The insiders are 144 days into their lockup period of 180 days according to the S1 filing. Morgan Stanley and their preferred clients have made their money and are moving on. So there's not much motivation among heavyweights to keep marketing the stock and there is some paranoia about the looming lock-up expiration.
The lock-up period is set by the investment bank, in this case Morgan Stanley. Just to be clear, a lock-up period is not required by the SEC. But all investment banks who underwrite IPO's require them to prevent insiders dumping the stock on the first day and hurting the banks clients who the bank convinced to buy the stock.
In general lockup periods are 180 days but I have seen 90 days in rare cases.
I'd imagine giving preferred employees a shorter lock-up would raise hell. Having said that, if you read the S1 it sounds like Morgan Stanley and Groupon have the right to extend executive lock-up by 18 additional days without notice and employee lock-up by 34 days. So there is some differentiation between stockholders.
I don't think too many people would object to the lockup period being based on join date. Ex: 30 days minus one day for each month you've been working at the company.
I see that SOX is working quite well in preventing companies with dubious business fundamentals filing IPOs and then running on investment fumes for long enough for key insiders to cash in before they collapse.
It's weird that that seems to say that the lockup period is from the date of that perspectus, rather than the date of the IPO (which was only 3 weeks ago).
Yes, it's from the date of the prospectus which was 11/7 and essentially the date of the IPO. You may be thinking of the series of S-1s which came out earlier.
The effect of the lockup expiration is generally overblown. Since it's known information, the impact is priced in days or weeks before the actual day. While the expiration results in a temporary imbalance, the stock usually closes at a reasonable price.
The lockup ends 180 days from the date of the prospectus not the date of the IPO. The prospectus is dated June 2, so the lockup ends a week from today. Watch out GRPN.
I haven't seen this particular agreement but in general the clock starts ticking on the day of the IPO. Basing it on the date of the prospectus makes no sense. There's no guarantee that the IPO will even happen within 180 days.
Right. I think we were both confusing the S-1 and the Prospectus. The Prospectus is dated 11/7 so it's correct that the lock-up begins on 11/7 when the stock starts trading, not on 6/2 when the first S-1 was filed.
Not going to make any predictions for the future here...but whether this should be characterized as a crash or not (at the present moment a decline from 24.5 to 18 over two days, about 27%) is a semantic question and open for discussion.
This is actually a very interesting question. Keeping the specifics of Groupon's business out of the equation at the moment, the pricing of growth companies is an incredibly inexact science. If most of these companies were publicly traded and liquid, you'd expect fluctuations of at least 30% a day during volatile periods. Just imagine the atmosphere in an average startup: One day you're going to conquer the world, the next day you're doomed...depending on prevailing conditions and random issues that pop up. This "atmosphere" (or expectation) carries over to the people who are attempting to determine the market value of your company. That's what the stock market is trying to: from moment to moment, determine the exact market value of each company.
The market still hasn't mastered pricing stocks like these (and it probably never will, potentially extreme growth stocks like technology startups practically by definition have huge volatility), but it is getting better. Look at the skeptics who try to price startups on revenue/profits alone. Obviously a bunch of really smart people in a garage with a sound plan but no revenues are worth more than $0. Some of these groups are bound to strike it rich, so average across all of them and you'll get a positive (perhaps very large) number. This is why we see large valuations of early-stage startups. But how large should the number be? The exact value of a company is the present-value adjusted worth of all its future profits. Determining this number is what everyone who does value-based investing attempts to do.
But finding this number is impossible, especially if you're investing in a very young company. I think that a lot of tech investors today are attempting to average the value across a large number of promising companies, instead of looking too much at the specifics of a single one.
Due to the inherent volatility, investing in potentially extreme growth companies like Groupon and LinkedIn is a _hugely_ risky business, unless you happen to be a genius who sees something about their business that no one else does. There were probably geeks who made these kinds of observations about Google in its early history.
It is certainly an inexact science, but in this case the insiders tipped their hand ahead of the IPO about what they thought of Groupon's valuation. That the last pre-IPO raise went almost exclusively towards cashing out insiders and early investors rather than shoring up a pretty serious capital problem obviated the need for me to do speculative modeling of discounted cash flows. More so than any of the other recent high profile IPOs, this one just looked like passing the bag to folks with far less information about the company's actual prospects.
Another way of looking at it is to agree with marvin's assessment that tech companies (like Groupon) are inherently volatile and for any individual it makes sense to diversify. The people that cashed out didn't sell all of their holdings, or even a majority. They sold a relatively small portion so that their entire net worth wasn't locked up in an extremely volatile stock. That seems pretty reasonable to me. They'd (at least in my opinion) have been fools to do otherwise.
