When I first started writing about Groupon more than four months ago, my friend Semil asked me “Why are you the only one saying these things?”
I explained that it call came down to incentives.
Consider the various people involved and what their incentives are:
Groupon insiders and investors. They own a substantial amount of Groupon stock. Obviously they have incentives to say good things about the company. In Groupon’s case, they’ve said substantially more than they should have. This includes Eric Lefkosky telling Bloomberg West’s Cory Johnson that the company would be “wildly profitable,” in violation of SEC quiet period rules. (A statement that was later retracted.) It also includes Andrew Mason’s extremely rosy email to employees that was “leaked” to the media.
Other startups looking to benefit from a frothy market. If Groupon were to have gone public with a valuation of $20 billion to $30 billion, it would have benefited other terrible companies looking to go public. This sentiment has shifted lately; I’ve heard more from VCs hoping that Groupon tanks because there are good companies out there and they don’t want a post-IPO disaster in Groupon to affect their strong companies.
Short sellers. Even if you think a company is the worst pile of shit ever known to man, your incentive is to keep your mouth shout. It’s better financially to wait for the company to go public and then either short the stock or buy puts against it. I’ve had shorts ask me to stop writing and talking about Groupon because I am reducing the maximum profit they can make betting against the company when it goes public. At a $30 billion valuation, Groupon is the short of a lifetime. At a $3 billion valuation, it’s probably still a good short, but there’s a lot less profit. Investor and analyst Paul Kedrosky says that institutional shorts are among the people most eager to see Groupon get out. He has also had people ask him to stop talking about Groupon. (See the video below.)
Partners. Groupon is still a big company with a lot of influence over the startup ecosystem. Partners and potential partners of Groupon have to say positive things about the company. But what they tell me in private is very different from what they say for attribution.
With all of that, you had a lot of people with incentives to say good things about Groupon.
The group that has the most incentive to accurately write about Groupon is the media. Unfortunately too many journalists (including business journalists) don’t understand the complexity of Groupon’s business model and the basics of economics and statistics. I’ve read a lot of really awful and inaccurate analysis by journalists.
Too many just blindly report what Groupon insiders tell them. My writing started after I read an incredibly glowing piece by a supposedly expert journalist. At the time, I knew that the company was worse than the picture he was painting; I didn’t know how bad it was. Only now are you starting to see the mainstream media tide turn against Groupon.
There is some great analysis out there, but by and large it hasn’t been in the mainstream media. Some of the best is on a blog called Grumpy Old Accountants.
In the print media, by far the best coverage on Groupon and the deals space has been by Doug MacMillan at Bloomberg Businessweek. On the TV side, Emily Chang and Cory Johnson have done a terrific job covering the story on Bloomberg West.
In terms of my own incentives, I have to admit that I sometimes question whether I did the wrong thing. I’ve invested a significant amount of time and money covering Groupon. Unlike professional reporters, I don’t get paid for what I write. My expenses (such as my trip to visit Groupon in Chicago) come out of my pocket. Financially, I would have been much better off waiting for Groupon to go public and shorting it.
There are times when I’m up at 3 a.m. doing analysis and I think “Why do I keep doing this?” The best answer I can come up with is I don’t want more small businesses to get fleeced. And that as much as I study the incentives of others, I suck at responding to my own incentives.