Groupon a Case Study in How Not to Do IPO

There has historically been a certain “quality” of companies publicly listed. Two things to consider. The first way this matters is that the “brand” of an exchange is, to a certain extent, harmed by a company of extremely low quality being listed. So it’s just like a store selling a terrible product. Even if the fine print says “terrible product,” the store’s business suffers if it sells terrible products.

The second way this matters is that certain investment vehicles are tied to investing in companies listed on the public exchanges. These investment rules rely on the implied quality of IPOs. If you throw that out the window and say “caveat emptor,” then all of those investment vehicles need to be restructured, which is going to cause a lot of disruption.

Neither of these reasons might compel the SEC to refuse a listing to an issue that seems to be of low quality, however they do point to the self-interest of a large number of people in ensuring that IPOs at least appear to be reasonable businesses. If Groupon appears to be a terrible risk and its IPO turns into a financial disaster, a large number of people will be adversely affected even if they didn’t invest in it. To the extent that they have influence over the process, they will resist, or apply pressure to Groupon to do a better job of selling itself as the Next Big Thing.

Cynical summary: The industry depends on its issues having a strong appeal. Regardless of the transparency and fundamentals, it is bad for business to have an issue that is perceived to be low quality.

I will bet you $500 USD that Groupon does not IPO in 2011.

Pets.com, Webvan, Kozmo? All of these are pretty well known.

Heck Hertz and Vonage have had what were considered failed IPOs.