Last night LivingSocial's pneumonia took a turn for the worse

By Sarah Lacy , written on February 28, 2013

From The News Desk

We've said it before: If Groupon has the flu; LivingSocial has pneumonia. And both cases look a lot worse after last night.

I'm really not trying to beat up on LivingSocial's CEO Tim O'Shaugnessy. But the rosy picture he tried to paint for employees last week is looking even more wobbly this morning.

In case you forgot, last week LivingSocial announced a $110 million round, following our reports that the company was getting into a desperate cash position and needed something to survive -- whether a white knight or a big cash infusion.

Privco wrote a devastating report on the terms of the deal, which seems to have at least in part been inaccurate. O'Shaugnessy sent an email to employees -- conveniently leaked -- that rebutted the inaccurate aspects of the report. (Good for him!) But he took it too far by presenting his own carefully worded picture of "Nothing to see here! We'll be fine! Don't be silly!" (Not so good for him or his team.)

I broke down all the reasons why I found this email misleading last week, but three bear revisiting given Groupon's messy earnings report last night. It's a lesson on why gilding the truth can be a dangerous way to motivate already beleaguered employees.

  •  O'Shaugnessy talked up LivingSocial's revenues of $500 million as evidence they'd be fine. As I pointed out last week, revenues have never been the concern in the daily deal space. But it bears noting just how much smaller LivingSocial is than even a weakened Groupon. Groupon's revenues were $638 million per quarter and include more than the core daily deal business. In fact, the company is trying to lessen its reliance on daily deals, dramatically. As Kevin Kelleher reported last night, Groupon has been having to cut merchants sweetheart deals to keep them happy. The key takeaway: Groupon is more than four times larger than LivingSocial in terms of revenue.
  • Last week, O'Shaugnessy shrugged off concerns about the falling valuation in the most recent round by saying LivingSocial merely had to clear an exit of $1 billion and it would avoid any cram-down ramifications of this. He made this sound reasonable by pointing out Groupon was worth some $4 billion. This was flawed reasoning last week, because the delta between a No. 1 and No. 2 player is much larger than simply discounting a valuation to match the difference in revenues. But as I said last week, it was an odd statement because Groupon's valuation is still clearly a moving target. To wit: Groupon lost a full $1 billion of that valuation rapidly in after hours trading last night. How's the likelihood of a $1 billion exit looking now, LivingSocial? This is the trouble with a CEO pegging his company's worth to a stock that's falling like a knife. It can't be encouraging to the team.
  • O'Shaugnessy also blithely referred to the company's potential for an IPO as if it was a likely outcome. That looks even less likely than it did last week. The last bastion of Groupon believers -- hedge funds like Tiger Global and Silver Lake who bought in around $6 a share hoping for a turnaround -- are all looking on shaky ground at this point. The group of institutions willing to take a risk on this space are dwindling by the minute.
I just hope O'Shaugnessy didn't believe what he wrote last week. Because God knows he's having a rough awakening to LivingSocial's reality if he did.