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Groupon files for IPO

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Andrew Mason's desire is for Groupon to be where you go when you think "I'm hungry or I'm bored"

If you're calling bubble and confused about how they're running at a loss don't miss this line:

"Participating Merchants: 56,781 in the first quarter of 2011, up from 212 in the second quarter of 2009"

That database of 56,781 merchants is GOLD.

The way their sale staff works is to create direct relationships, phone contact etc - that is not a cheap proposition.

In terms of growth potential there are 10x as many restaurants in the USA as Groupon's entire universe of merchants today.

If they continue to capture the consumer mind that they're the best in the world to answer those two questions, their valuation and growth potential is insane.

Refs:

http://answers.ask.com/Food_and_Drinks/Restaurants/how_many_...

http://www.geekosystem.com/groupon-im-hungry-im-bored/

Why is the growth of that database over 2 years so flat? What exactly will they do to actually make money from that database that they haven't done yet?

The value is less in the database and more in the relationships they've developed. We're not just talking rows in a table here. These are businesses which have bought into Groupon as a lead generator & who Groupon should be able to bring on board quickly to whatever future products develop.

And with all these businesses they've been consistently losing money. Personal relationship management is not something that gets cheaper with scale, so size of potential market doesn't really help as far as I can see.

I haven't seen any particular mention of amount of businesses retained as repeat customers, either.

Future products? Maybe they'll sell lucky moose.

The market is getting saturated with Groupon copycats. Plus, high quality merchants can't repeat Groupon offers all of the time or they risk cheapening the brand.

I have a neighbor who owns a "Moe's" franchise -- many of his customers refuse to do business without a discount.

I'd find the operating loss slightly disturbing, because it means they are relying on repeat business down the road in order to crank out profit. Not saying they are going to bomb, but as an investor I'd be more bullish if they could expand and profit at the same time - because it's possible that expansion will be a regular component of their business. Obviously if you believe they will do a lot of repeat business then this is not a problem at all.

Doesn't it boil down to choosing the rate of expansion?

They could probably expand at a slower rate and keep a profit; or they could spend what would otherwise be a profit to expand at a faster rate. At the moment they seem to be going for option 2 which may be a debatable choice but also very normal for a company in the high-growth phase. Amazon is the classic example for this.

If they are investing in growth, good. If they are just buying top-line revenue, no.

Many tech businesses typically like to leverage their debt if growth looks solid and steep and there's a land grab (which there is considering the people entering this space like LivingSocial, Yelp, Facebook, etc.).

I'll confirm the sales model, my mother runs an (awesome) coffee shop in Abbotsford, British Columbia, "Chapleos" - and she routinely gets a call from her Groupon Rep. I suspect that their direct sales staff are incented to contact small business, and update the database on them. To some degree, the principal assets of Groupon are (A) their Brand, (B) their Mailing list, (C) their direct sales force, and (D) That database of business which will soon, if not already, be the finest database of businesses in the world.

Both Yelp/Google have an issue with their data freshness on business. I'm constantly updating open/close times, (and even whether a business exists) on Yelp. And business (particular taxicabs) have long ago figured out how to Game Googles Small Business directory to get in fake listings.

It will be interesting to see what they do with their database.

Yelp has a pretty massive sales force and existing relationships with local businesses. I wouldn't count them out so easily.

I'm no fan of Groupon, but by not having user-submitted reviews (AFAIAA) they avoid the issues Yelp runs into by trying to please both businesses and users.

A funny example of how local merchants try to game Yelp: Plumbers and the like will frequently try to update a competitor's phone number to their own. This is hard to police without calling the merchant.

A have a friend who used to verify these listing changes for Yelp -- but it's all been outsourced to Indian now. Who knows if that will effect quality.

I find particular amusement and disgust with the local merchants who blatantly rate their own services with 5 stars from an account that clearly belongs to them.

Just sticking to restaurants, how many of those restaurants are potential customers for the groupon product as it exists today, let alone repeat customers?

Off the top of my head, I'd say the top 10-15% of restaurants would have no interest in trying Groupon because it cheapens their brand. Then account for chains who don't really need Groupon's reach to offer such promotions (or rather will find it more cost effective to do something like this themselves).

As for the rest of the restaurants, once the novelty of groupon wears off, how often will they come back to give the general public 50% (actually close to 75% off, because Groupon takes half the cut) off meals ?

The Groupon Now idea is a bit more interesting but I think it's something that's going to be best captured by a less physical method of scaling (i.e. not emplying 4000 sales people)

Disclaimer: I'm currently working for a startup in the restaurant space though it does not have any element(s) of a daily deals/groupon clone.

I don't have any special info but based on news reports it seems that restaurants aren't a great fit for massively discounted deals.

The type of businesses that do benefit the most are those that will operate anyway but have excess capacity to use (eg. beds and breakfasts).

Restaurants also have unused tables and surplus food. Is there another reason why they are not great candidates for deals? Because the reasoning above does not seem sound.

