratch requires an incredible level of psychological and man-hour commitment, in addition to constant creative and iterative idea generation. The idea that they are pump-and-dump schemes is absurd in light of this essential truth.

[wslh]

so, adding a painfulness metric is not a right when the incentives are huge.

[pron]

Sure, but these accusations shouldn't be taken as personal attacks against specific companies, but, rather, as a sense people get of "silicon valley" and the startup economy. It could just be jealosy or schadenfreude (which shouldn't be entirely discounted :)), but I take it as a political statement. Even if the facts in some particular case can be refuted, these statements express a true and valid sentiment about the state of affairs.

[api]

I wasn't suggesting that it was conscious con-artistry (though I don't completely rule it out either).

I worked in business consulting for a bit. Part of what I learned is that at least some emperors have no clothes. There were really two main types I encountered:

(1) Extremely competent, hard-working executives who try their best to build real value.

(2) Fast talking dominance machines. Sociopaths, really. They make big promises, send a lot of primate dominance gestures, and generally build vapid unsustainable businesses that eventually fail. Yet the failure never sticks to them, and it often never sticks to their initial investors. Usually it's handed off to someone down the line (later investors, the public, employees, etc.).

When I see a resume that consists of a series of a series of unsustainable businesses where the early investors and executives made out well by handing a bag of flaming poo to later investors, I tend to suspect that we're dealing with category (2) players.

I also suspect that when I hear of extremely magnetic reality-distortion-field personality types. There is a certain kind of charisma that I take as a contrarian indicator.

[javajosh]

It's interesting to me that api's vague attack on the leadership of certain companies is pushing your buttons - going so far as to call his comment 'drastic' and 'absurd'.

The key point here, I think, is to be very careful to distinguish between a failure to build sustainability, and willful maneuvering for maximum personal gain at the expense of sustainability. The former is a noble failure, the later is deeply unethical (if not illegal) and ne'er the twain shall meet!

[tatsuke95]

>"Mark Pincus and Andrew Mason are both still running these companies."

Because, at least in Pincus' case, he can't be removed. It would be pretty hard to argue that he wouldn't have been canned under different circumstances.

"Pump and dump" may be a bit much. But I'm glad that it's coming to light that business shadiness doesn't start and stop with the financial industry; it occurs everywhere there are substantial amounts of money changing hands. The Valley has some pretty serious scum-baggery going on. I hope we hold the people who promoted this stuff accountable in the court of public opinion.

[drumdance]

Yes, but he can cash in and quit. Why hasn't he? I've never run a public company but I know some who did during the first dot-com crash and it was not pleasant.

[ahi]

It's not easy to liquidate a majority stake in a large public company into cash. At least, not quickly.

[rms]

Because that signal might destroy the company?

[drumdance]

So what? If he's the sociopath everyone makes him out to be, who already has more money than God, what's the big deal?

My point is that "good vs. evil" style commentary is useless. It automatically lowers the commenters' mean IQ by 15 points.

This, of course, is the reason discussing politics (as opposed to policy) is generally a waste of time.

[majani]

That's a rather off-colour reply, it has to be said, sir. First you resort to an absurd comparison in a poor attempt at snark, then you claim that Mark Pincus and Andrew Mason are severely pained by their lacklustre performance on the public markets, without providing any evidence of that. This deserves downvotes in my opinion.

[knieveltech]

Definitely not up to PG's typical standards for a reply.

[api]

I get the impression it pushed a few peoples' buttons because the startup culture likes to think it's morally superior to Wall Street.

[ahi]

Pincus and Mason may still be running them, but they both already cashed out big time.

[staunch]

Don't you see how that defies the notion that it was a pump and dump? Why would they (with tens of millions of dollars) stick around?

No one can force them to stay. They're already obscenely rich. Think about what their motivations must be.

[tptacek]

As I noted above, this isn't really an argument. Sanjay Kumar made hundreds of millions of dollars from CA and could have left long before he was indicted having already ensured that none of his grandchildren would ever have to work a day in their lives.

[staunch]

If you think they're sticking around to make more money, then they must be trying to repair the company's stock price. Or you think they're still there out of a sense of pride or guilt.

Either way it's not a pump and dump, and their goal is to turn the company around.

[sirclueless]

The only thing their continued presence at their respective companies tells us is that they think they can do better by staying than leaving. Mark Pincus might be staying at Zynga because he thinks he can turn around the stock price and make it a sustainable company, or he might be staying because he thinks there is plenty of profit to squeeze out of the company as it dies. There are reasons to stick around besides goodwill towards the company.

