Archive for the ‘Bubble 2.0’ Category
Is Groupon on a Glide Path to Bankruptcy?
Last night, Groupon just released its earnings for the quarter ending 30th September 2015. Revenue was below expectations, and flat compared with the same period last year. The company issued revenue guidance for Q4 of $815-865m, which would be a drop on the same period last year ($883m), suggesting that growth has stalled. The share price dropped by 25% in after-market trading.
There’s more bad news buried in the balance sheet numbers. Groupon benefits from a negative working capital model, where it receives gross revenue 60 days before it has to pay its suppliers. During the year before its IPO, Groupon’s current liabilities exceeded its current assets by hundreds of millions of dollars, which meant that it was reliant on continued growth to remain solvent.
The money it raised from the IPO eliminated that deficit but the situation deteriorated sharply during the past quarter – net current assets (i.e. current assets less current liabilities) plunged from over $300m to just $87,000.
Part of the decline is attributable to a share repurchase program – the company spent $192.9m repurchasing shares (which seems ill-advised with hindsight, given that it paid an average of $4.36 for shares that are currently trading at $3.09).
If revenue growth has indeed stalled, and the decline in net current assets continues into negative territory, Groupon could once again find itself at risk of the loss-of-confidence scenario I described four years ago:
..the question that merchants should be asking themselves is this: Will Groupon be able to pay me what they owe me in 60 days time?
If a merchant ever thinks that the answer to that question might be “No.”, they’ll opt not to offer deals through Groupon. Why would you sell (at a heavy discount, mind you) your products or services through a company that may not be able to pay you? Better to take the guaranteed revenue from normal customers who pay up front, than risk selling through Groupon and never recouping a penny.
Without deals to offer to the people on its mailing list, Groupon can’t make sales. If it can’t make sales, it can’t generate revenue. And, if it can’t generate revenue, its negative working capital model will very rapidly lead it to run out of cash.
The most dangerous thing about this situation is that it doesn’t matter whether or not Groupon actually can pay the merchants. If enough merchants believe that Groupon is not creditworthy, a tipping-point will be reached and it will become a self-fulfilling prophecy.
So, Groupon’s negative working capital model exposes it to the risk that a loss of confidence could cause it to become insolvent.
When I wrote that, I questioned the wisdom of Groupon’s decision to pay out most of the money it raised in its Series C, D and E rounds to previous investors. Today, I wonder why it’s depleting its cash to repurchase shares when there’s a real risk that it might need that cash to remain solvent.
Bitcoin Part 2 – The Legacy
“The test of a first-rate intelligence is the ability to hold two opposing ideas in mind at the same time and still retain the ability to function.” — F. Scott Fitgerald
I previously wrote about Bitcoin’s flaws. However, despite the fact that I doubt Bitcoin will succeed as a currency, I expect that it will leave a positive legacy. For all its flaws, Bitcoin has garnered far more usage and media attention than any previous cryptocurrency. That will have long-term ramifications, for a number of reasons.
Bitcoin Part 1 – The Flaws
When I return home from an overseas trip, I toss my left-over notes and coins into a drawer. Euros and US dollars obviously get used (as long as I remember to take them with me!) but the dirham, rubles, rupees, yuan, francs, and dollars from Hong Kong and New Zealand just sit there gathering dust – pieces of paper and metal that are effectively worthless here in London.
However, for all its faults, physical notes and coins remain the only way in which you can transfer currency in a decentralised fashion. Electronic money – the ones and zeroes in our bank accounts, the records of credit card transactions and inter-bank transfers – ultimately rely on central banks and mechanisms like CLS, which keep track of how much money each bank has.
Bitcoin is an effort to bring the advantages of physical currency – specifically the ability to transfer wealth with little-to-no cost and without needing to involve anyone else in the transaction – to the electronic medium.
(Many assume that Bitcoin transactions are anonymous. They’re not. All Bitcoin transactions are recorded publicly in the blockchain. At best, Bitcoin transactions are pseudonymous; at worst, network analysis – something that security and intelligence services are very good at – can provide major clues to participants’ identities.)
