What really happened at LivingSocial?

This comes on top of an article a few days ago that (to people in the business at least) was almost as preposterous, in which their ranking criterion for VC funds was number of acquisitions. <a href="http://www.privco.com/top-20-venture-capital-firms-with-the-most-private-tech-company-exits-in-2012" rel="nofollow">http://www.privco.com/top-20-venture-capital-firms-with-the-...</a>

privco's sales people e-mailed the address on my company's domain and offered research services. when we declined, four days later an article ran on privco (an 'exclusive') reporting that we refused comment on something we had never seen which was an article full of made-up dire horseshit. so I was left explaining to my employees why this company was out to get us and no, I wasn't misleading them about our finances.<p>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.<p>what hurts the most is the pubs that parrot the 'research', like cnn did this time around, which gives it credibility.<p>edit: a16z and google pay them for their research. sad. <a href="http://www.privco.com/testimonials" rel="nofollow">http://www.privco.com/testimonials</a>

Parts of the PrivCo report might not be accurate, but I don't trust a word Tim O'Shaughnessy says. We were told long ago that we'd be profitable by now, and then there was a round of layoffs. Is he under any obligation to be truthful about any of this? It's an internal email within a private company. Take anything he says with a grain of salt.<p>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.<p>He also doesn't mention the threat of more closures and layoffs. From a business perspective, it makes <i>no sense</i> 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.<p>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.<p>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 <i>small</i> factor has a bridge to sell you.<p>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?

PrivCo has absolutely NO short positions in any private company we cover. These are PRIVATE companies and with rare exception do not trade. Nor do we earn any fees from private companies we cover (and we do NOT accept paid advertising, unless you count a the standard Google links).<p>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.<p>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).<p>But the numbers don't lie and we stick by our prediction.<p>The PrivCo Team www.privco.com

This in particular makes PrivCo look stupid:<p>"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."

LivingSocial's response is extremely damning of "PrivCo".

Off-topic: Don't get me wrong, I'm on the side of whoever is telling the truth here, however, this CNN report/posting seems to be right on time in favor of Living Social, how does that work? do the PR department just email CNN and ask them "Hey, can you make a blog post quoting an internal mail to dimiss the lies PrivCo said early today?" No sarcasm here, does it really work that way or is just my imagination?

What happened is in the end it didn't appear to have a repeatable and scalable business model.<p>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.<p>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.<p>Whether a PrivCo is funding them or not -- my original point stands.<p>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.

What I don't get is this; how does Living Social do ~$500mm in revenue and still fail to be in the black? It's not like they have any physical merchandise. All their expenses should be personnel, servers and bandwidth right? How are they bleeding through over $500mm in a year then? All the employees are overpaid? Paying too much for servers?

Well now the story is updated. Quoted below:<p>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.

&#62; our major competitor's market cap is now $3.9B<p>He can't say "Groupon?" Seriously?

Fortune just reported that insider's confirm LivingSocial was down to JUST $28M IN CASH in February right before taking yesterday's financing? If my math is right, looking at their 2012 financials on PrivCo: <a href="http://www.privco.com/livingsocial-receives-emergency-110m-cash-infusion-from-existing-investors-to-avoid-bankruptcy" rel="nofollow">http://www.privco.com/livingsocial-receives-emergency-110m-c...</a><p>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<p>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.

IMHO PrivCo's report appears to be a good ole-fashioned hatchet-job. The real question is who is PrivCo working for? Or are they just trying to generate press with down news?

I think the main problem with this business model is that it is not really beneficial for large number of advertisers. I heard so many times about local businesses that were screwed by Groupon, because they offered too many deals at too low prices (often below costs) and most people who bought deals did not return later. Groupon seemed not to care about providing a service that is really beneficial to advertisers, instead they concentrated on short term grow.<p>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.

Did PrivCo or some related business entities have a short position in LivingSocial when the PrivCo statement was made on LivingSocial?<p>Well, not in any simple sense since apparently LivingSocial is not public yet. But a short position on a related company?

If you believed the Privco report when you first read it, I have a bridge you may be interested in.

Fisrt time I've heard of privco, but just one look at their site screams 1998 scammy website. Ya know, the kind with bold lettering, a sticky caps lock, and looks kinda like those chain emails your grandma keeps forwarding....

The more damning evidence is Chad Fowler's recent departure from LS to Wunderkinder.

Oh for chrissake: Just release the funding docs and term sheet.<p>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.