Selling food is a low margin business because food are high. Whereas other businesses with excess capacity and most of the costs are operational don't have these problems

I thought the biggest expenses were the staff and rent. No?

EDIT: OK, maybe not, only estimate I was able to find: http://en.allexperts.com/q/Running-Restaurant-2285/Ideal-res...

I don't have any special info either, but after getting a couple of Groupon deals for restaurants, I've stopped.

Dining out simply isn't pleasurable when the waiting staff treat you like a 'coupon customer'.

I'm in this business and I routinely hear from my sales staff that merchants who have done a deal with Groupon, want to do a second deal but never get a call back. Also once the deal is inked the sales person goes silent. I know there is a lot of turnover with the sales team there but more often than not we hear of a lack of relationship building at Groupon but rather "pump and dump".

> The way their sale staff works is to create direct relationships, phone contact etc - that is not a cheap proposition

Isn't that in itself a reason to be skeptical about whether they can actually scale? The whole point around most internet businesses is that they can scale for very little cost. For Groupon to scale they need huge capital input (to hire staff) but then importantly that expense needs to be maintained to keep the treadmill going.

So some rough math shows that if you assume that the valuation of Groupon at $20 billion is based on that database of 56k merchants, you come out with an expected value of around $350k per merchant. That seems highly dubious to me, for a few reasons.

1. Many of these businesses are small restaurants, bars, etc. Notorious for going out of business.

2. The ones who don't go out of business can easily switch to other discount coupon providers.

Personally I've somehow ended up with way too many discount coupon providers sending email to my inbox. I suspect I'm not alone. Presumably I'm also not alone in the other behavior I see in myself - of those providers (Groupon, Living Social, Gilt Group, Bloomspot, Yelp deals, ... there might be more... I could care less), I am least likely to open Groupon emails.

Your back of the envelope calculations do show how seemingly ridiculously overvalued Groupon is.

However, one also has to look at what kind of business you can compare Groupon with. My guess it is taking over part of coupon and other marketing companies.

What kind of valuations do those kind of "old school" companies have? I take the market is rather segmented. That is what kind of cash flow were they producing, what is their price to sales ratio and EPS?

Can we call it a bubble yet?

Those of us who were around in the early 2000s recognize this game. Brand new ventures filing for IPOs based on 'amazing potential' and even more amazing valuations.

This is all going to come crashing down soon. The question is whether it happens before or after Bitcoins. :)

Did the 2000 bubble come with revenue numbers like these recent IPOs?

Huge revenues are less impressive when coupled with huge losses.

> Did the 2000 bubble come with revenue numbers like these recent IPOs?

Lol.

When Webvan when public in 1999, they were predicting by 2001 they'd be at $518.2 million revenue with a $302 million net loss, roughly where Groupon is now. So you're quite right: GroupOn's farther down the path of losing a lot of money.

http://news.cnet.com/THE-DAY-AHEAD-Webvan-revs-IPO-as-questi...

Eh, those are all hopeful predictions. Actual revenue numbers for the year in which Webvan filed for IPO (1999):

"projecting revenue of $11.9 million and a $73.8 million loss"

On the other hand, in the year 2000 Amazon made a net loss of $1.4 billion(!) on revenues of $2.7 billion.

No, but have you corrected for the size of the audience? The web is a lot bigger than it was eleven years ago.

Meanwhile, from Groupon's prospectus:

Our revenue is the purchase price paid by the customer for the Groupon. Our gross profit is the amount of revenue we retain after paying an agreed upon percentage of the purchase price to the featured merchant.

So they have huge revenue numbers because they move a lot of coupons. But they're operating at a loss. It's promising that they have a big audience, and a database of merchants, but what does that really mean when they're not profitable?

If I build a scalable website that sells ten-dollar bills for $9, I will probably attract as much traffic as I can afford. If I have a billion dollars to lose I can probably arrange to do roughly $10B in "revenue". But what does that number prove? Not so much in itself. It's other details that matter.

Why would you have to correct for audience size? The web is the web is the web. If you're a web business today, you have a much larger potential market than companies did in 1999.

That's the point. The audience is substantially higher now, and you can thus expect revenues to be higher.

I think I will read this sentence once a week.

If you take your analogy to completion it makes perfect sense.

Let's say you're in the business of giving $10 for $9.

Let's say you become so popular at it that you beat out all your competitors and now whenever anybody wants to make $1 comes to you and goes to no one else. So multiply this by the size of your market.

Now you add the condition (or maybe you had it in the first place) that those $9 have to stay with you at least 10 years. Now you're pretty much running a bank (well perhaps a CD is closer in terms of return and style of investment.

That's a real business. It's not just leveraging capital but now you're the only bank out there so you've pretty much got a monopoly going. Now you can change your terms and say instead of giving back a $1 maybe you only give back $0.50 or $0.25. What is everyone else going to do about it since you have so much power in the industry you can crush your competition?

The point was that for Groupon the revenue numbers are meaningless not that the example business plan can't work.