I first became aware of Bitcoin in 2010, when someone paid 10,000 bitcoins for a couple of pizzas. My instinctive gut reaction was that it was an interesting technology but, ultimately, would prove to be nothing more than a fad. Three years later, I have yet to be proven correct. Enough people have supported Bitcoin that an eco-system has built up around it. There are online exchanges where you can buy and sell bitcoins for dollars, euros or pounds; payment processors that allow merchants to accept bitcoins for goods or services; casinos where you can gamble your bitcoins; and online marketplaces where you can use bitcoins to buy drugs.
Foursquare does a down round
11th April 2013 Update – Foursquare have finally announced a $41m round of debt and/or convertible debt. Union Square Ventures’ Fred Wilson has blogged about the round.
Keith Rabois appears to be enjoying his birthday. After a Twitter tête-à-tête with Foursquare founder/CEO Dennis Crowley (which was amusingly misreported by Business Insider as “Square-bashing”), Rabois referred to “another down round” (emphasis mine) at Foursquare, which intrigued me, so I asked the obvious question:
Andrew Mason’s legacy
Yesterday, Groupon announced lacklustre earnings, which caused the stock price to tumble by nearly 25%. This evening, the company announced that Andrew Mason is being replaced as CEO. Within minutes, Mason posted a memo admitting that he was fired, which people have described as honest, charming, humble and “a good standard in how to leave“.
People have short memories. Throughout 2010 and 2011, Groupon raised $1,098.2m from investors. More than 86% of that money ($946.8m) was distributed to the founders or earlier investors in the form of share buybacks. Andrew Mason personally received nearly $28m. (For full details, see my post from September 2011.)
It later emerged that, at the time the founders and early investors were taking money out of the company, Groupon’s liabilities exceeded its current assets (i.e. it owed more money to merchants than it had in the bank). If Groupon’s growth had slowed during 2011, it could well have gone bust. Mason and Lefkosky’s judgement in opting to enrich themselves instead of bolstering the company’s financial position was questionable, to say the least.
Saturday marked the three-month anniversary of Facebook’s IPO. Its stock price is down nearly 50%, while the S&P500 has risen by over 9% over the same period and the NASDAQ-100 index (which Facebook hopes to join later in the year) is up over 12%. This past week alone saw Facebook shares decline more than 12%, hitting an intra-day low of $19.00 on Friday (suggesting that limit orders are kicking in at that level). Commentators have suggested that the drop can be at least partly attributed to the expiry of the first lock-up period on Thursday but one would expect that the market would have anticipated and priced in the impact of insiders and early investors liquidating a portion of their holdings. The fact that the price still dropped suggests that the post-expiry sell-off may have been greater than expected and doesn’t bode well for the lock-up expiries that are due over the coming months. Facebook could end up rivalling Zynga and Groupon for the title of “largest decline in stock price since IPO” (Facebook, of course, has already won the gold medal for “Largest decline in market capitalisation”).
How can a company that was valued at over $100bn just a few months ago now be worth barely half that?
Well, the scary fact is, it could get worse. Jan-Frederik Kobus came up some valuations for Facebook stock based on the methodologies commonly used on Wall Street. The results aren’t pretty, ranging from $6 to $10.
The only way Facebook is worth $19 a share, let alone $38, is if investors believe that it can generate far greater revenues than it does at the moment. So, let’s take a look at some of the risk factors that could affect its revenue growth.
User Growth
Facebook’s growth has been phenomenal. It rapidly eclipsed the previous generation of social networks and looks set to reach a billion users in the next couple of months. However, if Facebook adoption mirrors the standard technology adoption S-curve, subscriber growth will begin to slow at some point. Every Wall Street analyst covering Facebook will be adding newly-announced subscriber numbers to their graph and looking for any hint that the slope is flattening out, at which point we’re likely to see a rash of headlines and more downward pressure on the stock price.
