Disclaimer: Rocky Agrawal holds a variety of short positions in Groupon. You can find a full list of his disclosures here and in his author bio.
In the midst of all the turmoil of Groupon, which is now trading at a market cap below $8 billion and broke below the $12 mark in trading today, the company’s hometown newspaper had a sitdown with Groupon chairman Eric Lefkofsky. As a former journalist who once aspired to work at the Tribune, I’m embarrassed for them.
The interview took place after Groupon’s accounting restatement on March 30, which sent the company’s stock into freefall, but most of the interview is spent on Chicago’s venture capital scene. It’s as if they interviewed John Wilkes Booth after he assassinated Lincoln and asked him about his acting career.
Several of the most obvious and important questions for anyone who has been following Groupon and Lefkofsky were left unasked:
- Why shouldn’t Groupon investors worry that Groupon will turn out like previous companies you have run? Although the companies are mentioned in the interview, what’s not mentioned is that investors lost money while Lefkofsky profited handsomely.
- Why did you take so much money out of Groupon during its private financing?
- Do you regret telling Bloomberg West that you thought the company would be “wildly profitable” in light of what that did to the IPO process?
- Did you cost investors billions by repeatedly trying new accounting tricks? Wouldn’t it have been better to have been upfront about the business from the start?
- Do you regret not selling to Google? (Lefkofsky is personally better off that they didn’t; shareholders, not so much.)
- How do you explain all of the bad experiences that small businesses have with Groupon?
- If Chicago is such a technology hub, why is Groupon’s technology center in Palo Alto?
- What do Groupon’s woes mean for the city of Chicago and its tech community?
The Tribune lets Lefkofsky get away with comparisons to structurally sound companies like Facebook, Zynga, and LinkedIn, which have none of the problems of Groupon’s model.
In the interview, he implies that Groupon had to go public because of the 500 shareholder rule. That would be similar to the reason Facebook is going public — but any comparison to Facebook is idiotic. Facebook is a fantastic company that prints cash and whose hand was forced by the 500-shareholder rule; Groupon has hemorrhaged cash for most of its existence and needed to go public. Unlike Facebook, many employees have zero equity in Groupon.
Here are some of the most interesting interactions from the interview, along with my commentary:
“When you have an Internet startup, and you’re often raising money from venture capitalists, you have to be cognizant of the fact that eventually at some point down the road they’re going to want liquidity.” — Lefkofsky
And Lefkofsky and other insiders didn’t even wait for the IPO for liquidity. Lefkofsky and affiliated entities took out nearly $400 million before the IPO.
“Everybody around the table wants that document to be as clear as it can be. They want to tell the story as accurately as they can. They want to make sure whatever business you’re talking about, the investors get it.” — Lefkofsky
The Groupon S-1 was the most convoluted document I’ve ever read. In August, I wrote: “The depth of deception in this S-1, if gone unchanged, will give plaintiff’s lawyers a lot of ammunition. (As will the many news stories generated every time Groupon fudges metrics.)” Groupon has been sued many times in the last month by shareholders’ lawyers.
“Adjusted consolidated segment operating income (Adjusted CSOI) was a metric that everybody at the time thought would be a very clear way to explain to investors that we were making significant investments acquiring subscribers.” — Lefkofsky
And it was a metric that every competent financial journalist jumped on as soon as the S-1 hit the wires. Unfortunately, the new JOBS Act will mean that investors will lose insight into management’s thought processes and only see the SEC-approved version. For me, it’s material information that management thought ACSOI was a valid metric because it provides insight into the integrity and ethics of the team.
Q: Let’s say, I’m a mom in Naperville and I have a 14-year-old boy, who I’m already worried about his ability to get a job. What do you tell that mom? And then what do you say to the college senior who has a degree in history, who’s like where am I going to get a job? I’m asking because you’ve created 15,000 jobs.
This is in a section about technology jobs and the importance of coding skills. In fact, Groupon hires lots of liberal arts majors because most of its jobs have no technology component.
“I can’t pick up the paper, any paper, anywhere, without reading about Apple, and Google and Groupon, for good or for bad…. It’s just because, for whatever reason, our mind is captured by these technology companies that have in some way changed our daily lives.” — Lefkofsky
Again, Lefkofsky’s trying to paint Groupon as a technology company. Not only does Groupon not belong in the same breath as Apple and Google, it’s business is fundamentally different.
There are some things that Lefkofsky said that I agree with:
“So here’s what I would say to someone who’s 16 or 20. If you can, in your educational career, you should try to learn how to code. I think it will serve you well. It’s a great career path. In my lifetime, when I was young, if you wanted a stable career and you wanted to make money, you became a doctor or a lawyer or some profession like that. That’s what people had in mind. In the last 10 to 15 years or so, a lot of people have gone to business school. Some have tried to work at a bank or a consulting firm. But over the next 10 to 20 years, I can see software engineering as being a field where security is found and a lot of money is made.
You’ve got to invest in innovation, invest in training people, invest in your schools. You have to have a community that’s focused on helping people raise money and take risk. You’ve got to honor the entrepreneur even when he fails because you need people who are willing to put themselves out there.”
Lefkofsky also mentions several Chicago companies that might qualify for my list of interesting local businesses. Both Lightswitch and Belly have interesting concepts. Here’s one place where Lefkofsky and I are in vehement agreement:
“What motivates people to make a purchase decision is very different. Sometimes you want $5 off a cupcake, but sometimes you want to be in the back room making a cupcake and sometimes you want to have your name on a cupcake. You’ve gotta figure out what motivates a different constituency and customer, and then use technology to try to achieve that.”
I will be doing my own reporting on the ground from Chicago next week, talking to Groupon employees and other startups. (I’ve also asked Groupon and Andrew Mason for an interview.) If you’re involved in a Chicago startup that you think I might be interested in, email me at email@example.com.