The difference is that Groupon is generating revenue near billions, whereas in 2000 companies were IPO'ing without any significant revenue or traction.

>The difference is that Groupon is generating revenue near billions,

there is no problem to generate a billion revenue that costs a billion and half. Barings bank in 1995, Enron in 2002, Merrill Lynch in 2008 ...

>in 2000 companies were IPO'ing without any significant revenue or traction.

Of course, nobody would fall for this old trick of 2000 - IPO without revenue. So the new trick of 2011 is huge revenue, profit negative. You see, at the scale of a billion it is clear whether it is a profitable scalable business model or not.

Not at all. Groupon is cementing it's position as the market leader by spending a huge amount in expansion, thus it's going to result in losses for the foreseeable future. However, that doesn't mean they're not going to be profitable in years to come.

>Groupon is cementing it's position as the market leader by spending a huge amount in expansion, thus it's going to result in losses for the foreseeable future.

Iridium satellite phones.

Or Amazon.com

Amazon lost $3 billion over 8 years before they started turning a profit. [1]

It's HARD to tell the difference between Iridium and Amazon. That's why some investors make money and some lose money.

[1] http://www.slideshare.net/faberNovel/amazoncom-the-hidden-em...

>It's HARD to tell the difference between Iridium and Amazon

yep. And it was hard to pick Amazon among the well funded overhyped dot-com crowd. Nothing indicates so far that Groupon is Amazon, not Webvan for example.

>That's why some investors make money and some lose money.

Ones who picked AMZN would like to think that they were smart, not just lucky. Ones who picked some dot-com loser instead of AMZN would like to think that they were unlucky, not "unsmart" :)

I think that very early on, picking AMZN as a winner is luck. But the difference between them and their competitors (even in the early days) was constant innovation both in technology and business. For example, one-click purchasing, free shipping on orders over $25, users also viewed, reviews etc.

Much of what they did is par for the course today but, at the time, it was innovative. Amazon didn't win because they were lucky. They won because they were smart. Investors who recognized this were betting intelligently, not just lucky.

The other thing to notice is that that culture still exists today. They take big chances in areas seem tangential to their business (eg. AWS, Kindle) or use business innovation to drive sales (eg. Amazon Mom).

The only thing I notice is that people like and use groupon. Just this past Wednesday there was a status update in my news feed: "I ♥ Groupons!" from a recent college graduate who teaches English as a second language (ie not a hacker or startup nerd).

That's one obvious difference between Iridium and Amazon. 10 years ago, when Amazon was still losing money, I had already made purchases from them. It was the first place I checked if I wanted to buy books online. I had never heard of Iridium.

I don't think groupon will be as successful as Amazon, but having real fans among consumers is a big deal.

That's why the spectator sport hindsight-investing is so popular.

It's funny how many people are so sure of the soundness/lack of soundness of a business model, yet surprisingly few put their money where their mouth is.

It's HARD to tell the difference between Iridium and Amazon.

I agree, which is why it is important to also look at the behavior of the founders who have intimate knowledge and secret desires. I won't begrudge anyone taking some money off the table but the amount they are funneling out seems completely out of line with the idea that they expect this business to keep growing.

So what exactly indicates that they are (going to be profitable in the years to come)?

What does "market leader" mean in this market? The one who spends the most on direct marketing? I haven't talked to a single person who has brand loyalty to Groupon or uses it exclusively and there certainly isn't repeat business amongst a majority of their merchants. They're also in a business that, judging by the number of new entrants into the market, will see an attrition in profits-per-deal as time goes on.

Market leader in this market means the brand that has the most users or most potential value to partners. That is, if a business is going to use a discount service to acquire new customers, the market leader will be able to bring in the most customers or the most high-value customers.

That doesn't answer the question about the ratio of investor cash-outs to expansion, though. It just (somewhat) addresses the question of whether a growth strategy without profits makes any sense at all.

The issue with this is that of the businesses who run deals, many operate them at a loss. As a result, they actually do not want the maximum number of new customers that Groupon can bring. "High-value" is a different issue altogether. In my opinion, Groupon does not have ability to judge what makes a "high value" customer to the merchant as they don't ever see the customers on-site purchase pattern at a given merchant. The real value here would be separating "deal chasers" from people who actually go back to businesses they bought a Groupon at in the past which currently they have zero ability to do.

Sooner or the later, the number of businesses that realize issuing 50% Groupons is a losing business will shrink to 0

From the other article they are apparently also spending huge amounts on cashing out the early investors.

>there is no problem to generate a billion revenue that costs a billion and half. Barings bank in 1995, Enron in 2002, Merrill Lynch in 2008 ...

In all three of these cases, you have situations where sophisticated financial instruments were used to hide real losses or very risky and costly investment bets.

That's a very different situation than one where you're leveraging debt to gobble up market share to become the market leader for a certain kind of service. This is particularly useful in types of businesses where winner takes all.

Kozmo.com might be another example from the past.

