UPDATE: Just got off the phone with Hamadeh
[PrivCo CEO], who is standing by his original report.
He says O'Shaughnessy is misleading his own employees,
and that classifying the round as "equity" is a
technicality given all of the debt-like provisions
PrivCo continues to believe were attached. He also says
that PrivCo spoke with a LivingSocial spokesman prior
to publishing, and sent him a draft of the report with
a request for any needed corrections. When nothing came
back four hours later, PrivCo published.
PrivCo saying they "...sent him a draft of the report with a request for any needed corrections. When nothing came back four hours later.." they assumed everything is true is a weak though.
I guess I will send LS an email saying I am the new CEO, please email back if this needs to be corrected...
...I will let you guys know if they don't respond, in which case, D.C. here I come!
There is nothing livingsocial can do to revert its current trajectory. It's not about the company, but the very core of its business model does not work, not one but dozen of similar companies failed early, are livingsocial and groupon trying to run some sort of ponzi scheme on desperate investors and employees?
I don't doubt for a second that LivingSocial is experimenting with it's models, innovating and trying new stuff. It might not work out, but the investor clearly has enough confidence that it will to invest more cash.
According to the PrivCo article, they got first rights on liquidation. So they'd be either getting a huge part of a miracle turnaround, or most of their money back when the company was sold off in bankruptcy.
Of course that article appears to be completely wrong, so I guess it doesn't actually matter. But there's your motivation for investing in a dying business.
"We are a company that does over half a billion in revenue. If we stay diligent, we hope to turn the corner to become profitable soon."
What groupon, livingsocial, et al assumed was that this was an endless market and would work for every type of business. This is clearly not the case. Whether these particular companies can get to the right size and find the right market remains to be seen - but I don't believe this is a "ponzi scheme" at all.
IANAL, but this doesn't seem like libel per se, so damages and malice would both need to be proven by the plaintiff.
After that they have a "team of more than 4,500 employees includes LivingSocial professionals in every city where we offer deals"[1], 19 offices[2] plus another office/shop thing called 918F Street[3] and they have a 5 month training program[4] which adds costs to their hosting, software design etc.
Once they've paid out for its 4,500 employees, offices, hosting, software design, training programme, legal costs etc they also have significant marketing costs as well. Although companies like Ampush have helped them to lower it recently[5]
[1] http://corporate.livingsocial.com/bythenumbers
[2] http://corporate.livingsocial.com/ourcompany
[5] http://ampush.com/ampush-lowers-livingsocials-cpa-costs-on-f...
My guess though is that their major cost is customer acquisition. That seems to be the norm in this space. They're buying customers for $5 and making $2.50 off them (numbers theoretical, as an example) hoping to make the rest back later when they've won the market.
1. Many here seem to feel that taking 50% is unfair to their merchant partners. Yet, they are nonetheless struggling to turn a profit
2. Like any other coupon, LS deals run the risk of un-use. Speaking for myself, I have forgotten about at least 4 separate deals, and am not an active "daily deals" consumer.
How can LS ever be profitable? It feels like they are already absorbing as much net revenue as they can, and have the deck as reasonably stacked as possible. Is it a question of needing to run leaner (they do spend hand over fist, in my experience)?
Earlier in its existence, marketing was also a huge cash sink for Groupon. This has improved for them as their product matured, but it's likely that Living Social is still spending a huge amount here, too.
http://investor.groupon.com/releasedetail.cfm?ReleaseID=7002...
[1] http://articles.washingtonpost.com/2012-10-25/business/35501...
Well, not in any simple sense since apparently LivingSocial is not public yet. But a short position on a related company?
While it might be theoretically possible to short something using a company like SecondMarket, the prevailing wisdom is that if it's not public it's probably not being shorted.
The letter was full of possible half-truths(eg: 'There is no "4x liquidation preference"' does not preclude 3x or 5x or any other number besides 4), so smart employees should be looking until they see the docs.
I chose a phrase as an example (hence the abbrev "eg"): You chose a different phrase.
If you want to instead parse the phrase you chose for half-truths, we can do that. It will not change the substance that there is all sorts of potential for half-truths.
All kidding aside, it seems almost criminal that a company would create such damaging news as a way of generating publicity (speaking, of course, about LivingSocial). I just can't fathom what would drive someone to do this, unless someone who was leaving LivingSocial wanting to spread a lot of damaging news about their old employer.
we do not have the resources to sue. wish livingsocial and the other companies targeted by these pieces of shit would. it's all a giant scam.
what hurts the most is the pubs that parrot the 'research', like cnn did this time around, which gives it credibility.
edit: a16z and google pay them for their research. sad. http://www.privco.com/testimonials
This funding round is going to play out in a way that will make it very clear in a few months who nailed the story and whether this reporting is malicious. If PrivCo is guilty of systemic fraud or extortion, there are surely online discussions that can support the claim. As a web entrepreneur myself, I also find the anonymity here puzzling for another reason -- if I had a legitimate grievance with the company I would be doing everything in my power to inject my story into the national media at this point. Free SEO from CNN and other major news outlets? Sign me up.
UPDATE: Just got off the phone with Hamadeh, who is standing by his original report. He says O'Shaughnessy is misleading his own employees, and that classifying the round as "equity" is a technicality given all of the debt-like provisions PrivCo continues to believe were attached. He also says that PrivCo spoke with a LivingSocial spokesman prior to publishing, and sent him a draft of the report with a request for any needed corrections. When nothing came back four hours later, PrivCo published. As you might imagine, now I've got a new call into LivingSocial.
What's different after this followup is that now CNN/Fortune is suspect too, because repeating this verbatim is unethical.