I definitely agree that it can make a lot of sense for founders and early employees to cash out a portion of their holding so their entire net worth isn't locked up in one company. Other threads on HN have covered how it can better help align founders' incentives with those of investors, likely leading to better long-term results. With co-founders cashing out a partial share, they can focus more on long-term growth rather than worrying about protecting their value in the short-term. That is good for everyone.
From my admittedly superficial knowledge of the Groupon example, it doesn't seem like that is what happened with their previous capital raises. They've distributed about 80% of what they raised from their Series C and D rounds to early investors at a time when the company has serious capital concerns. Lefkofsky took about $400 M from the last pre-IPO round and is reportedly focusing on other ventures now.
I don't blame any of them for taking the money (as you say, they'd be fools to do otherwise), but all of this makes me sure that Groupon is not a company I want to put my money in.
A very interesting point. Can you provide an example with numbers? Company X originally invested Y and since the IPO has sold Z%?
As a totally naive assessment it seems that if Z == 100 then you're shooting yourself in the foot by precipitating a crash, so the line of 'no confidence' would be closer to 50%.
I've been a Groupon defender (lots of downvotes to account for it!) but would agree that while cashing out early is reasonable, the magnitude in this case was breathtaking and, as you note, probably indicative.
It wasn't a difficult task for some funds/investors to do the maths: the cash yield of Groupon was lower than US 10y govt bond, blue chip dividends plays, etc. This implied that (i) either Groupon was a safer investment than the above, or, (ii) that Groupon was completely mispriced. By method of elimination we are left with the later one. Groupon has HUGE execution risks, facing large and tough competition, image deterioration, reducing margins, etc, while still needing to achieve espectacular growth to deliver such value. How can you price something at such a ridiculous valuation when its equity risk is way higher than those other safer investments? To price Groupon at 20usd/share was just wrong. Some of us know how much did Groupon+investors push the underwriters to make this possible, and how many sales calls the equities' desk had to do to get this thing going. No surprise this is going underwater.
> the cash yield of Groupon was lower than US 10y govt bond, blue chip dividends plays, etc
What do you mean by their "cash yield"?
I thought people investing in Groupon were doing so because they thought it might continue to grow as it had been, and potentially be absolutely massive.
Cash yield doesn't tell the whole story for startup companies, in some cases it doesn't even factor into the equation. YouTube is a perfect example back when they had a monopoly on online video, were growing at 100% a year and were using up their cash at an incredible speed.
A pure cashflow analysis would indicate that YouTube was worthless. But if YouTube stock had been offered on the market at this point, you can be certain that it would have been given a considerable positive value. This is due to the chance that the company would become profitable or make a large exit in the future. You need to also take future revenues (or a chance of future revenues) into account when making a guess at the market value of a company.
You are right, cash yield doesn't tell the whole story BUT it is the only data available to public investors. No public investor has had access to any projections, detailed operating metrics, access to growth drivers and no real information on the use of the IPO proceeds. The stock market is not a place for pure startups. Startups is an asset class that should only be for angel investors, VCs, and other niche funds. If you are selling me the startup story, I want startup returns, i.e. for each $20/share I buy I want to have the "certainty" I will be able to make $200/share in 3 to 5 years. Consequently $200/share is an implied $127bn market cap. Can you see how weak that "Groupon is a startup" argument is?
Having said that, Groupon is not a startup: 7,000+ employees, over $500m in revenues, considerable international presence, large M&A transactions, etc. This kind of company should be be valued using a DCF. Growing at 100% per annum is no excuse to be able to perform such exercise. The devil is in the detail, and trying to find excuses to argue that Groupon is a startup, and consequently valuing it by god knows what random vanity metric is not a valid argument.
Can you give me a data based argument/point that shows that Groupon is not overpriced at $20/share? I have given you one.
Bottom line: all I'm saying is that Groupon should be valued fairly, $20/share is not a fair value, it's overpriced. Investors are left with no upside. I'm not saying that Groupon hasn't got a valid business.
I haven't looked at Groupon's numbers in detail, but yeah, I'm inclined to believe that they are overvalued. I certainly wouldn't buy at this price, the downside seems bigger than the upside.
My original comment was a general comment about startup valuation. I've heard so many arguments on HN that seem blatantly incorrect about the valuation of companies that don't have positive profits or revenues, and I wanted to start a proper debate.
each company/startup is a world of its own (the market, cost structure, growth drivers, capex needs, scalability, even investors play a key role). generalising on startup valuation methodologies is the wrong way to approach it. all i can say is that i've done quite a lot of number crunching on Groupon, and all valuations do not get past the $2bn market cap.