It has a short term feel to me, not a bubble, more like a craze that needs to settle before we find its true value.

It sounds like an ad agency, but perhaps better suited to surviving through recessions.

The important aspect – that needs to be determined – is whether existing clients are happy, and therefore returning for more business.

Raising money near to revenue doesn't sound bubble.

This seems more like Amazon to me than random questionable ventures. Of all the big name IPOs on the horizon, this is the only one I've repeatedly given money to.

Absolutely wild. Revenue was almost as much in Q1 2011 as it was in all year in 2010 ($645m vs. $713m) with a 20,000% revenue growth since June 200.

They are hoping to raise "close to $1 billion at a valuation of about $20 billion." [1]

And they still aren't turning a profit. (~15% loss Q1 2011 and ~54% loss in 2010) [2]

[1] http://online.wsj.com/article/SB1000142405270230374530457636... [2] http://www.sec.gov/Archives/edgar/data/1490281/0001047469110...

Incredibly impressive revenue, but really, $389.6MM loss on $713MM revenue? Perhaps I'm missing something, but I don't get why it's being hyped up so highly.

Presumably because, like many a previous startup, revenue growth is fantastic. I agree with the HN consensus though-they have no real way of differentiating themselves from LivingSocial et all, so they will continue to have to pump lots of money into marketing ($208m in Q1!!), sales teams, etc and watch their margins go down over time.

That's some pretty insane expenses. What are they wasting money on?

EDIT:

1) Ad spend: $200+ million

2) 7000+ employees (at $40K average per employee, that's $280M/year)

Salary, to convince businesses to work with them on their extreme terms.

Some startups (notably Amazon) use the money they raise to outrun competitors by subsidizing the product. Then, when they have the network tied up, they start making a large profit.

> "And they still aren't turning a profit."

That part just boggles my mind. How can you go from revenue of 30M to 713M in a single year and not have wound up with any profit? Their revenue has grown so fast that I simply cannot imagine being able to greenlight enough spending [1] to get rid of it all in such a short amount of time.

[1] intelligent spends that is; frivolous waste notwithstanding.

I assume there revenue numbers refer to the amount of money collected BEFORE paying merchants. Is that correct?

Yes. I'm assuming that it reported as the cost of revenue (~58% in Q1 2011).

I'd imagine it has something to do with the 7,000+ employees and incredible amount of advertising spend.

The employee growth is definitely a part of it. They went from, what was it? 120 in 2009 to 4000 in 2010?

My boggling is more at the challenge of intelligently doing that spending than simply tabulating it. e.g. how do you intelligently hire 20 people a workday, every workday for an entire year, when you were a 100-person company?

Just mind-boggling. In Canada at least the advertising budget is just monstrous. Their ads are everywhere!

I'm not a pro at reading these, but it seems like you can see for yourself at: http://sec.gov/Archives/edgar/data/1490281/00010474691100561...

That 713M "costed" 433M (seems to be that what goes to the companies advertising via groupon). Then theres 263M on "marketing", 233M on "selling, general, and administrative", and 203M on "acquisition related". The link has more detail on what each of these means.

This is always someone's reaction when someone calls bubble. I don't think it's justified you have to short the stock to be skeptical.

Am I wrong, or any idiot can spend 1 billion dollars to make 700M?

It's very scary to me that they scaled and failed to prove they can profit, before going IPO. I have no issue with that tactic as a private company, but you shouldn't go public until you can prove profitability. Otherwise, the bubble word is truly deserved.

Abosolutely right on. If they can't show profit at this scale and leverage as a private enterprise, it is a big question mark as to when & how would they turn up a profit and at what margin. It looks like investors cashing out rather than sticking on to provide the business model and profitability.

My read on this, especially given the extreme flexibility series G investors showed in cashing out founders, is that when Groupon is up and running in a locale, it makes a whole shitload of money.

I also would anticipate from reading the expansion numbers and having a little bit of business experience myself that Groupon grew literally as fast as it possibly could in the last few years; there was no way for them to successfully move any faster, no matter how much cash they were given.

I'm guessing you'll see some gyrations as they continue to try and solidify their global lead, then slow move to profitability, then one day, (if margins hold up) BAM. Major Net Income.

Right now the market clearly is going to reward a company who can get this done successfully in as broad a portion of the world as possible; if they can demonstrate that existing locales are profitable after a certain period of time, they will have happy shareholders as well. It's a landgrab, and Amazon is a good comparison.

Perhaps the other useful part of the Amazon analogy is that I believe that GroupOn will slowly be eaten alive by competitors unless they bring some real business and/or tech innovation.

Last I saw, LivingSocial's trajectory was steeper than GroupOns. I think we can expect LivingSocial to go public soon so they can add some cash to their war chest.

This would be great. I'd gladly be in a situation where I could split investment dollars between two large growing competitors in a market situation like this.

> it makes a whole shitload of money.