[corford]

These guys obviously aren't the sort of people that are happy to lie by the beach reading a book, quietly enjoying their millions.

They're alpha dogs in the absolute worst sense of the word. They thrive off ego, winning, power, greed, narcissism and all those other lovely traits most people pulling similar moves seem to have.

Think Gordon Geko. Remove the pin stripe suit, fast forward 30 years and change the modus operandi from cynical asset stripping to cynical stock hyping and you get...

Edit: a more charitable view, in Pincus' case, is he isn't THAT evil and instead simply made a hugely expensive mistake buying OMGPOP. That wrecked the balance sheet and he's holding in there trying to recover.

[9999]

That thing that you said there does not describe Andrew Mason in any way shape or form. He used to post on a forum that I spent a lot of time on in the early 00s. He's a clever, funny guy, and he took most of his lessons in ethics from Steve Albini. Before Groupon, he created The Point which was a group funding site for social initiatives that in many ways resembled Kickstarter.

[ahi]

Maybe not Mason, but it seems like a reasonable assessment of Lefkofsky.

[corford]

I'm happy to stand corrected on Andrew Mason since I don't know an awful lot about him. But as others have said, Lefkofsky definitely appears to fit the profile.

[ahi]

Not really. There's still money on the table so they are still playing.

[lwat]

> Running a public company that's doing badly is extraordinarily painful. No one would bring that on himself.

I would openly run a company into the ground if I got hundreds of millions of dollars in the process like they Zynga or Groupon guys did.

[antr]

Agree on GroupOn and Zynga, and there are still plenty of popular services which are far from being economically sustainable and yet everybody says what a "great company" that is, when in reality all it is is a "great product/service" with no revenue proposition (still, kudos for building it). See Path, Foursquare, Turntable.fm, Tumblr, etc.

If the liquidity from large companies such as FB, Google, AOL, Yahoo, etc. disappears, the value of the above mentioned startups will collapse. A big part of the startup ecosystem is a house of cards, unfortunately many first time entrepreneurs did not experience the .com rise and bust to understand what a downturn really looks like.

[untog]

I would actually exclude Foursquare from that list- they're building up a really interesting collection of business partnerships- the one with American Express was particularly significant.

Doesn't mean all their money making problems are solved of course, but they're further down the line than turntable.fm are, who continue to confuse me in terms of their lack of business model.

[pron]

To reiterate what I've said in my comment above, I'm not sure this is a downturn. A downturn implies some shift in the market, while this phenomenon is intrinsic to the particular startup economy. There might be a downturn in investment, though, as this inherent behavior gives rise to investment cycles.

[hkmurakami]

>See Path, Foursquare, Turntable.fm, Tumblr, etc.

Gasp How could you forget Quora! :)

[pron]

I don't think it's fraud, or anything like it. After all, there is something so-far sustainable here, and it's not the companies; it's the pattern (which is not quite new), and fraud is never sustainable. I have a theory about why we see this pattern, and it starts with how those companies are financed.

VCs fund many promising startups, often flooding them with money that can support the company for a long time, while maintaining a very active public image that perpetuates the sense that the company is successful. Not only is the actual business value hidden, VCs encourage the companies to not try to turn a profit, but to grow very, very quickly. This is, perhaps, what obscures the actual value the most.

Now, why do VCs do that? Because they hope for a good ROI, and some of them do quite well (the entire portfolio taken together, of course). Some say that VC's true desired goal for a company is an IPO, but IPOs are rare, and, I think a good IPO (for anyone who's not Facebook) is only about 10x that of a good acquisition. So I believe, that it is the acquisitions (that outnumber IPOs more than 10x) that really drive the VC investments, and, in turn, the whole industry.

But how can acquisitions be the bread-and-butter of the industry if so many of them fail (for the acquirer, that is)? Because, on the whole, acquisitions are still much cheaper for the acquirers than funding their own technology - or market - research. Instead of throwing a lot of money on large, money-hungry research departments, Big Tech would rather let a ton of entrepreneurs and VCs fight it out, and award the winners handsomely. The price they pay is far less than what they would have had to invest doing independent research.

So, who loses? I'm not sure anyone does. Entrepreneurs get the independence, excitement, and the possibility of huge payoffs of a winner-takes-all market; VCs - well, some of them - do alright, and Big Tech saves a ton of money on thousands of employees they don't need to directly employ and manage. Oh, and bloggers and industry insiders get a lot of juicy gossip and cautionary tales.