Competition
The biggest threat to Facebook’s dominance of social networking is that a new entrant will disrupt Facebook in the same way that Facebook disrupted Myspace. Most people believe that the network effects that allowed Facebook grow so large, so quickly, present a massive obstacle to any challengers, but the fact is that, in an era of accelerating technological development, network effects are a double-edged sword.
Bear with me while I draw an tenuous analogy from the financial sector.
In the mid ’90s, the majority of trading in German government bond futures happened on the London International Financial Futures and Options Exchange (LIFFE, pronounced “life”), an open outcry exchange, where all trading occurred between traders shouting and gesticulating furiously at one another on a physical trading floor in London. Its closest competitor, the Deutsche Terminbörse (DTB), had managed to capture the local German banks’ dealflow but it wasn’t until it introduced screen-based trading (which allowed traders outside the trading pit direct access to the market, instead of having to place their orders through brokers who had seats in the pit) that it managed to challenge LIFFE’s dominance. Once DTB captured 50% of trading volume, a tipping point was reached and, within months, the vast majority of trading shifted from LIFFE to Eurex (DTB’s successor), where it remains to this day.
The worst-case scenario for Facebook is that a new entrant builds enough momentum to become the hot new way to keep in touch with one’s friends. Mobile presents the most obvious opportunity in the short- to medium-term but the obvious candidates to exploit it – Google and Path – have failed to make any inroads thus far.
In the longer term (which, to be fair, is probably a time horizon too distant to affect Facebook’s stock price today), the threat is likely to come from a generational shift, in which the children of today eschew the social networks their parents use, in favour of newer, trendier, more fashionable alternatives.
Business Model
The lion’s share of Facebook’s revenue comes from advertising, which is a zero sum game – on the whole, companies don’t start spending more on advertising when presented with new advertising channels; they simply re-allocate their budget to the most effective channels. That means that Facebook must compete against other channels for every dollar of advertising revenue it earns, and the competition for advertising dollars is only set to intensify. The next big development in this area is likely to be targeted promotions, personalised by users’ location, demographic, personal preferences and their friends’ preferences and recommendations. However, this is a space which Google, Groupon and Foursquare are as well-positioned as Facebook to exploit.
The other key revenue stream for Facebook is what it refers to as “Payments and other fees”, the majority of which comes from Zynga, which hasn’t exactly been impressing the markets recently. While Zynga was content to leverage Facebook’s network to grow rapidly, there’s no guarantee that the next generation of social gaming companies (which, chances are, will be founded by disgruntled ex-Zynga employees) will be as keen to fork over 30% of their revenues to Facebook.
Zynga, like Groupon, surfed a wave of hype and explosive growth to rush to IPO, allowing the founders and early backers’ to cash out before it dawned on investors that the business model’s half-life was on the verge of expiring. Google, on the other hand, having triumphed over AltaVista, Northern Lights and Inktomi, found a viable business model and then proceeded to diversify beyond its core search-driven advertising business into apps, maps, videos and mobile phones, and continues to expand into driverless cars, glasses and fiber.
Facebook’s first attempt to expand its business beyond the confined of its own website was an unmitigated disaster and there has been little indication since that the company has either a strategy or the capability to diversify beyond its existing revenue models. Even if it starts tomorrow, it will be doing so while grappling with the challenge of maintaining its existing revenue stream while its subscribers shift to mobile.
Structural Shifts
In a sector as fast-moving as the Internet, the most dangerous threats are the ones that aren’t obvious or even visible – Rumsfeld’s “unknown unknowns”. Yahoo! never imagined that a PageRank’d search engine could replace its Internet directory. Sun Microsystems never imagined that a free, open source operating system running on Intel hardware would triumph over Solaris on UltraSPARC in the enterprise. Microsoft never imagined that Apple would rise from obscurity to rule mobile operating systems and Nokia never imagined that a company with 0% market share would come to dominate the mobile phone market. Back when I started using the Internet in 1993, I never imagined that, 19 years later, I’d be accessing the ‘Net from a handheld, wireless device, with bandwidth exceeding a T1.
