Too Big to Fail or Too Big to Succeed?


DM CONFIDENTIAL – Talk of a bubble has faded somewhat. It’s still not far from people’s minds, but something in the discourse has shifted. Companies are still seeing tremendous valuations, from the billion dollar Airbnb out west to ZocDoc out east, and acquisitions appear to be happening at a rapid clip. Something, though, is changing or perhaps has changed.

The volatility in the stock market hasn’t helped. All of a sudden the path to liquidity doesn’t look as clear. Several companies have managed to exit, but some of the ones that seemed all but assured just a month or two ago look less certain, namely Groupon, Zynga — even Facebook.

It’s not as though all of the companies are going to go out of business. LinkedIn, now public, isn’t going anywhere, but just maybe there is a collective concern over the ultimate upside.

Of all the companies that seemed certain for success in the public market, one of them now seems less certain — Groupon. From leaked memos to forward-looking statements, the company has recently been referred to as the poster child for “how not to go public.”

In some ways, it is probably hard to be Groupon. While they no doubt have executed like champions, their success came fast — arguably too fast. In some respects, they didn’t experience the type of failures and setbacks that others do. Theirs has been a rocketship fueled by almost limitless capital.’s $40 million of funding pre-product and revenue is a lot, but Groupon’s $1 billion is hard to top. You might think they were a biotech company not a digital marketing, direct selling machine.

One of the biggest questions facing Groupon is their cash position. The company is losing money. What that really means is harder to understand. Companies seem to lose money all the time but stay in business. Amazon and Priceline managed to lose a kajillion dollars but ultimately succeed, so doesn’t that mean Groupon could too?

I wish I were financially astute enough to read between the lines in their public filing document to guess one way or another. With so many people so concerned, though, it seems we must start to consider the fact that perhaps this revenue machine needs a major overhaul to stay road worthy.

Working at Groupon and being involved with the company from early on must be a little bit like having been involved in Webvan, one of the dot com one’s biggest implosions. Ironically enough, we could compare it to Webvan, which was like Groupon was Online to Offline — people ordered from the web but had an offline experience. While not a perfect analogy, Webvan also had the benefit of seemingly unlimited funding, having blown through $830 million.

None of that could prevent the message that was spread early July 2001, namely that, “The company has no plans to resume operations, and it will pursue an orderly wind-down of its operations and sale of its assets and business.”

During the same time, Chief Executive Officer Robert Swan said that while the company “made significant progress” in cutting operating losses and reducing its burn rate, order volume in the quarter just ended “declined considerably,” accelerating the need for new capital, which they ultimately couldn’t obtain. The company was public at the time but unable to meet the minimum threshold for staying listed on the Nasdaq.

Groupon has roughly the same headcount as Webvan when it went under, and had the markets not turned drastically south, Webvan might have received the funding they needed to stay afloat. Reading over past stories of the final days of Webvan, we see that Groupon is nowhere near where Webvan was, but at the same time, seeing that such a high-flying and large company as Webvan could not only fail but fail relatively fast, must give us pause.

A domino effect could sneak up on a company like Groupon – merchants pulling back, consumers buying less, and the capital markets drying up. A few staff reductions and the company continuing to chase profits that aren’t quite enough to cover overall costs, and almost before we know it, they decide to simply close up shop because no one else has the money or desire to keep it going. Hard to imagine such a scenario, but we would have said the same about Webvan.

Not that there was a question, but the answer might be hubris. When things are good and momentum is strong, a company can seemingly do no wrong. But very few companies get so lucky as to never face challenges, and it is times like those when you want to see a greater level of awareness and a business maturity.

The last thing you want to see is defiance and fueling the fire of a cocksure attitude. A teenager must become an adult, sometimes faster than they might like, but they must. A company is not a rock star or other diva personality who can simply do what they want and have the world adapt to them.

Hopefully, we’ll see the rebellious outbursts lessen in our teenage superstar, Groupon. Otherwise, this business prodigy could end up burning out and become an unfortunate and expensive case study.

Cross-published at the DM Confidential blog.


  1. I think the title of this post says a lot.

    Yes, companies of all kinds require outside financing from time to time, whether it be equity or debt. In the case of established companies, financing is usually used for expansion or to cover some difference between current assets and current liabilities.

    In the case of startups, financing represents a bigger risk, in that the startup does not have years of run-rate business on which to build a case for financing. Startups need to have a provable business model (i.e., one that will eventually be cash flow positive or a good candidate for acquisition) to secure financing.

    I think that’s exactly Groupon’s problem. They have a business model, yes, but one that may very well be a HUGE long term money-loser. Would an extra infusion of cash (in the form of an equity investment) allow Groupon to continue operations and expansion for X amount of time? Yes, absolutely. But what happens when THAT cash runs out? Looking at Groupon’s IPO filings, it appears to a lot of people (myself included) that Groupon may simply have a fundamentally flawed business model that will NEVER be cash flow positive, especially not to the tune of a multi-billion dollar IPO valuation.

    When Groupon’s current cash balance runs out, no matter how big the company is getting in terms of revenue, groupons, merchants, cities, or customers, investors may simply look at another investment round as throwing good money after bad. In such a case, when the cash runs dry, the company will either go belly-up or be acquired for pennies on the dollar.

    I, for one, will be quite impressed if Groupon can turn their bloated ship around and not go down in a spectacular ball of flames. To me, that would be the real case study. The current scenario just boils down to poor (and somewhat shady) cash management — that’s Finance 101.


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