LivingSocial: Canary in a Coal Mine?

Big hat tip to The Analyst for digging this up. I never would have found it otherwise.

Most of us would agree that there is a bubble in Web 2.0 offerings at the moment. Absurd valuations for companies like Demand Media, LinkedIn, and most recently Groupon will mark 2011 as the year of the sucker bet in the IPO market. Well, the biscuit wheels may have just fallen off the gravy train.

Groupon knock-off Living Social filed a Reg D-506 offering to sell $400 million worth of restricted stock to private accredited investors, with the sale commencing on November 18. None other than JP Morgan and Silicon Valley's Code Advisors are handling the offering, and in the midst of a frothy Groupon IPO, selling Living Social shares should be like falling off a log, right? Wrong. To date less than half the money has been raised.

Could it be that the market (even the private market) is growing more skeptical of these deals? Living Social refused to disclose any financials with the filing, so it's anyone's guess what kind of money they're making. But I think it's safe to assume they're only selling a small percentage of the company for $400 million, so you can bet they're placing an astronomical valuation on the whole thing. Maybe investors are fed up.

Could Living Social be the canary in the coal mine of Web 2.0 offerings? Is the weak response to their offering a signal that the market is growing wary of "the next big thing" and is becoming more rational?

Think about the audacity required to even file for a $400 million private placement. And JP Morgan and Code Advisors must've thought they could place it, or at least they convinced Living Social they could.

Did Groupon burst the new tech IPO bubble? Zynga cut its initial valuation from $14 billion to $7 billion or less. And that's a company with real revenues. If so, what does this mean for the Facebook IPO? Could it be that some of the late private investors are about to take it in the shorts?

 

The fact that anyone agreed to invest in this absurd exercise despite the fact that Living Social refused to disclose any financials is completely insane.

Btw, I don't even know how Zynga is worth anywhere near $7 billion. They might generate a lot of revenue, but they're more or less a break-even business. Not to mention, their whole business model reeks of dog shit. They make the bulk of their money from people buying virtual goods. And, all of their games are essentially knock-offs of each other with a different word thrown in before -ville.

 

We should make a game called WallStreetVille. We'd make tens of hundreds.

If I had asked people what they wanted, they would have said faster horses - Henry Ford
 

The whole deal a day site space has become a joke now. With tons of reports of the big players squeezing restaurants with ridiculous margins (especially Groupon) resulting in restaurants losing money AND pissing off customers because of increased wait times/poor service, these sites have resorted to BS offerings like clean your car deals or random spa combos. I never used these sites much before, but now they seem pretty damn useless.

Meanwhile there's hundreds of other Groupon ripoffs now willing to do exact same thing for lower and lower margins. There's no sustainability.

While there have been some ridiculous valuations for web 2.0 companies, this space is in a league of its own in unrealistic and irrational valuations.

 

I did a little more digging, and their last private placement was in June for $1.5 million. Perfectly reasonable for what is essentially a late stage start-up. To go from a $1.5 million private placement to a $400 million private placement in less than 6 months is mind boggling. I'm actually fucking stunned they managed to pull in $176 million this time around.

 
Edmundo Braverman:
I did a little more digging, and their last private placement was in June for $1.5 million. Perfectly reasonable for what is essentially a late stage start-up. To go from a $1.5 million private placement to a $400 million private placement in less than 6 months is mind boggling. I'm actually fucking stunned they managed to pull in $176 million this time around.

i work in tech industry, and let me tell you that most if not all start ups want to go public asap. Whats shocking about it? The IPO game is rigged by the banks, the investors are mostly retirement funds, IRA's etc who have no clue wtf they are actually buying. My guesstimate is that the bubble wont burst until Europe tail risk smacks the markets across the face. I personally know a guy whose company reached $600 mil market cap in 2000's and made a boatload of money, he still makes decent revenue at $30 mil, but now hes jumping on the IPO bandwagon again.

 

I got a LivingSocial or Groupon or something for fucking McDonalds...that should say it all.

If I had asked people what they wanted, they would have said faster horses - Henry Ford
 
Edmundo Braverman:
Correct me if I'm wrong, but don't the underwriters have some serious egg on their face over this botched placement? Especially JPM? I mean, if you don't have a reasonable expectation of getting a deal fully subscribed, why would you risk the reputational hit to the firm?
I agree with you in theory but do you honestly think anything short of an Enron like event could meaningfully change JPM's reputation?
If I had asked people what they wanted, they would have said faster horses - Henry Ford
 

Happy,

I'm really talking more about their reputation with potential clients. In other words, when they're trying to convince the next tech company to let them handle their private placement, what happens when the tech company says, "What about Living Social? You guys really fucked that deal up."

I just think it puts the firm at a competitive disadvantage with potential business when they overreach and then fall on their face. I know if I were a tech CEO that's what I'd be thinking about when JPM offered to handle my placement (especially if I knew my company was way overvalued).

 

It was 13 big macs and 13 large fries (in increments of one big mac and one fry at a time via 13 certificates) for 13 dollars. Anyone who thinks thats not a good deal is crazy.

“...all truth passes through three stages. First, it is ridiculed. Second, it is violently opposed. Third, it is accepted as being self-evident.” - Schopenhauer
 
seabird:
It was 13 big macs and 13 large fries (in increments of one big mac and one fry at a time via 13 certificates) for 13 dollars. Anyone who thinks thats not a good deal is crazy.

That's pretty amazing, actually. That means McD's is selling a Big Mac and fries for 50 cents (after GRPN takes their cut). Guess they're hoping you buy a large drink to offset the loss.