The one remaining question is, how come so many companies seem very promising, get good indications from the market, and then slowly (or quickly) declines. I don't have a good answer, but I do have a hypothesis. Web companies mostly compete in a global market. That means that in order for them to succeed, all relevant consumers must learn about them, and must learn about them quickly (fast growth, right?). But this is just not possible, because the average consumer can only keep in mind a bounded (and rather small) set of vendors. So, not only is, say, Groupon competing with uhmm, I dunno, Amazon, maybe for the purchase of some items, it is also competing with Zynga over my time. And not only that, it's even competing with Salesforce because there are only so many products I can even remember to use on a regular basis. And when new startups are funded, they are encouraged to very quickly get global attention, and - out with old, in with the new - novelty seeking consumers forget about yesterday's big thing.

So all of these companies are competing with one another for attention, so the question is, how many fast-growth, global companies can even prosper at the same time?

[jonnathanson]

"So, who loses? I'm not sure anyone is."

Well, if you factor in the opportunity costs of the capital and talent allocated to unsustainable companies, then there's a good argument that the US economy loses. Every dollar invested in Zynga or Color is a dollar that could have been invested in something productive over the long haul. Every talented programmer that goes to work at a flash-in-the-pan, overhyped startup creates opportunity costs and economic inefficiencies by not working at more productive enterprises, creating real value. The wage and equity inflation created in the job market by overhyped startups leads to similar inflation across the industry, raising operating costs for everyone in the business.

All that hype-based investing does is swap money around between a relatively tiny cohort of people. It doesn't create real value over the long run, and all the real value that is foregone is opportunity cost.

[pron]

Well, I don't know. Suppose all those engineers were working for a company like IBM or Google, doing research. Much of their work would go to waste, too, as most research does not turn into successful products.

I think this is an interesting cultural change rather than a loss. Engineers are willing to sacrifice job security for a small chance for a big payoff. The winner-takes-all approach has long been part of the American ethos, only now its working its way down from the capitalists to the workers. I just think it's interesting.

You could say, though, and I think I've written it before, that its the workers (i.e., startup employees) that lose. If the theory is correct, then Big Tech is exploiting the workers' naive preference for promises of big rewards over regular, secure, pay. But, again, I don't know if that desire is naive; most startup folks understand the chances well, and still choose as they do. Maybe the excitement and perceived freedom are worth more than money to them. They sure are to me.

[jonnathanson]

I don't think there's anything wrong, per se, with engineers wanting to gamble on bigger, riskier projects. Nor do I necessarily see the "productive vs. hypey" dichotomy as a strict dichotomy between startups and the IBMs and Googles of the world.

But I do think that there's a major opportunity cost incurred when dollars and talent get shuttled into hypey, bullshit-driven companies instead of legitimate ones. Including legitimate startups.

Of all the risky startups who could potentially get funded and attract talent, it's better for the good ones to get the money and the talent if possible.

To put it another way: the VC system should be selecting for the next Google, not the next Color. But to whatever extent it's selecting for the next Color, it is sub-optimized. That degree of sub-optimization is the opportunity cost / inefficiency inherent to the system.

[pron]

Yeah, well, every investor would rather invest in a "legitimate" startup, and every engineer would rather work for one. But telling which is which is the tricky part, isn't it? Some things are only obvious in retrospect.

[jonnathanson]

While true, that's beside the point at hand. The author is suggesting that the VC system is consciously selecting for the Colors of the world -- or, at the very least, that it has created conditions conducive to the next Color.

In other words: it's not simply betting at the track and ending up with the wrong horse. It's actively betting on what it knows to be the wrong horse, because the wrong horse pays off in the short term.

[drumdance]

I think Groupon was/is overvalued, but I also think they can deliver value beyond leads. I believe they already offer a booking service, and they should be offering opt-in email, social management services, and other services that SMBs have already shown they will pay for.

They may have grown too fast to do it under the Wall St microscope though.

[roc]

That's like saying Pets.com could have worked out -- given how readily people took to buying pet meds, food and accessories over the internet -- if only they hadn't grown so fast.

Growing so fast is not only a problem of expectation, it's a problem of massive overhead that competitors don't have. That's going to harm their competitiveness in anything they do.

[drumdance]

The reason I said they grew too fast is I experienced this myself in the late 90s. I was with a public company that did email marketing services. That sector has turned out to be a massively profitable business. ExactTarget just went public about 6 months ago, and I know a lot of other private players who are doing very well.

The company I was with failed because they bought into the "get big fast" meme that was driving consumer Internet companies. So they went on a acquisition spree, tried launching too many products when they should've just focused on their core, opened several international offices etc.

