
Groupon files for IPO - 44Aman
http://blogs.wsj.com/deals/2011/06/02/groupon-ipo-its-here/
======
aresant
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://answers.ask.com/Food_and_Drinks/Restaurants/how_many_restaurants_are_in_america)

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

~~~
ghshephard
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.

~~~
nostromo
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.

~~~
sleight42
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.

------
nicpottier
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. :)

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

~~~
mechanical_fish
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.

~~~
freshfunk
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?

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

------
bryanh
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...](http://online.wsj.com/article/SB10001424052702303745304576361631817311972.html#ixzz1O9D5o2Hb)
[2]
[http://www.sec.gov/Archives/edgar/data/1490281/0001047469110...](http://www.sec.gov/Archives/edgar/data/1490281/000104746911005613/a2203913zs-1.htm)

~~~
daeken
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.

~~~
rorrr
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)

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

------
alain94040
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.

~~~
happyfeet
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.

------
vessenes
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.

~~~
freshfunk
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.

~~~
vessenes
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.

------
zmmmmm
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.)

~~~
Duff
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...](http://allthingsd.com/20110602/where-did-groupons-billion-dollars-go/)

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

------
jsm386
Prospectus:
[http://www.sec.gov/Archives/edgar/data/1490281/0001047469110...](http://www.sec.gov/Archives/edgar/data/1490281/000104746911005613/a2203913zs-1.htm)

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

~~~
scottkduncan
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.

------
bhangi
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?

~~~
rganguly
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.

------
jdp23
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 ...

~~~
rottencupcakes
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.

~~~
bcrescimanno
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.

~~~
olivercameron
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.

~~~
bcrescimanno
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.

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

~~~
bcrescimanno
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.

~~~
dmarquis
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.

------
iqster
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.

~~~
jonknee
> 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.

~~~
iqster
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.

~~~
jonknee
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.

------
jcampbell1
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.

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

------
dsplittgerber
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.

~~~
fleitz
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.

~~~
jsm386
1 for 10 reverse split...

~~~
lsc
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.

~~~
mcphilip
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...](http://www.usatoday.com/money/perfi/columnist/krantz/2009-01-12-delisting-
stocks_N.htm)

~~~
lsc
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.

------
megamark16
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?

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

~~~
svrocks
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.

~~~
staunch
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)

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

------
dr_
"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.

------
hncommenter13
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."

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

------
paraschopra
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?

~~~
Goladus
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.

------
thomasgerbe
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.

~~~
daeken
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.

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

~~~
daeken
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.

------
danielharan
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?

------
naeem
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.

------
matt_s
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.

------
hxf148
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.

------
Apocryphon
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.

~~~
nostrademons
Pandora's already filed for an IPO:

[http://tech.fortune.cnn.com/2011/03/01/not-pandoras-box-
why-...](http://tech.fortune.cnn.com/2011/03/01/not-pandoras-box-why-the-
music-companys-ipo-isnt-the-sign-of-a-bubble/)

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

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

------
oceanician
It's not a boom. It's not a boom. It's not a boom

------
suking
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.

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

------
veyron
ticker symbol grpn