Nobody knows that may appear out of leftfield over the coming years but one thing worth remembering is that the most successful communications and media technologies – from the original telephone, thru GSM mobile phones to 3G, from fax to email, from cassette tapes thru CDs to MP3, from VHS to H.264, from Ethernet to the Internet itself – have all been based on open standards and platforms. It seems unlikely that, in ten years’ time, we’ll still be logging into http://www.facebook.com in order to send friend requests, organise parties and share photos.
Facebook’s ability to foresee an recognise such changes, to pivot and adapt to them, will determine whether it follows in the footsteps of Google or Yahoo!
Leadership
The single, overriding factor affecting Facebook’s long-term success, is the company’s leadership. Ultimately, the buck stops with the CEO.
Back in 2001, when it became apparent that Google had discovered a viable business model in the form of AdWords, its investors (led by John Doerr of Kleiner Perkins and Mike Moritz of Sequioa) insisted that Page and Brin hire a professional CEO. They chose Eric Schmidt, who presided over a successful IPO followed by steady growth. By the time he handed the CEO’s baton over to Larry Page in early 2011, Google was generating annual revenue of $29bn.
By contrast, Mark Zuckerberg has held onto the Chairman/CEO role at Facebook. In theory, Sheryl Sandberg brings the managerial expertise that Zuckerberg lacks but, through Facebook’s dual-stock structure, he controls the majority (57%) of shareholder votes, despite owning just 28% of the shares, which makes his position and authority unassailable (as evidenced by his unilateral decision to acquire Instagram). It also gives him the ability to stack the Facebook board with yes-men, if he chooses to do so.
In effect, buying Facebook stock means that you’re betting that Zuckerberg has the ability to lead the company through the challenges detailed above.
The scandal over Facebook’s “selective disclosure” of reduced revenue forecasts to a select group of Wall Street analysts just before the IPO will have dealt a blow to the market’s confidence in Zuckerberg’s. It will also have served to remind them of the controversies over how Facebook was founded and how Zuckerberg tried to screw his first investor. Investors don’t want to invest in a company ruled by a CEO who does whatever he wants – they want to invest in a company led by a CEO who delivers unto them a return.
Zuck successfully built the world’s biggest social network but it remains to be seen whether he can steer it through the challenges it faces, to retain that position.
Update – 20th August 2012, 14:53
Less than 24 hours after I wrote this, news emerged that Peter Thiel has sold the majority of his shareholding in Facebook, which can only add to the downward pressure on the stock price.
Can Groupon Pivot?
Last week, I wrote about the fact that the single largest threat to Groupon’s survival is a loss of confidence on the part of its merchants, in Groupon’s ability to pay its debts. Just as Lehman Brothers was brought down when other banks stopped lending it money because they feared that Lehmans wouldn’t be able to repay, Groupon could be brought down were merchants to stop supplying Groupon with deals if they feared that Groupon wouldn’t be able to pay up in 60 days time.
Since then, Groupon’s IPO has been delayed and news has emerged that Groupon employees are suing the company (credit to Eamonn Carey for bringing that last piece of news to my attention). Meanwhile, Groupon’s competitors continue to gain ground and Google has expanded the “beta” version of its Google Offers service to five more cities.
The bad news is piling up and one has to ask oneself: “Is this the beginning of the end for Groupon?”
Will Groupon be able to pay me in 60 days time?
Update: Commentary added on 7th September after news emerged that the Groupon IPO may be delayed.
The traditional path from startup to success used to be as follows: a company gets founded, it gets funded by VCs and then it either IPOs or gets sold to another company, allowing the founders, VCs and employees who have been granted share options, to cash out their shareholdings and reap their just rewards.
Over the past few years, however, things have begun to change. Companies like Facebook and Twitter are now eschewing IPOs in favour of staying private, in order to avoid the public disclosure requirements and regulations that a public company must comply with. The downside of this is that the time horizon for founders and employees to receive their pay-off stretches out into the dim and distant future. To solve this problem, it has become common practise for shareholders to cash out small portions of their shareholdings as part of investment rounds, thereby liquidating some of their wealth and enabling them to buy a house, a Ferrari or whatever else they fancy. However, when this occurs, it normally only accounts for a small fraction of the investment round, with the majority of the money raised going into the company, to fund its growth and expansion towards an eventual exit (or, if they opt to remain private, profitability).