AND they were already public, so they had to deal with all the BS that comes with that.

The did all of this inside of two years. It was senseless. A company culture rarely scales that well.

And it turns out that in most B2B markets (except for commodities like bandwidth), you don't need to grow that fast. You need to grow in a way that makes your customers happy, yes, but you don't have to worry about everyone suddenly adopting a new competitor (i.e. switching from Yahoo to Google).

But when you have investors throwing money at you, it's easy to think that every decision you make is genius and that you can solve problems simply by throwing money at them.

So to my original point. I think Groupon has multiple strategic options, but it may take them 3-4 years to see them through and in the meantime they have to justify their valuation to angry investors every 90 days. This would not be necessary if they hadn't bought into the "get big fast" mantra.

However, I believe they do have lots of cash in the bank so they may still have time to turn it around. It will be painful and take years.

[ahi]

As far as I can tell, the cash in the bank isn't theirs, it belongs to the SMBs. They don't have 3-4 years.

[patmcguire]

Groupon may never make money, but some company with a similar business model will eventually make a profit. What deal of the day sites offer that no one did before is an immediate and essentially limitless supply of customers.

Even if most companies lose their shirt on that, there are going to be some industries and situations where infinite customers at a temporary loss makes business sense, and once the market for it becomes rational again someone will be able to do it better than they could internally and make a profit on it.

[drumdance]

It was many years before Amazon.com made a profit. Compared to them Groupon is ahead of schedule.

[Tipzntrix]

But that's what GroupOn was betting on to begin with!

[danso]

I have to strongly disagree with comparing Groupon to any of the OP's failed examples. Groupon may well run into the ground, but consider that:

a) It was the first big success in its space b) at its peak, hired dozens (hundreds?) of actual employees, even copywriters from journalistic institutions. c) Had a huge, huge base of customers

Groupon's leaders should be faulted for the various strategies and actions that have put the company where it is. But Groupon did create a vibrant service out of something that seemed quite pedestrian (can't you just get coupons from the weekend newspaper?)...and a lot if its downfall comes from how easy it is to copycat it.

Color, in contrast, had none of the above.

[enraged_camel]

>>It was the first big success in its space

Success that is not sustainable is not success.

>>and a lot if its downfall comes from how easy it is to copycat it.

No, I don't think so. The real (and perhaps the only) reason Groupon is not sustainable is because the fundamental assumption that the business model rests on turned out to be false. Let me explain.

The original idea was that Groupon would team up with a business and provide deep discounts to consumers to encourage them to try out that business. The assumption, which Groupon's sales folks used aggressively to push sales, was that a significant portion of those consumers would like the business so much that they would become repeat customers, thereby (in the long run) offsetting the cost of the original discount. In the end, the business would turn a profit.

Except it didn't work that way.

What ended up happening instead is that the vast majority of consumers never actually went back to the business. The reason is simple: while they could justify paying X dollars for the business's product or service just to try it out, they couldn't justify paying X times three or four. Because of this, most Groupon clients (the businesses) end up losing money, and never offer a second or third discount via GroupOn.

This is why GroupOn has such a huge number of sales reps: they need an ever increasing number of clients in order to postpone the inevitable sinking of the ship.

[webwright]

"Because of this, most Groupon clients (the businesses) end up losing money, and never offer a second or third discount via GroupOn."

That's false.

in Q3/2011, 33% of Groupons merchants were people who were doing it for a second time. That number was up to 56% in Q1 of this year.

The deals are getting less lopsided-- $12 for $24 at a restaurant where it's challenging to eat for anything less than $50 is a pretty good buy for a restauranteur. With most of their costs tied up in fixed costs (real estate, etc), they aren't losing much (if any) on this a deal of this size.

You're also somewhat wrong when you say, "The original idea was that Groupon would team up with a business and provide deep discounts to consumers to encourage them to try out that business."

That was part of the original idea, but there are a few other benefits. 1) Filling empty seats for businesses whose costs are largely already incurred 2) It's an effective cash advance for the business- they recognize the revenue quickly (it's like a Kickstarter campaign).

[patmcguire]

I don't think you're correct about the cash advance - as I recall the merchant only gets paid when the coupon is redeemed. Groupon keeps the float and the breakage.

[webwright]

Here's a recent state of things... It's a bit of a moving target, but they get a big chunk up front.

http://venturebeat.com/2012/05/07/groupon-tightens-its-payme...

Another thing to realize is that they get the money REGARDLESS OF WHETHER YOU REDEEM IT. EVER. Depending on the type of Groupon, upwards to 20% of them are never redeemed (this is a dirty secret of gift cards, too).