 
Edmundo Braverman:
seabird:
It was 13 big macs and 13 large fries (in increments of one big mac and one fry at a time via 13 certificates) for 13 dollars. Anyone who thinks thats not a good deal is crazy.

That's pretty amazing, actually. That means McD's is selling a Big Mac and fries for 50 cents (after GRPN takes their cut). Guess they're hoping you buy a large drink to offset the loss.

Profit margins in the fast food business are insane, they make the markup that a bar charges for booze look ethical in comparison (bottle of Jameson costs $20 but we charge $6 per shot). McDonalds breaks even on drink revenue. Any money spent on food is all profit.
Get busy living
 

i actually like livingsocial...found a couple decent restaurant deals and there are some sweet vacation packages on there.

"Life all comes down to a few moments. This is one of them." - Bud Fox
 
noke2012:
i actually like livingsocial...found a couple decent restaurant deals and there are some sweet vacation packages on there.

I'll credit LivingSocial with the best looking app and they sure make their travel deals look pretty sick (private catamaran trip anyone?)...never used one though. In terms of actual value though, I feel like Travelzoo has some better deals, especially for hotels and entertainment in major US cities (some of their international stuff seems kind of sketch).

 

A friend of mine actually created stealthedeal.com, a groupon clone, and sold it before the jig was up. Wish I got in on the action.

I wonder what he made off of the deal?

 
evilbyaccident:
A friend of mine actually created stealthedeal.com, a groupon clone, and sold it before the jig was up. Wish I got in on the action.

I wonder what he made off of the deal?

i thought you said my "friend" cant u ask him?

 
go.with.the.flow:
evilbyaccident:
A friend of mine actually created stealthedeal.com, a groupon clone, and sold it before the jig was up. Wish I got in on the action.

I wonder what he made off of the deal?

i thought you said my "friend" cant u ask him?

Not exactly something one would feel comfortable asking.
If I had asked people what they wanted, they would have said faster horses - Henry Ford
 
go.with.the.flow:
evilbyaccident:
A friend of mine actually created stealthedeal.com, a groupon clone, and sold it before the jig was up. Wish I got in on the action.

I wonder what he made off of the deal?

i thought you said my "friend" cant u ask him?

Dude was smart enough to build a business in a bubble and sell it before the burst, he's smart enough not to broadcast his new found wealth.

 
TheKing:
Btw, I don't even know how Zynga is worth anywhere near $7 billion. They might generate a lot of revenue, but they're more or less a break-even business. Not to mention, their whole business model reeks of dog shit. They make the bulk of their money from people buying virtual goods. And, all of their games are essentially knock-offs of each other with a different word thrown in before -ville.

Why is Zynga a break-even business? They built their business on Facebook's back, let Facebook do most of the advertising, and they don't even produce a real product. Do you know how easy it is to make a "virtual good?" Click, look, I just made one, and you just paid $10 for it. 100% profit.

Q3 Revenue of $307mm, $13mm in Net Income (43% decline) while boosting spending on infrastructure, staff and new game development. "Active Users" increased from 5.1 million (9 months ending September 30th) in 2010 to 6.7 million in 2011 and they spent an average of $110 each.

I'm not gonna act like I know enough about valuation to throw one out on Zynga, but their business model is pretty solid and I think you are underestimating how truly pathetic a large portion of the global population is that spends money on this bullshit. I don't see it slowing down anytime soon either.

People really get off to climbing the rankings in these retarded games and big name companies are starting to throw advertising dollars at Zynga for in-game advertisements (Coca-Cola got the ball rolling).

I would have no hesitation buying and flipping Zynga after a year for LT capital gains and probably 50-100% return.

My name is Nicky, but you can call me Dre.
 
Best Response

@aempirei

I just find it weird that Zynga is basing their income on the 5% of their active users that spend money. I don't know the multiples that are in use behind the valuation, but it still seems odd that it would justify an IPO of ~$7bn. I see this as a company that would have an increase of costs associated with expanding, but with lagging income. This market is just waiting to be saturated and crowded. Just how would they tap into customers not considered as 'whales' is beyond me. Can't say I've seen many people play FarmVille, ShitsVille, Whatever-Ville in the last six months and people are actually leaving FB. 1

Of course, this is a great company to flip just like LNKD after two or three days. I just don't see the LT gain in this company, but they have a great business model as long as FB stays popular or they branch out to other social sites (I don't know if G+ offers gaming).

1http://techland.time.com/2011/12/05/the-beginning-of-the-end-for-facebo…

CNBC sucks "This financial crisis is worse than a divorce. I've lost all my money, but the wife is still here." - Client after getting blown up
 

Zynga's competitive advantage is that they have almost the entire market share of social network / virtual good gaming, and now that they have an established user-base, they are looking to hop off of Facebook's back so that they can keep a bigger piece of the pie. I'm not sure where you got the 5% figure, it seems extremely low to me. That would imply that of their 6.7 million users, only 335,000 of them "bought" virtual goods / spent money on these games, and that each of those individuals spent an average of $2200 during the first 9 months of 2011. That is simply not accurate.

Regardless, their revenue model is actually superior (IMO) to that of a traditional console / PC video-game maker who spends a boatload of money on development and only has a very short window to generate sales on the finished product. These social-networking games actually generate residual income over a much larger window, and some of their games are actually generating more revenue now then when they were initially launched due to listening to their end-users' feedback about what they want to see in the game for it to continue.

I would buy stock in Zynga before I ever bought stock in Blizzard/Activision or Take-Two Software and they are 2 of the top video-game developers out there.

My name is Nicky, but you can call me Dre.
 

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CNBC sucks "This financial crisis is worse than a divorce. I've lost all my money, but the wife is still here." - Client after getting blown up
 

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My name is Nicky, but you can call me Dre.

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