Optimistic news releases yesterday warbled about daily deals site LivingSocial raising $110 million. In an email to employees, CEO Tim O'Shaughnessy called the iinfusion "a tremendous vote of confidence in our business from the people who know us best," according to the Washington Business Journal.
But all may not be so rosy. A day after the deal, financial research firm PrivCo issued a scathing assessment of the transaction, calling it "a last-ditch attempt to save the privately-held daily deals company from imminent financial ruin."
PrivCo said that, far from being another round of venture capital financing, as many reports implied, the deal was a mixture of "emergency" convertible debt and warrants.
It also pegs the company's current valuation at just $330 million, down from $5.7 billion in Dec. 2011.
"LivingSocial essentially threw itself at the mercy of its investors -- who had already sunk over $823 million in the company before today's $110 million additional lifeline -- to avoid a total collapse of the company that would have occurred within days," said said PrivCo CEO Sam Hamadeh.
PrivCo said the latest financing forced LivingSocial to re-price participating investors' previous rounds.
"[It] effectively means that its most recent investors entirely control the equity of the company," said Hamadeh, rendering stock held by the company's founders and its 4,000 employees essentially worthless.
O'Shaughnessy called PrivCo's analysis "straight up fiction."
Shine wears off
LivingSocial may be second only to Groupon in its difficulties, just as it is second to Groupon in most other ways. As we've previously reported, daily deals sites are finding the going gets a lot tougher once the shine wears off.
The problem basically is that the daily deals business model relies on a rate of growth that may prove unsustainable. Both companies take in wads of cash from consumers but a large percentage of that cash must be paid back out to the merchants who floated the discounts that drew in the consumers.
Back in November, Groupon was reported to have about $1.2 billion in the bank but it owed about half of that to its merchant partners. Meanwhile, it has high sales and overhead costs that must be paid.
Over time, as growth slows, incoming revenue may not be sufficient to cover the merchants' share, raising the scary prospect of running out of cash.
Late last year, observers thought that crunch-time for one or both of the sites would come early this year. If PrivCo's account is accurate, it would seem that that prediction came true.
What's this mean for consumers? Not too much. As long as coupons are promptly redeemed, the financial risk rests much more heavily on the companies' shareholders and on the merchants who are awaiting payments.