[cellis]

"Success that is not sustainable is not success"

I guess you think everything ever invented is a failure then?

[angryasian]

I think another point to mention with the popularity of social media, deals could be offered directly once a sustainable customer base was built using the initial audience from groupon. Cut out the middle man.

[prostoalex]

>> Success that is not sustainable is not success.

You're confusing the product and the company. iPod in your definition is not a success, and neither is Sony Walkman.

[antr]

Success? GroupOn isn't profitable, it hasn't even returned via income the equity invested + accumulated losses. Anyone can hire tonnes of people, pay them, provide a service/product, and still deliver negative equity returns. Anyone.

[danso]

...But not Bill Nguyen (at least with Color).

I probably gave more than $200 to Groupon during the time that I found it useful. I checked into Color over a period of weeks and never stayed on for more than a minute.

So while both are money-losing ventures, I think Groupon should still be ranked higher than Color.

[hkmurakami]

>Anyone can hire tonnes of people, pay them, provide a service/product, and still deliver negative equity returns. Anyone.

Well I don't think anyone can successfully pitch investors and take millions of dollars of their hard earned (sometimes) money, but agreed on the other points.

[antr]

who is talking about raising capital? is raising equity capital a measure of a success? i'd say the contrary. equity is the most expensive source of financing. i've raised equity, and trust me, it's a mixed feeling.

[TeMPOraL]

GroupOn had also this ridiculous idea that small businesses can earn return customers by offering them extremely huge discounts.

[megablast]

If you look at it as a form of advertising, it is a great idea. And I am sure there are a number of returning customers.

[Retric]

I suspect the real problem was the size of their discounts. Selling a 40$ bottle of wine wine for 20$ attracts far more people that buy 20$ wine than people who buy 40$ wine. So unless you can afford to keep selling at 20$ the odds of repeat bushiness is low.

Really when it comes to coupons there are three options that actually work. You can always have a sale, you can make it a pain to use, or you can limit yourself to 10 to 15% off.

[pyoung]

That would have definitely been the much more sustainable approach. Although I have a feeling that offering discounts of 10-15% would not have resulted in the hysteria that they originally generated and thus would have limited traction. It is one of the many ironies of their story.

[carbocation]

Well, that is the proposition. It turns out it may be false, which in fact would explain why Groupon is doing poorly.

Giving discounts may induce the most price sensitive to use your service. They will continue to be price sensitive, and stop using your service once the cost returns to normal.

If the opposite were true, and if business actually did profit from this approach, then it is likely that Groupon would be killing it.

At the end of the day, some types of retailers find ways to profit even off of the price sensitive, but it seems to be the case that the same is not true for most Groupon-trying businesses.

[tesseractive]

A hypothetical ideal business in this segment would find a way to profit off of attracting people interesting in sampling new businesses for long-term patronage rather than making its money off of the price sensitive. The idea would be that you would find a way to make the proposition most appealing to people who are looking for a new... hairstylist/florist/gym/supermarket/whatever, and either avoid targeting offers at people who are likely to sample at a low price and move on, or make the offer less appealing to them.

This has been a key part of the mailing list business for many years -- lists that target people who have recently moved, gotten pregnant or had a baby, gotten married, and so on. Special offers with unusually good deals are then offered, because the chance of converting a percentage of the recipients into long-term customers makes it worth it.

If this kind of business model has been translated to online effectively, I'm not familiar with it. Certainly some of that effect can be achieved with the right search keywords or the right websites to advertise on (e.g. baby name sites), but businesses like Groupon and Living Social have brought in many more price sensitive customers than actual long-term business prospects, which is one of the big reasons why they are not more successful.

[padobson]

I don't think the author of the post is arguing that GroupOn isn't a good product, it's just not a sustainable business. The company they build fills a need for its customers, but it doesn't make money for GroupOn by fulfilling that need.

[bduerst]

I doubt it's fraud-level, but it is cashing in on the hype-machine in the silicon valley. If there wasn't a market for this, then we wouldn't be reading this article.

VCs do due diligence - success for them isn't just funding a real business, but more along the lines of cashing out at the right moment.

[pron]

One thing to realize is that the "hype-machine" is a cornerstone of modern, capitalist, economy. So much in the economy is built around expectations, so I wouldn't single out silicon valley. Silicon valley, since it occupies the innovation/novelty niche, is just a exaggerated, caricaturized, even (not necessarily in a bad way), microcosm for the entire capitalist economy.