Groupon : How Good Of A Deal It Is For Investors?

Must read for everybody. Entrepreneurs, investors and some of you may start with a pinch of salt but to most people that are aware of how most of these hyped VC darlings and highly ‘valued’ companies work, should be just a reminder of the hard reality and what to focus on.

There was a lot of discussion on ‘Custom’ metrics that Groupon came up with to show to the world that it is actually doing great and making profits. But it turned out, they are all ‘gimmicks’ to hide costs and show profitable when it is actually loosing money.

"Alright, you caught us. We're actually not making any money. In fact, we are really losing a lot of money."

This is the essence of Groupon's declaration last week that it will remove the controversial accounting metric called Adjusted Consolidated Segment Operating Income (ACSOI) from its financial statements. ACSOI essentially measures Groupon's profits before subtracting its subscriber-acquisition costs and stock option-based compensation. The metric was an attempt to put a thin veneer of respectability on what are extremely disconcerting profitability numbers for the company. In the first quarter of 2011, Groupon posted a net loss of $113.9 million. Yet, the company reported ASCOI of positive $80.1 million. In most recent quarter, Groupon's losses continued to mount as it begrudgingly abandoned the ACSOI metric amidst criticism and incredulity from the SEC.

Source: Groupon Doomed by Too Much of a Good Thing, Harvard Business Review

Text highlighted by me. Some more key excerpts that are kinda shocking to most unaware readers but totally in line with most ‘valued’ startups of the day.

Groupon's fundamental problem is that it has not yet discovered a viable business model.The company asserts that it will be profitable once it reaches scale but there is little reason to believe this.

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The real cause of Groupon's problem is that it had too much of a good thing. With over $1 billion of venture capital money to invest in growth, what manager has time to worry about profitability? Groupon's "bad money" — investments that were patient for profit but impatient for growth — did not instill the discipline needed to enable the company to emerge as a successful standalone venture.

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The story would be much different if Groupon did not have nearly unlimited access to funding so early in its corporate life