When it comes to Groupon’s accounting methods the term “controversial” is a little soft. To miss report a $113.9 million loss as an $80.1 million profit is nothing short of criminal. ACSOI accounting is a highly misleading non-GAAP method that allows reporting of profit without taking into account many factors including stock option compensation. Now that we have a clear picture of Groupon it isn’t pretty.
So what happened here? The answer is a failing business model. I fully agree with Rob Wheeler’s blog in which he states that a “businesses should become profitable before they become big.” Groupon has some how gotten the idea that they can scale up to size and then become profitable but truly lacks the proper business model to do so. The fact that Facebook was successful with this method means nothing*. Facebook becomes more beneficial to its users the more of their friends join meaning that they can produce profit after they become large. So far Groupon have had $1 billion of investor money to spend, but where do you go when that dries out? The most likely outcome at this point seems to be to fold in on themselves.
*Flaws in Facebook’s business model
**Article: More Trouble for Groupon IPO