At the same time it becomes more public knowledge that 2010 funding rounds were to buy out early investors, who made out like bandits, and retail investors, pension funds and so on lose a huge stack of money.

Now look at that (admittedly pessimistic) picture and try and tell me there won't at least be calls for "reform".

One company with a 280 million dollar bankruptcy (or, more realistically, by the time of the IPO it will be a few billion dollars) isn't going to make a big dent in how the markets work. But, a half dozen such companies in the same boat when the bottom falls out of the market and the fallout for all of the companies that they suckered into taking these deals, could very well lead to something scary enough to get regulators and legislators involved.

It's plausible, if not entirely likely, that Groupon, and their ilk, could very well kill IPOs for the rest of us for yet another decade.

If groupon defaults, the businesses will just not honor the groupon coupons. After all, they haven't been paid for.

The entire hypothesis of this article is that Groupon amounts to a marketing firm where you pay most of the cost in kind much later, instead of paying up front for a big marketing campaign. The 'in kind and later' part makes your scenario absurd.

However, I this article basically misses the point. Lots of businesses have excess capacity that costs them nothing to utilize. For example, a hair salon which employs 4 stylists will have several hours per week, and perhaps many more, where a stylist is idle. Giving someone a very cheap haircut when otherwise idle is a chance to win a future paying customer, and has basically no cost. It's a win for the customer and a win for the stylist, and of course groupon is getting a fee for that.

The same is true of items, like designer clothing and food, that have absurd markups. Selling it for closer to cost will cannibalize some future purchases, but overall isn't really that harmful, and may generate recurring income from newly converted customers. It is certainly MUCH lower risk than an advertising campaign, in that all the cost is baked in to people who actually show up in your store, instead of spread to the wind in the hopes of hitting the right people.

The problem with groupon is that it has no moat. http://37signals.com/svn/posts/333-warren-buffett-on-castles... Any competitor can come along and set up an identical business, and there is basically no network effect to speak of to keep customers coming to groupon instead of living social or any other competitor, and no risk for retailers or customers of trying another competing site. This is why there is 1 classified site in the US (craigslist) and 1 auction site (ebay), but innumerable comparison shopping sites all sharing the same retailers (amazon, half, cnet, shopping.com, pricegrabber, etc etc).

I dispute this assertion or, in the very least, see this as being far more complex than you suggest, for two reasons:

1. Customers who might otherwise pay full price will end up using these deals, which is a direct loss to the business; and

2. The inventory may be used up by such offers to such an extent that customers who might otherwise pay full price may not be able to do so.

> The problem with groupon is that it has no moat.

On this point you are I agree.

As for being "win win", apart from the above, you have to look at a number of factors:

- Do Groupon customers return?

- What word-of-mouth do they give to businesses as a result?

- How much do they spend (initially and on repeat visits)?

- Are they people brought in by Groupon representative of your existing or desired customer base? There is plenty of anecdotal evidence suggestings "Grouponers" are "cheap" (both in spending habits and tips).

The "offer marketplace" providers (Groupon, LivingSocial or whoever) seem to be missing a golden opportunity to mine useful data here by tying an offer redemption to an actual person.

Yes, This is one of the most dubious Groupon "sells".

There are a very small class of businesses that excess capacity which costs nothing to use. These mostly the type of business where you're just consuming an "experience" - adult classes, skydiving school, etc. Unfortunately, a big part of business, classes, is already competing with the Internet. And so the rest is skydiving schools, martial arts schools, and yoga schools, the few places where you just have to be there. But those are pretty marginal.

Restaurants certainly aren't in that class. Food is expensive. Food is a significant share of cost for anything but the most expensive restaurants. Sure, restaurants may throw food away each day BUT the only way to profit from that optimizing that is to sell food cheap on the contingency that its available. That's far from the Groupon model and clearly would "cheapen" the feel of any given restaurant.

I heard of a restaurant in France years ago that priced by the hour. That could actually cut waste to nearly zero - but it would destroy "the feeling of specialness" which many higher end restaurants cultivate.

Anyway ... the staff and building sit idle for a lot of the time. On a Friday night, there's lots of people. But on a Tuesday at 4pm, there won't be a lot of customers.

I guess you could look for chefs that only wants to work from 11-2 and 5-8, Friday and Saturday, but most chefs want to work 5 days a week.

A lot of restaurants have under 10% rent.

Assuming the GP was generalizing "Rent" to include all expenses associated with the physical plant and presence, the sample income statement linked is close enough to that 30% number.

But your call on whether my assumption is too generous :)

A pan may be a fixed expense but it is to a significant-extend used up at the rate that people consume food, so it's not really "free" if fewer people are in the restaurant. Only "rent rent" and wages if fewer people in the restaurant.

Essentially, economies of scale might be possible in operating a restaurant but the place would need to be organized for this from the beginning - the simple ability to get people in the door is worth less than a large share of the receipts.

I generally disagree with your sentiments in your post but had nothing to add that really interested me to say.

Speaking from personal experience, the GP is correct. At my local climbing gym, the groupon special just brings in 30 extra new faces to the already crowded gym during peak hours. The slow times are just as slow as always.

They are now under-staffed during the peak hours (which get busier every time they offer a special) which means that the general state of the gym declines and the new customers just accept it because hey, they got a deal right?

It's a race to the bottom and I can see customers turning to businesses that focus on offering a great experience every day. Those businesses don't use groupon.

As for the worst case scenario, for the sake of all the small business 'investors' in Groupon (though I'm not sure that they actually realize their participation), I certainly hope that something like this doesn't happen.

However, considering the ugly and apparently underhanded 2010 funding play, some investigations may be in order.

Besides which, the chairman of Groupon is already Mr. Class Action Lawsuit. So, based upon previous performance, one can likely predict future results in this case.

The latter two committed actual fraud. As in, this article would be saying "Wow, Groupon is hugely profitable" rather than the press we're seeing now.

shouldnt it be illegal by law to invest pension funds in startups - especially in startups having some of the ugliest balance sheets on earth