Sounds like they /gross/ a shitload; but they need 7,000 salaried employees to do it, and they're not even in that many places yet. Groupon is a brilliant idea, but it's not the typical zero-overhead startup that HN people are often involved in. Just because you are bringing $20 billion in the door every year doesn't mean you are making f.u. money. I'm not knocking it as in investment -- I really have no expertise in that area -- but the numbers appear less eye-popping when you look at it as sales/marketing outfit that happens to do all of its business online.

If nothing else the timing of this seems suspect to me. The Linked In IPO has investors who missed out champing at the bit for something else. I think Groupon knows their current business model is unsustainable and have picked this moment precisely because the market is particularly irrational right now. (Note: I'm not saying there is a bubble in general, just that the Linked In IPO has created a unique opportunity for them to go public with less scrutiny than would otherwise be the case.)

I think Groupon is a suspect company to begin with. It's a great idea, but most of the last few rounds of funding have gone to pay off the early investors.

http://allthingsd.com/20110602/where-did-groupons-billion-do...

They raised nearly a BILLION dollars, and spent 80% of it on paying off the insiders. Not a good sign.

Prospectus: http://www.sec.gov/Archives/edgar/data/1490281/0001047469110...

The risk factors section (starting on page 11) is particularly enlightening.

Pretty standard from what I've seen, actually.

I agree, and these two would concern me if I were considering investing:

-Retain our existing merchants and have them offer additional deals through our marketplace;

-React to challenges from existing and new competitors.

Groupon could be facing the double-whammy of existing merchants in many markets having no incentive to offer follow-on deals while threats from the competition would erode margins. These are threats to existing revenue streams, not just to revenue growth.

In my view, investors in Groupon must be betting that they can successfully translate their current traction into a more sustainable business model (i.e. Groupon Now). At this valuation, not a bet I would take.

From what I could make out of the prospectus, the revenue number is the sum of the face value of all coupons sold. Since Groupon has to pay the merchants a predetermined percentage of the face value, I'm having a tough time understanding why the entire face value should be considered as revenue. To take an analogy, this would be like Visa claiming the total value of transactions as revenue instead of the fees it charges the merchants for said transactions. Am I missing something?

You're paying your money to Groupon, then they send a portion of the dollars to the merchant. You can assume that basically all of the cost of revenue line item is representative of the portion they send to the merchants.

From the article:

'Don’t expect profits anytime soon: Groupon hasn’t turned a net profit in any of its first three years of operations, including a net loss of $389.6 million in 2010. The company said it expects its “operating expenses will increase substantially in the foreseeable future ...“'

Sounds very 1990s dot-com bubble to me ...

No, it actually sounds like their business model is so profitable in a single locale that they've been rapidly spending outside funding to accelerate their growth and stay ahead of the competition.

Voting you up, up, up. Zipcar turns great profits in various locales, but they do not turn profit as a whole because they're investing heavily in their fleet.

s/fleet/'sales team' and s/Zipcar/Groupon and you should see why Groupon isn't profitable yet.

I'm sorry; but that's a completely ridiculous conclusion to draw from reading that they have been losing tremendous amounts of money.

Staying ahead of competition means nothing if you don't have a strong plan to become a profitable business.

Why is that ridiculous? It's ridiculous to say that Groupon doesn't have a "strong" plan to become a profitable business. Of course they do.

The market they are in is becoming intensely crowded, and since they are the current market leader, they need to spend a lot of money (yes, even if it results in losses) to stay in that position. If they stay can cement that position whilst their competition falls at the wayside, then they will become extremely profitable as the market leader.

It's ridiculous to draw a conclusion in this form (as rottencupcakes did):

"Local-oriented company is losing money globally, therefore, they must be hugely profitable in at least one locale"

There's absolutely no evidence to support that claim (at least, none that has been presented in this discussion).

You've actually taken ridiculous one step beyond with your assertion that, "they will become extremely profitable as the market leader." Market leadership has absolutely nothing to do with profitability. The two concepts are 100% unrelated.

What is their plan to become profitable? If they can grow revenue by thousands of percentage points and still not achieve profitability--how do they do it? They've got great plans around achieving revenue growth--but I contend that have no idea how to go from revenue growth to profitability.

You really don't think Groupon has a plan, however flawed, to go from large revenues to large profits?

Based on the way they've operated their business to this point, I have no reason to believe they have such a plan.

There are things we know, such that Groupon is known to negotiate very aggressively with local businesses to get the best possible deals. We also know that there's strong competition to Groupon negotiating with the same (or at least a similar set of) businesses. That fact alone suggests to me that Groupon will not be able to negotiate as strongly as they currently do--therefore their COGS will go up.

We also can see a trend where as their revenue has grown, their expense growth has actually outpaced their revenue growth. While that means they haven't found efficiencies that no doubt exist in their business, the fact that their expense growth is outpacing their revenue growth suggests that they aren't even LOOKING for those efficiencies.