Good eye for catching that bit of nonsense. Someone commenting like they know what they're talking about. If potential investors valued Amazon based on its 'cash yield' at the time of its IPO who would have invested.
Writing a compiler is hard. One day, you're sure it'll be the fastest thing in the world, the next day there's sheer terror because no object code will run.
I'll grant you there could be 30% fluctuations from one given day to the next, but the months of work determining an accurate valuation should smooth out a lot of that noise.
I'd guess a hundred man years of effort went into the deal. Furthermore, this isn't grad-student eating ramen effort. This is high finance. Smartest guys on the planet and all that. Sure, you can't think of everything, but there must have been some underlying value that everyone believed in.
Any other process - highway throughput, software memory usage, year over year daily sales, cancer survival rates, just about anything getting 30% worse in two days would be a pretty pathetic failure.
Perhaps it is just noise, and it'll bounce right back to IPO valuation. I'm skeptical that that price was reasonable.
If there's one thing I've learned about "the smartest guys on the planet", it's not to listen to what they say to the public. If you're on the front desk, you might get the real story behind the news.
Graphs show that the drop started on Monday morning. On Friday afternoon a piece of news appeared that LivingSocial is about to raise a $200M round to strengthen its position as a competitor for Groupon. More recent rumours say that the round may actually be much higher than that, backed by some big names, and the cash would go to the company and not to investors (http://blogs.wsj.com/venturecapital/2011/11/22/livingsocial-...). So this may have influenced investors mood to some degree, maybe enough to make a spark so to speak, which probably was the opportunity that short sellers were expecting to start making big bets. It's just an assumption, but it could make sense.
According to an earlier Reuters analysis, Groupon shares are very attractive for shorting because the company is losing money, had issues with accounting, unproven business model, and may face stiff competition (http://www.reuters.com/article/2011/11/14/us-groupon-shortse...).
My personal experience is that LivingSocial offers are more interesting, and Groupons are often redundant. Most notably, some Groupons look like steals or desperate sales, while others are fairly banal (and useless).
Meanwhile LS's offers are usually fairly constant in terms of discount, and focus on areas I find more interesting.
This must have something to do with the quality of script/process that LS's sales folk are working with.
groupon is a pseudo ponzi scheme. For any market X there exists a high variability for profitable, volume adjusted, daily deals (resource {R}), which people want. After time t, the most desired deals r in resource R are exhausted, leaving behind lesser deals (deals which make substantially less revenue-share). So as t >> T, only less desired deals remain for market X, hugely eroding profits margins, given the high fixed cost to set the deal. So the only way to maintain margins is to enter a new market Y, where r (very profitable daily deals) is in high supply. But eventually this market will be exhausted of r, and margins will again collapse. Therefore Groupon must continually enter new markets to maintain margins, which it has been doing. But there are only a finite number of markets. So eventually Groupon will collapse. This is an intrinsic problem of the daily deals market. Google may overcome it, if it can implement it's near field communication strategy, or automate the bidding process. But other daily deals site, like Living Social, with high employee counts, are bound to fail.
You make a good point. But this is only true if all sellers are putting their items in Groupon. In a sane market, there will be only few sellers which want to make daily deals, and also few buyers which want to take them. I don't know the market, though, but this model can work.
There are literally thousands of vendors in the city of chicago. It would be years even if someone wants to do a second groupon. I dont get your logic behind market getting exhuasted.
I would argue that the only infinite supply of deals are deals where the profit margin is so high that it supports profit at 50% off plus Groupons cut.
A restaurant does not have 300% profit margins, so long term a restaurant cannot support this model. Only service businesses, or businesses with fixed costs with low variable costs per additional customer, can be on there.
Restaurants have very high fixed costs and 60-70% margins (basically, the food) so even with a 50% cut to Groupon, they can usually make it work. With a 20-40% cut to Groupon, they can make it work without much deal overage or return customers.
But I thought the main premise of Groupon is that the deal brings people in and the <fill-in-the-blank> from the business brings people back. I guess a deal could be run again to capture new customers but it's hard to imagine the need if the initial brought in customers and more importantly, brought back customers.
Any stats out there on a company that has done more than one daily deal an their resulting numbers? I would suspect diminishing returns, lots of people that took the first deal and weren't converted into customers coming back for another big discount.
Since the coupon magic/mania started (everybody and their dog is doing a coupon site). Has there appeared a site/service that disrupts this whole model?