Groupon have been doing things slightly differently.
Between its founding in 2007 and the Series E round in November 2009, Groupon raised $35.8m.
Then it stepped up a gear. Since the beginning of 2010, the company has raised over a billion dollars – $1,098.2m to be exact.
Here’s the interesting thing: of that $1,098.2m, $946.8m (more than 86%) has been distributed to the founders or earlier investors in the form of share buybacks.
Lies, Damned Lies & Statistics
(or The Importance of Knowing What The Hell You’re Talking About).
Earlier today, Vicky Brock posted a graph to Flickr labelled “ICO website traffic impact of cookie opt in“. She had compiled the graph from the results of a Freedom of Information request to the Information Commissioner’s Office, which had yielded their Google Analytics data.
Before long, tech blogs were writing stories based on the data. Chinwag reckons it’s “cookiepocalypse“, while TechCrunch asks whether you “Want a 90% drop in your site visitors?“. To the casual reader, it would appear that implementing an explicit cookie opt-in, as the ICO have done, will result in 90% fewer people visiting your website. However, this is not the case at all.
The graph shows the number of visitors as measured by Google Analytics. Anyone who, like me, was willing to spend all of about 60 seconds researching how Google Analytics works, would have discovered that Google Analytics uses cookies to track website visitors. If a visitor’s web browser doesn’t accept a cookie from Google, their visit and page views won’t be recorded by Google Analytics.
Before the ICO implemented the cookie opt-in on their website, you had to explicitly configure your browser to reject cookies (whether in general or from Google specifically). The vast majority of web users probably don’t even know what a cookie is or realise that their web browser downloads cookies from almost every website they visit, let alone know how to restrict their browser’s appetite for cookies. Hence, most people accept cookies unwittingly and, as a result, Google Analytics can track most people on the Internet.
By introducing a cookie opt-in, the ICO turned those numbers on their head. Instead of automatically trying to stuff a cookie down the throat of every person who visits their website, the ICO will now only give a cookie to people who tick a box and click a button to indicate that they’re happy to receive a cookie. The opt-in box is at the top of the page, isn’t unnecessarily large and isn’t obnoxiously sticky (i.e. it disappears off the top of the screen as soon as you scroll down the page). Most visitors to the ICO website don’t need to accept a cookie in order to find whatever information they were looking for.
So guess what? Instead of circa 99% people receiving cookies without realising it, only about 10% of people went to the trouble of ticking the box and clicking the “Accept” button.
That is what is reflected in the data that Vicky Brock obtained from the ICO and the graph she posted.
In other words, a whole lot of people (some of whom are clearly not qualified to comment on a topic like this), are making a mountain out of a very small molehill, jumping to conclusions and prophesising doom and gloom. There are a slew of appropriate quotes here: “Those who know, speak. Those who speak, don’t know.” and “Empty vessels make the most noise” spring immediately to mind.
This is a common problem in the Internet/tech industry. Like any fast-growing sector, it attracts self-professed “experts” who basically know more about courting publicity and exposure than they do about the actual subject matter.
The moral of the story? Caveat audiens.
Crashing the social media giants’ party
I’m a great believer in the potential of open, decentralised platforms to disrupt and disintermediate incumbents, particularly in the social media space.
I’ve been keeping my fingers crossed that the students behind Diaspora will make good on their idea of building an open competitor to Facebook (although, with nearly a year now passed since they raised over $200,000 on Kickstarter, my optimism is waning).
The Tahrir Project is the brainchild of Ian Clarke, who intends to build a “distributed, decentralized, anonymous Twitter”. It’s an idea with huge potential and, given that Ian has a very strong track record in this space, having previously developed Freenet, I’m going to be monitoring its progress with a lot of interest.
jackgavigan.com 