Finally, there's the evidence that (like many tech companies before it) that investment up to this point in Groupon has basically operated as a ponzi scheme--taking new investments and paying that capital out to earlier investors. Sadly, that's a really dangerous indication of their real reasons for doing an IPO--raise capital so the last of the early investors can cash out.

I'm not saying a business like Groupon can't succeed and can't have a legitimate IPO--but I see no evidence that Groupon is really that business.

The barrier to entry for Groupon competitors is low and there is no cost for both consumers and local businesses to switch to competitors. Based only on that I don't see much hope for them long term.

> No, it actually sounds like their business model is so profitable in a single locale

Chicago is by far their fortress of revenue. Check out the by-city Groupon sales stats for a day in December 2009.

Image: http://static.businessinsider.com/image/4b301d5300000000001d...

http://www.businessinsider.com/groupon-office-tour-2009-12#t...

I'm surprised by the loss they are running. Think how big their cut is. My understanding is that on a 50% off deal, they get half of the merchant's take! Granted their effective cut is lower since they provide some costly/valuable services .. e.g. they pay you right away while redemptions might happen over months. But still ...

I wonder if merchants aren't just curious about the groupon model as opposed to groupon having "cracked the local nut". I guess we'll know in 2-3 years. If their revenue flattens or goes down vs if it keeps going up up and up.

On a side note, I hope this makes Facebook file for their IPO already. For some reason, I feel the Facebook IPO will be a turning point of sorts in the current tech boom. Not sure why though.

> Granted their effective cut is lower since they provide some costly/valuable services .. e.g. they pay you right away while redemptions might happen over months. But still ...

How is that at all costly? Groupon receives money up front--say $20 for a $40 coupon and then pays half to the merchant ($10 in this case). The customer is the one floating it--Groupon has theirs, the merchant has theirs.

You're right. The customer is the one doing the float. This margin seems high to me. And they still end up with a loss ... boggles the mind.

They spend a ridiculous money on advertising and sales, so it's not too surprising too me. Their products are "free", but having a staff of 7,000+ means a tons of boots are on the ground to shake out those deals.

I know there are people scraping Groupon deals and sales figures and estimating revenues. Does anyone have the name of these sites? It seems like a hell of a opportunity to sell $10k research reports based on public information to wall street traders.

$200million in ad spend + dozens of competitors spending just as much or more on ads = buy GOOG.

Cue for dozens of Fortune, Newsweek et al articles proclaiming the new bubble. If everyone's so confident in their assertion, go short that stock.

Groupon will grow like hell until there are finally no new deals to lure with left and the 'extreme couponing' lifestyle has been grinded to death (regular couponing will have a place like it always had).

The problem with extreme valuations/bubbles is not so much to recognize them, it's to pinpoint when they will burst.

Yeah, when it bursts short it all the way to the bottom, hopefully panic selling ensues and you can pick it up a firesales prices at the bottom. Just saw citigroup at $40 today and am kicking myself for not having the cajones to pick it up at $2. Hindsight is 20/20 though and I know I liked it at $18 as well.

Looks like I'm being downvoted, I guess the CEO of overture reads HN.

1 for 10 reverse split...

Ahh ok, I was wondering how the heck it recovered. I'm glad I didn't pick it up then. I haven't followed the finance sector for about a year.

Why glad? a 10-for-1 reverse split means that the stock is still double it's $2 price point. Doubling your money in a year or two isn't bad at all.

I could have also picked it up at $18 (pre-reverse split)

Well yeah; that would have sucked. :P

I always find it weird that retail investors speak of share price when that number is so obviously easy to game. Seems to me like it'd be better to think of it in terms of percentage of the company than in numbers of shares.

You're right about that number being so obviously easy to game, but share price isn't completely irrelevant since many mutual funds won't hold shares with a price < $5 [1]. Also, share prices < $1 can lead to delisting from exchanges such as NYSE or Nasdaq [2]

[1]http://www.cfo.com/article.cfm/3011203?f=related [2]http://www.usatoday.com/money/perfi/columnist/krantz/2009-01...

right, but a company that is worth something is going to do a reverse split when it starts trading in the $5-$10/share range. Share price is technical arcana, something the accountants should worry about.

Personally, I'd compare letting the stock price fall below $5 to filing your required government regulation paperwork late. If it happens often, there is something wrong, sure, but it's something that can be fixed by firing a couple of paper pushers; it doesn't indicate a fundamental weakness in the company's business.

I just don't understand why anyone would invest in a hot IPO for a company that hasn't even turned a profit yet and had a $389.6 million net loss in 2010! Can someone explain to me the allure of an investment like this?

because there are far more people who don't care about such trivialities as profitability or sustainability than those who do

It's alluring as a trader; less so as an investor. An IPO like this is going to have plenty of trade-able price movement.

It's also very alluring to the the current investors and founders.

They appear to have cracked the nut on local advertising. Their business could end up bigger than Google's.

Losing a lot of money by emailing half-off coupons isn't going to end up bigger than Google.

Google drives billions in revenue to online businesses.

Groupon drives billions in revenue to local businesses.