What I mean is - the Service Providers are getting really a shitty value out of GRPN other daily deal sites. Initially GRPN needed loads of cash to get their sales people on the streets and logistics behind this were pretty massive.
But today, I see this market as completely commoditized. Everybody and his dog knows of the daily deal sites. Lately I haven't really met anybody who is doing some kind of services who doesn't know of daily deal sites (and I'm from Slovenia).
So here is my question - is there a sort of service that would take a one time fee/subscription for service providers and let them run their own daily deals.
This way you cut out the middleman and the (expensive) sales people and this would even offer sufficient value to the service providers.
Why would you need fewer sales people to sell this model than to sell Groupon? Restaurant and retail shop owners are not the easiest group to get ahold of, and they are suffering from pitch fatigue as everyone and their brother tries to sell them their daily deal service (that does have some theoretical differentiator).
For one, when your trying to disrupt something doing more of the same everyone is doing is probably not the right way to do it.
Service providers talk, they talk to their customers they talk to their competition - otherwise they provide a shitty service, which doesn't bring in much money, which gets you out of business.
Imagine this conversation:
Provider Alice: Hey I just got my first daily deal out the door. Hope it recuperates the steep cost in the long term.
Provider Bob: Cool, where did you do it?
Provider Alice: Groupon Clone X! Because...
Provider Bob: Nice, I do all my deals on Disruptive service Y, which costs me only a fraction of the Groupon Clone X.
Provider Alice: Motherfucker...
What I'm trying to say is that this market is a race to the bottom and will probably enter the schoolbooks as an example of a dead-end business opportunity.
I think the question boils down to this: Who will be the first to offer merchants a more favorable cut than 50/50? Or who will offer to let the merchants hold the cash? It's an inevitable race to zero for the coupon providers.
Just recently, I saw a daily deal to get your own daily deal site. It was either Slovakia or Czech Republic, not sure. So basically yeah, this market is THAT bad.
Haven't checked the numbers, but if it's true, shorting began in earnest because the cost to borrow went from 95% to (a still pretty obscene) 30%. At 95%, to make money on a year-long short the stock would have to drop to pennies. At 30%, it still needs to be a massive dog, but it's doable.
The sudden explosion in shorting caused by this drop in cost to borrow is probably seen as a negative signal and making some investors nervous, causing the stock to drop as they sell it off.
But the cost to borrow doesn't normally drop from 95% to 30% in the absence of a lot of newly-issued shares. So why did this happen? Someone must have made a large number of shares available to borrow - so the question here is who was it and why did they do it?
With the Groupon float so teeny, it's a lot easier to manipulate pricing. This could be completely straightforward and boring, but this could be an institution with advance notice of some favorable information about Groupon setting naive investors up for a classic short squeeze. (Good news comes out, some shorters panic and buy to cover their shorts, increased demand causes prices to rise, more shorters panic... iterate your way to a massive pop and a whole lot of severely-burned shorters.) This would be a good way to compensate for the inevitable drop when the lock-up period expires.
TL;DR - Don't buy or short individual stocks without fully understanding what's going on, and that goes beyond the fundamentals of the business.
>The sudden explosion in shorting caused by this drop in cost to borrow is probably seen as a negative signal and making some investors nervous, causing the stock to drop as they sell it off.
I'm still trying to learn how investing and markets work, but isn't this stock manipulation? I mean, if I get a bunch of people to agree to short this stock, and others observe this happening, then the short will come through by virtue of a fall in share price because people saw that I was shorting.
I'm still trying to wrap my head around how markets work, when making observations on the system necessarily changes the system, rendering your original observation invalid.
That's just the inverse of going long on a stock: Other people observe you buying up many shares of a stock, causing the price to go up, which in turn causes your long bet to come through. The degree that this changes the market depends on how well-respected a trader you are.
For example, if Warren Buffett invests in a company, that company's stock generally rises. That's why Warren Buffett was able to get sweetheart deals when he made short-term loans to Goldman, Sachs and Bank of America recently. They were willing to pay him billions of dollars just for his imprimatur. Buffett received options to buy shares of their stock at the much lower, pre-bump price.
It's not really stock manipulation, though. If you're big enough, or respected enough, you have to expect your trades to move the market.
Not necessarily. It's completely normal for borrow rates to be ~100% shortly after IPO, it takes a few days for the stock borrow market to settle on a more realistic rate. I wouldn't read much into the drop, and remember that rates different based on your account status and broker, so it's not 30% for everyone.
