Friday, June 03, 2011

Groupon Deal: Buy Early Shares for $10 and Get $50 Worth of Investor Money

That's not intended to be a literal expression of Groupon's business model or IPO, but as Frank Reed notes, early investors have been doing very well on their Groupon shares:
And remember when Groupon raised $950 million not so long ago? Guess what that did? It simply paid out the early investors in handsome sums. It did little to build the business. You can get the details in the All Things Digital post.
If history should teach us anything, it's that the financial industry loves bubbles. It loved the profits it made during the first Internet bubble. It was ecstatic over its profits during the housing bubble. And now, having been bailed out, pampered, and guaranteed immense profits and compensation at taxpayer expense on the ground that they're "too big to fail", why not do it again? Besides, a few IPO's that result in pumped up valuation, enormous, easy profits for early investors, insiders and investment banks, and... well, quite possibly not much for ordinary investors in the longer term, if that counts for anything... don't make for a bubble, do they? It's just a few hundred billion, maybe a trillion. Chump change.

I am of the impression that Groupon's founders want to build a sound, dominant business. But that doesn't mean they don't want to cash in. Is that the new economy? Build a $billion business, a $5 billion business, a $10 billion business, a remarkable accomplishment in itself, take it public at a ridiculously inflated valuation, the bankers, and investors and founders get rich beyond fabulously rich. As for the ordinary people left holding the stock? Sure, they may have paid $50 for $10 worth of company, but they got the exact number of shares that they paid for. Whose fault is that?

1 comment:

  1. I ran the Groupon IPO by Tom, who used to do financial analysis for a living (back in the days when we were still using cuneiform for the receipts); his take is that the 'it's a Ponzi scheme' argument is unfair, but that the most charitable interpretation is that the original investors are gettin' while the gettin' is good. (The less-charitable interpretation is that it's pump-and-dump.)

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