Groupon: Doomed to Fail or Worth a Leap? A Twitter Debate

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Among those debating the value of Groupon as it filed for its hotly-awaited initial public offering — which could give it a market capitalization as high as $30 billion — were two startup entrepreneurs who took to Twitter on Thursday night. On the “Groupon is doomed to fail” side of the question was David Heinemeier Hansson, a partner at 37signals and creator of Ruby on Rails, and on the “give Groupon a chance” side of the debate was SimpleGeo co-founder Joe Stump. Who won? You will have to judge for yourself. Their conversation is embedded below.

Hansson started the debate by tearing apart Groupon’s financials, noting that the company had not only lost more than $500 million so far, but that its losses and spending were actually accelerating, and that it was costing the company far more than $1 to make $1 in revenue — a fundamentally unsustainable situation. After a series of tweets on that topic, Stump joined the debate by saying Groupon should get some credit for being able to generate revenues of $600 million or so every quarter, and that this would give the company some breathing room to figure out how to generate a profit.

Stump also pointed out that Amazon started by losing huge sums of money and was widely criticized for it, but the company is “now doing $9bn a quarter and [is] quite healthy.”

Hansson, however, said that it would be difficult to figure out how to make the business profitable while still trying to come up with $120 million a quarter — the amount the company is losing. And the 37signals partner also said that it wasn’t fair to remember “the one company that made it out alive” from the 90s bubble, unlike dozens of others such as Pets.com and WebVan. Stump retorted that none of these companies had the revenues or revenue growth rate that Groupon or Amazon has had.

Is growth enough? Hansson said it is not — that increasing scale “only makes the problem worse if your losses scale just as bad,” and that Groupon’s losses are actually accelerating. Stump countered that with scale comes lower costs, and that if Hanson wanted proof he should “ask Walmart’s suppliers.”

A 30-month-old company that is generating $600 million in revenue per quarter should get the benefit of the doubt at least, argued Stump — but Hansson said it was hard to give that benefit to a company losing $117 million every quarter. He added that he was concerned that the IPO was going to be “gamed like a casino and pop massively before crashing leaving the public with the bag.” He called this a “wealth transfer to a select few bandits.”

In the end, Stump said that he wasn’t planning to buy Groupon stock, but that he didn’t believe the company was necessarily destined to fail. Hansson, meanwhile, said that while failure was not guaranteed, the company should be “treated like Greek bonds” because the likelihood of failure was so high.

Excerpts from their full conversation are embedded below:

Post and thumbnail photos courtesy of Flickr user Thing Three

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