There are important differences, and Groupon may fail, but their fundamental market opportunity is easily as big as Google's.

Google also drives billions in revenue to local businesses. I spend more locally through Google and even Yelp than Groupon. Humorously, to drive growth Groupon has been sending bucket loads of cash to Google.

Wow. Google revolutionized the way we entertain ourselves, learn information, and interact with each other. Groupon has revolutionized paying $5 less for a pedicure on Sundays before 1pm.

You have stated the point sarcastically but thereby revealed the truth of the point you're responding to.

Groupon is revolutionizing the way we explore our local communities, discover hidden treasures, meet like-minded people, go on adventures we wouldn't have otherwise.

Google has revolutionized finding celebrity sex tapes and forwarding people to Wikipedia 2 billion times a day.

(It's easy to put a spin on anything)

Imagine life without Google (or any other search engine) Can you? Now imagine life without Groupon. Done.

Groupon isn't revolutionizing anything, it's DISCOUNTING the way we explore, discover, meet...

Google monetizes very little of what they revolutionize. As far as money goes, Google revolutionized how we find small businesses. That's pretty much it. The entertainment, education, and interaction portions are all loss leaders so that the answer to "How do you find small businesses?" is "I go to Google."

Groupon does the exact same thing, answer "How do you find small businesses?" The difference is that they compete on price instead of relevancy. Google's value proposition is that they will show you the most relevant ads to your query, so that you don't need to wade through lots of useless shops to get the one you want. Groupon's value proposition is price: the merchants they show you will give you lower prices than the ones you'd find elsewhere.

It remains to be seen whether this is a sustainable value proposition. I can think of two Web 1.0 companies that Groupon reminds me of: Amazon.com and Kozmo.com. But while Amazon became a huge retailing powerhouse, Kozmo deadpooled, hard. The difference was that Amazon's value proposition was convenience and selection, and they used the Internet to deliver both through some pretty impressive logistics management. Kozmo's value proposition was convenience and price, and they used lots of venture capital money to deliver both through selling at a loss. Groupon's business seems to remind me a bit more of Kozmo's though: they compete on price through using direct subsidies.

Yeah, who cares about consumer spending?! It's only 70% of our nation's economy.

http://en.wikipedia.org/wiki/Consumer_spending

http://en.wikipedia.org/wiki/Greater_fool_theory

If a growing company is too big for VC's to handle, it has to IPO to continue gathering investment. Especially if it's capital-intensive. Amazon did this in 1997 and that doesn't seem to have been a disaster.

"Don’t expect profits anytime soon:"

Based on their first quarter 2011 results, they are on a revenue run rate of 2.4 billion a year. It's a little surprising that they are not going to generate profits on 2.4 billion a year in revenue, despite the fact they employ around 7000 people and have other operational expenses.

One important item that hasn't received a lot of attention is Groupon's "Accrued Merchant Payable." If you'll indulge me, a longish thought experiment (yes, it relates to Groupon).

Imagine a sandwich shop that allowed customers to purchase future sandwiches--buy one today at a 50% discount, eat it sometime in the future. The sandwich shop would receive $3 for a sandwich for which it normally charges $6, and it would owe me a sandwich at a future date. Also assume the sandwich costs the shop $1.50 in direct costs (50% margins at a $3 price).

This proves to be a popular promotion with the shop's customers. The shop sells lots of $3 "sandwich rights," bringing in $3 in cash up front. It spends a good deal of that $3 in cash to pay ongoing expenses and to get the word out about its 50% off sandwich deal.

But then the growth of its "sandwich rights" business slows. Other sandwich shops offer a better deal--$2 for a $6 sandwich--and it begins to saturate the market of local lunch eaters, causing a slowdown in the sales of sandwich rights and the cash they've been paying the shop in advance.

Now the sandwich shop owes sandwiches to all of its rights holders, each of which costs $1.50 in cash expenses (to pay suppliers, employees, etc). However, instead of holding the cash it previously received for the sandwich futures, the shop has already spent it on marketing to other potential purchasers of sandwich futures. Clearly, if the shop doesn't have the money to pay $1.50 x # outstanding rights or can't get financing, it will go out of business. Because the shop was dependent on sales of sandwich rights to finance its growth, when the growth rate slowed, the money dried up. In essence, the shop borrowed from the future by sucking in cash today for discounts on tomorrow's sandwiches.

This is exactly what Groupon has done. Its operating cash flow includes "Accrued Merchant Payable" of nearly $291M (3/31/11). But its cash balance is about $208M (3/31/11). Because it collects cash up front from individuals and pays merchants over time (or, in its non-US operations, only when coupons are redeemed), Groupon is showered with customer cash before it must pay merchants. Roughly half of this cash eventually belongs to Groupon, while the other half is eventually owed to merchants (true, there is breakage, but if nobody redeems the coupon, that adds little value for the merchant, so significant breakage/non-redemption isn't necessarily in Groupon's long term interest).

