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.
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.
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.
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.
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?
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.
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).
Dining out simply isn't pleasurable when the waiting staff treat you like a 'coupon customer'.
EDIT: OK, maybe not, only estimate I was able to find: http://en.allexperts.com/q/Running-Restaurant-2285/Ideal-res...
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.
I haven't seen any particular mention of amount of businesses retained as repeat customers, either.
Future products? Maybe they'll sell lucky moose.
I have a neighbor who owns a "Moe's" franchise -- many of his customers refuse to do business without a discount.
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.
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. :)
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.
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.
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.
Iridium satellite phones.
Amazon lost $3 billion over 8 years before they started turning a profit. 
It's HARD to tell the difference between Iridium and Amazon. That's why some investors make money and some lose money.
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" :)
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).
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.
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.
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 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.
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.
I think I will read this sentence once a week.
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?
Read more: http://news.cnet.com/THE-DAY-AHEAD-Webvan-revs-IPO-as-questi...
"projecting revenue of $11.9 million and a $73.8 million loss"
They are hoping to raise "close to $1 billion at a valuation of about $20 billion." 
And they still aren't turning a profit. (~15% loss Q1 2011 and ~54% loss in 2010) 
1) Ad spend: $200+ million
2) 7000+ employees (at $40K average per employee, that's $280M/year)
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  to get rid of it all in such a short amount of time.
 intelligent spends that is; frivolous waste notwithstanding.
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?
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.
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.
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.
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.
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.
They raised nearly a BILLION dollars, and spent 80% of it on paying off the insiders. Not a good sign.
-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.
'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 ...
Staying ahead of competition means nothing if you don't have a strong plan to become a profitable business.
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.
"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.
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.
Chicago is by far their fortress of revenue. Check out the by-city Groupon sales stats for a day in December 2009.
s/fleet/'sales team' and s/Zipcar/Groupon and you should see why Groupon isn't profitable yet.
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.
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.
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.
Looks like I'm being downvoted, I guess the CEO of overture reads HN.
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.
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.
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)
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.
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.
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."
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.
So it sounds like they're just spending madly on acquisition and growth. Or am I missing the gross/net distinction here?
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.
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.