Insider trading motives aside, this fall in stock price coincides with a general trend I'm seeing in this daily deal market. As a merchant whose had lots of success with these sites, the offers have become better and better over the past few months. Our first Groupon ever was a 50/50 split. Our last deal was 80/20. They offered 70/30, we asked for more, we got it. Maybe that's a sign that their costs have gown down so they have more room to play with.
Personally, I reached deal fatigue and unsubscribed from all of the sites. How many times can you possibly eat out / get a message / get your car detailed?
I'm pretty glad about this. I've been shying away from even deals I want, because I know that Groupon is (was) taking 50% of the price and leaving the merchant with what was probably a loss. I might be more likely to purchase them again now.
The IPO never made any sense for an unprofitable company like Groupon. Seems like the early investors just wanted any exit they could get before the ship sank, like a ponzi scheme.
How did anyone ever expect to make money off of a coupon company?! News media provided a spin campaign to inflate Groupon's value and everyone flocked to it like white on rice... We haven't learned anything since the real estate bubble popped. The investing masses are 85% sheep.
Apropos of some of the recent HN discussion of automated story writing, following one of the links on that page led me to http://www.tickrwatch.com/2011/11/abnormal-price-movement-de... , which is a "story" about abnormal price movement in the GRPN stock. It is fun because it does things like discuss the performance of the stock "in the past year" and I particularly enjoy the line "The stock may bounce back to test the 200-day moving average." I find myself wondering what code lies behind that line. Also the last line is a real gem in the field of using lots of words to ultimately say nothing concrete. Automated story writing gone bad.
I was surprised to find out that the cost to borrow shares (to short) was still so high. Doesn't that pretty much guarantee that the share price is somewhat above the "fair price"? The cost to borrow is like a tax. The price consumers pay is always above the equilibrium price, which is above the price the sellers get (30% below the buyer price).
What about derivatives? Are there calls and puts on Groupon?
This is exactly what I expected. I firmly believe Groupon's business model(daily deals) is not a sustainable model, because it's not actually creating any real value but only destroying margin.
I'd like to be wrong on this one. My position was that Groupon should not have gone public in its current state.
Because I'm not a Wall Street expert, but just a regular guy, I still hold the slight hope that someone knows better than me, and Groupon did go public for good reasons.
If I end up being right, it's not a victory, it's further proof that our startup world is dominated by speculators who will eventually destroy it to squeeze more money. Nothing to rejoice about.
My position was that Groupon should not have gone public in its current state.
I think a lot of folks felt this way, heck I think even Groupon would have liked to hold off as the time got closer. Unfortunately Groupon put itself in this position, they took a billion dollar VC round and used it, almost exclusively, to pay out early investors instead of putting some back into the business for additional runway. I think both the investors in that round and Groupon management were extremely short sighted at that point and now they reap what they've sown. They were bleeding cash right now, and I think they realize they weren't going to get very favorable terms in another raise, so they went the IPO route to raise operating capital. So yeah they had some damn good reasons to go public right now. They just could have been avoided.
What's wrong with saying "I told you so"? I would say there were more people blindly championing Groupon in the lead-up to the IPO than contrarians. Let the contrarians enjoy their moment, and let the champions eat their crow. As long as we learn our lesson, it's OK.
I definitely don't dispute that – it probably depends on where you hang out online. I saw a lot of rah-rah on the "mainstream" media (CNN, etc.) and aggregators like techmeme.com, etc.
Although GRPN is undoubtedly a money-burning scam of a company that is doomed to inevitable failure, it should be noted that the broader market is currently suffering from sovereign debt contagion in Europe and the associated liquidity scrambles. It's not only GRPN.
Sorry David but that makes no sense. Why aren't US companies with large exposure to Europe falling +10% too? Groupon's exposure to European countries going through the debt crisis is negligible. It's only Groupon
While there isn't enough trading history to say with confidence, I don't think it's unreasonable to say that GRPN has a pretty high beta to the broader market, so I would expect it to rise (or fall) several times the % of (most of) the rest of the market.
May be not (then why are we discussing it on HN?). Not sure what you definition of a tech company is, I was comparing it to nextflix and the likes.
Also i got this from WSJ, "33% of the 4th quarter US IPOs are trading below their offer prices." . So why is GRPN being singled out when all the stocks are taking heavy beating.
Groupon is not a tech company, it's a marketing & sales company. But they're worth discussing because they started as a technology company, a scrappy startup with a fun story.
i remember jason fried was having a conversation here on HN about why early investors decided to sell some part of their shares at the time of ipo , trying to say it was a normal thing to do
havent noticed any posts or comments from him in this thread though , kind of tells it ...
http://www.sec.gov/Archives/edgar/data/1490281/0001047469110...