In other words--and Groupon spells this out--if the growth rate in coupons sold to customers dives, Groupon could face a cash flow problem. It's not a ponzi/pyramid scheme exactly, but it is a highly risky financial practice to spend cash you will owe tomorrow on expenses you incur today. As long as the company grows and/or can sell shares to the public and increasing prices, it will do fine. Once the growth slows or access to capital dries up, it's vulnerable. Groupon may well outrun the cash demands it has piled up by going public. But it can't maintain these growth rates forever--remember those other sandwich shops selling similar products?--and will ultimately face the music.

Don't believe me? Here's a quote from their S1: "Our accrued merchant payable, which primarily consists of payment obligations to our merchants, has grown, both nominally and as a percentage of revenue, as our revenue has increased, particularly the revenue from our international segment....We use the operating cash flow provided by our merchant payment terms and revenue growth to fund our working capital needs. If we offer our merchants more favorable or accelerated payment terms or our revenue does not continue to grow in the future, our operating cash flow and results of operations could be adversely impacted and we may have to seek alternative financing to fund our working capital needs."

Or that $1bn+ they've raised could have gone to this instead of cashing out the insiders...

When and how can they eventually make some profit? If they aren't making a profit at expected ~2.5 B revenue, how would an additional infusion of 1 B make them profitable or let them grow more in the long run? Isn't that what companies get listed for?

Groupon wants to be THE site for deals and coupons. If they acquire enough end users, the cost of acquiring new partners will go down. The benefits will be common knowledge, businesses will approach them, and lots of salespeople will get laid off or at least growth there will slow dramatically.

But end users won't use groupon without a good selection of partners. There are a variety of strategies for building up a solid base of partners, and it appears groupon's tactic is a large sales staff. It's a gamble and I have no idea whether they will pull it off. If they don't eventually lower the marginal cost of acquiring partners they will certainly fail, but there is possibility for success and aggressive growth is an understandable (if risky) approach.

Does the fact that they aren't turning a profit concern people that much? Didn't the Xbox division take years before profitting? I'm not a business guy so I'm genuinely asking this out of curiosity.

The Xbox wasn't in a market with zero brand loyalty, low barrier to entry, etc. It's an apples to aircraft carriers comparison, IMO. Groupon could be very profitable in the future, but so could the other 1000 companies in the space. It's a race to the bottom with little retaining their business.

Good points, but as a business, I would consider GroupOn before those other 1000 companies because of their reach.

They have reach now, but others are gaining ground. I see LivingSocial as the biggest potential competitor right now, since they're an Amazon subsidiary -- that gives them a lot of leverage that Groupon doesn't have, e.g. giving away $20 Amazon gift cards for $10.

For one thing, when you buy an Xbox, and Microsoft has revenue for years. Customer retention is fairly easy. It's easy (and fun) to unsubscribe from Groupon.

The fact that they aren't turning a profit and have an indefensible business model is concerning to me. There's no reason why a Groupon customer shouldn't use LivingSocial or one of the dozen other competitors.

No net profit, but: "gross profit (revenue minus expenses, which was $280 million in 2010)"

So it sounds like they're just spending madly on acquisition and growth. Or am I missing the gross/net distinction here?

I worked as a sales manager at a group buying site which is a competitor of Groupon, and it amazed me how well off they were despite playing a domain you would expect to be monopolized by a goliath like Groupon. Just goes to show how much room for expansion there is in the niche.

Wouldn't it be typical of a growing company like Groupon to run negative because they keep investing all the profit into people and technology? Paying over 7000 people and their benefits probably takes a majority (e.g. 51% or more) of the revenue.

It does feel like 1998-2001 but it also feel more solid this time. Business with actual revenues rather than the hypothetical revenues of so many early dot com's.

I kind of hope we aren't' in a bubble but a rise in the economy. Either way head down and back to work. I missed the first bubble and related opportunities being distracted by school and the fun of school.

Not this time. I doubt that http://infostripe.com will IPO anytime ever but if there is enthusiasm and growth in the industry then I want to be in there somewhere in the wings fighting over the scraps.

Looks like they beat Zynga to it, there's only a handful to high-profile tech companies who are likely to go IPO soon, perhaps we could bet on who goes next + what their valuation will be at.

Maybe the next one isn't one of the big ones (Facebook, Zynga) but is instead something like Yelp or Pandora.

Edit: Didn't realize that Pandora just filed. Overshadowed, indeed.

Pandora's already filed for an IPO:

http://tech.fortune.cnn.com/2011/03/01/not-pandoras-box-why-...

Coincidental timing that they happens right after Google announces it's baking its clone into all future Android phones?

When is the actual ipo though? These articles never seem to mention that.

It's not a boom. It's not a boom. It's not a boom

Wow, Eric Lefkofsky owns a shit ton of that company, and already cashed out a decent chunk of change personally and through his various LLCs just recently. Never even heard of him before.

He's the secret big dog in Chicago tech investing.

Obviously you're not from Chicago =)

ticker symbol grpn

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