Finance 101
link Why Groupon Is Poised For Collapse.
Lurking underneath the hype of crazy valuations for ‘social networking’ companies recently are some sobering realities of their business models. Talk abounds now of a $100 billion dollar valuation for Facebook for example. Ahem. Groupon has seen a meteoric rise from only 3 years ago to achieve some real eye popping valuations in advance of their much anticipated IPO. But what are people buying? This article gives a revealing look at the mechanics of the Groupon model.
For those not steeped in finance, it’s essentially a mechanism to give short term loans to small businesses, which, under the right terms, is a good thing. It’s somewhat eerie to consider that the financing model looks strikingly similar to the whole housing mortgage disaster which crippled the American economy just recently. In both cases, money was essentially lent on favorable terms in advance to people on the financial fringe on the expectation that the carrying cost would be offset by rising house prices or by increased sales volumes in the case of the Groupon model. Now that I think about it, that’s the same model used to sell Government treasury bonds. Hmm.
This all works as long as things go as expected. What are the odds of that not happening? I’m sure the flinty eyed MBA’s and actuaries at the big investment firms have done their risk calculations to arrive at a resultant valuation for the IPO. After all, to float a $100 billion market cap company, you’d have to convince a lot of smart people, not just the rubes buying 100 shares for their grandkids. The truth is, many investments are good investments only because everyone else thinks they are, not neccesarily because of fundamental reasons. Stock investing is prone to the dictates of fad just like accesories in the fashion world. Compounding that is the reality that many investment professionals drink from the same cup as far as market wisdom; the Bernie Madoff scam proved that just recently.
Actually, I think the Groupon founders are geniuses for creating such a finance model since it obviously fulfills a need in the marketplace. The reality is that no one gets something for nothing in business. Consumers may get goods at a discount using their services, but definitely not to get their stock. If it were me, I’d wait for the discount.