Why Silicon Valley Is the New Las Vegas

Illustration by R. Kikuo Johnson

Groupon, which runs the largest coupon website in the world, went public last November, and already it is having problems. In March the company announced it was revising down the financial results it previously had reported for the December quarter, its first since going public. The news has sparked an inquiry by the Securities and Exchange Commission.

But Groupon has been shaky from the get-go. Before going public, it raised $1.1 billion in funding, but its founders got most of it, leaving less than $200 million for the company itself. Groupon’s original IPO filing used an accounting trick to make the site look profitable when in fact it was losing money. (The company deleted the trick after the SEC complained.)

Unfortunately, these hijinks aren’t accidental screw-ups by a bunch of naive, inexperienced kids struggling to manage a fast-growing company. Indeed, they are symptomatic of a new generation of Internet entrepreneurs. These young bucks are apparently running companies as a kind of get-rich-quick game where the goal is to get away with as much as possible and where ethics are for suckers.

Take the San Francisco–based Zynga, which generated $1 billion in revenues last year selling virtual goods to people addicted to its cheesy Facebook games like Mafia Wars and Farmville. Zynga is notorious for peddling knockoffs of games made by others, and its CEO once boasted he had done “every horrible thing in the book just to get revenue right away.” Before Zynga’s IPO, the company demanded that some employees give back stock they’d been granted, or else get fired and lose it anyway.

Same goes for Facebook, which last year cooked up a scheme with Goldman Sachs that would allow the social network to raise $1.5 billion and sidestep SEC rules about disclosure. The rules say that if you have more than 499 investors you have to disclose your financial results publicly. Goldman and Facebook tried to create a “special-purpose vehicle” so that many Goldman clients could buy Facebook shares but be lumped into a single entity. (It didn’t end up working.)

Or look at Path, a little startup whose iPhone app got caught uploading people’s address-book information, without permission. Path apologized, promising never to do it again. But why do it in the first place?

Character counts in political campaigns. Should it also matter in business? I’m afraid it’s both naive and old-fashioned to even ask that question.

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