My interest in following this story is personal as I live in DC and have many friends still employed at the company.
I'd disagree that CNN is being unethical here, their story/angle is about the process and getting to the bottom of the PrivCo report.
You trusted them before?
We have no agenda other than to try and publish facts, and what LivingSocial announced yesterday immediately struck us as misleading and fishy based on everything we knew about the company and it's dire financials. The press release and memo to employees (imagine you are one of those trusting hardworking employees, or a local daily deals merchant they owe money to "soon") - over $300 Million worth actually, but have only $76 million - made it seem as if the company was doing so well financially that their happy investors who had invested at a $5.7 Billion valuation wanted to double down on their investments and bet even bigger. NOTHING WAS FURTHER FROM THE TRUTH. The company was NOT doing fine, lost over $400 Million last year, was running low on cash, and had to take a massive valuation haircut and grant all sorts of special preferences in order to get this last lifeline of cash.
Their financials can't be papered over...and they verified to the penny as public Amazon.com owns 31% now of the company. Look them up...if you know anything about finance or accounting you will reach the same conclusions as PrivCo did. LivingSocial will soon require mass layoffs, and will be insolvent or sold for pennies on the dollar by the end of this year is our prediction. (And we hope we're wrong, and don't make a dime either way, as we don't want to see 4,000 trusting employees lose their jobs).
But the numbers don't lie and we stick by our prediction.
The PrivCo Team www.privco.com
We're debating the veracity of all of the non-public details that made your report interesting. Well, in theory we are. Only one side of the debate seems to have showed up.
Do the math: looking at their 2012 financials on PrivCo: http://www.privco.com/livingsocial-receives-emergency-110m-c...
That is, LivingSocial's operating expenses are about $1.4 Billion/year (Revenue + Operating loss = about $1.4 Billion they spend a year). That's $120 Million a month of expenses. $4 million a day. MEANING NEW FORTUNE/CNN UPDATE to their story confirms LIVINGSOCIAL WAS DOWN TO JUST 7 DAYS OF CASH! How is that NOT the very definition of a "distressed financing" situation? Correct the record CNN and Fortune - shame on you - and admit when you're wrong - (and by the way they just deleted this posting from the article comments). LivingSocial was down to a dangerously low level of cash just as PrivCo's sources confirmed, only a week, maybe 2, left, before paychecks would start bouncing and the whole house of cards came down. This is the very definition of a "distressed financing."
Edit: For the record, I read the article, I forwarded it to colleagues interested in the space, and the only thing worthy of it for me was my comment -- don't start one of these without a business model.
All this PR commentary about misunderstandings about finances, funding all ties back to one thing -- they don't make money. Companies that make money don't hide it, and have a hard time hiding it.
Whether a PrivCo is funding them or not -- my original point stands.
This place for me is about learning to create a real business and not the lame bantering about distractions from this one requirement of any successful startup.
I hope the whole "daily deals" fad dies soon, along with all the shitty companies (LivingSocial, GroupOn, etc.) that promote it. There is nothing more frustrating than getting consumers in the mindset of "I want to try it, but I'm going to wait until a daily deal comes along."
A cursory glance at the original article makes it obvious that his comment is irrelevant. It's just pithy snark against a company already dealing with false "news" reporting.
He can't say "Groupon?" Seriously?
He doesn't mention the allegation that LivingSocial owes more to merchants right now than they have on hand. As others here have mentioned, that's going to hurt the quality of deals they're able to put together at a time when they need to be building confidence with customers and merchants.
He also doesn't mention the threat of more closures and layoffs. From a business perspective, it makes no sense to pay high salaries to college educated 20-somethings to do customer support from expensive downtown DC loft office space, but he never mentioned that in any of the all-hands meetings when he said we would be profitable soon.
The constant theme in communication from management at LivingSocial is always "don't listen to what others are saying about us; they don't know the full picture." I wonder how much longer they can keep that up.
If they do go under, there will be a massive rush on all the talent that will suddenly become available. The brain drain is already beginning. A number of very talented engineers (not just Chad Fowler) have already left. They've been diplomatic about it, but the fact is that they saw better opportunities elsewhere. Anybody who says that the tenuousness of LivingSocial's continuing existence isn't at least a small factor has a bridge to sell you.
People won't jump ship all at once, but this is going to be a huge problem for recruitment. Salespeople and customer support staff are a dime a dozen. No news there. But anybody talented enough to be a developer at LivingSocial (and the talent is considerable) would have to be quite desperate to come on board at this time. HN readers know that the caliber of developer they need can choose where they work. Would you sign on in this environment?
So true and the same comment I was going to make. I was in the Seattle office and thought the same thing 2 years ago.
A lot of times these writers are on the hunt for sources for their articles, and making yourself available to answer questions or give quotes, whether you're the founder or someone in the PR/Marketing dept, will go a long way down the road when you're looking for coverage on a new feature or want to clarify some bad press.
Their operating expenses are about $1.4 Billion/year (Revenue + Operating loss = about $1.4 Billion they spend a year). That's $120 Million a month. $4 million a day. THEY WERE DOWN TO JUST 7 DAYS OF CASH! How is that NOT the very definition of a "distressed financing" situation? T
hey were down to a dangerously low level of cash and regardless of the financing terms or structured as technically debt or technically equity, that yes this was a distressed financing situation.
"Two of the three investors listed on the PrivCo site as participating in the round didn't participate, and one isn't even an investor in the company."
A lot of successful innovation today is about eliminating middlemen. Local deals companies do just the opposite. They are a new middleman that tries to cut a large percentage from local businesses income. I don't think this is sustainable.