November 26, 2014

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Groupon Occupies Wall Street

Groupon Founder and CEO Andrew Mason with wife Jenny Gillespie stand outside the Nasdaq Market in New York

The road to Groupon‘s initial public offering has been long and tortuous. But it’s finally over. Sure, they’re still losing money and getting negative press. But now they’re also worth more than $15 billion dollars. In fact, it’s the biggest IPO by an Internet Company since–and second only to–Google’s IPO in 2004.

The question now is: How long will the party last?

Back in July, when we covered Groupon on our podcast, the group-coupon/daily deal company had already filed for an initial public offering with the Securities Exchange Commission, and were supposed to be in the midst of a quiet period–a time when companies who have filed for an IPO traditionally keep their mouths shut and don’t publicize themselves to potential investors (a.k.a. – the general public). But Andrew Mason, Groupon’s eccentric founder, couldn’t seem to help himself, and Groupon’s talking-cat-mascot began making some rather snide, passive aggressive comments. It caused quite a stir on Wall Street. While this was delightful for all of us who enjoy hearing economists dissecting sarcastic remarks made by a talking cat, it didn’t bode well for Groupon’s proposed IPO. In the end–perhaps unsurprisingly–the talking cat turned out to be the least of Groupon’s problems.

Want more on the talking cat, and other Groupon controversies? Check out our full length podcast on Groupon, where the Why Guys also discuss the company’s origin story and inner workings.

More into “the whole brevity thing?” Check out our 90-second radio feature on Groupon!

“I’ve done more than 10,000 IPOs and secondary offerings over 39 years and this one is up there among the most tortured,” IPO research analyst Scott Sweet said in a recent Reuter’s article. As the article explains, “Groupon changed its accounting twice under pressure from regulators, lost its chief operating officer, and faced questions over whether CEO Andrew Mason was too unpredictable for Wall Street after a sensitive internal memo was leaked.”

Groupon Founder and CEO Andrew Mason with wife Jenny Gillespie, outside the Nasdaq Market in New York

When September rolled around and the stock market was more or less in the toilet, Groupon delayed their IPO. Plenty of other companies plotting IPOs did the same thing, opting to wait out the market’s volatility. But last month, Groupon decided the wait was over. They’d be the first big IPO to debut since the stock market’s September Slums. Except now they were only going to offer up a small fraction of the company for sale.

Last Friday, GRPN finally hit the NASDAQ, with only about 1/18th of the company being traded.

The Financial Post breaks it down this way: “The percentage of the company being sold was just 5.5%, the second smallest since 2001 and well below the average of about 38%, according to capital markets data provider Ipreo.”

It may seem a little disingenuous to take your company public, only to offer a minute portion of the company to the actual public. But the strategy has its advantages, not the least of which is scarcity. With so few shares being offered, the stock was a hot buy. It began trading at $20 a share–giving the company an overall valuation of about $13 billion. Within the day, the shares increased in value by more than 50%, getting “as high as $31.14,” the Huffington Post reported, “at one point pushing the market value of the company up to $19.9 billion.”

Things have calmed down a bit, with Groupon shares trading at just under $25, at the time of this writing.

All in all, Groupon raised more than $700 million with the IPO, “becoming the largest IPO by a U.S. Internet company since Google Inc raised $1.7 billion in 2004,” according to Reuters.

That would be the same Google that tried to buy Groupon for $6 billion earlier this year. Groupon turned them down. One can see why too, in light of Groupon’s spectacular Wall Street debut. It’s probably a safe bet to assume that Andrew Mason and company have their sights set a lot higher than their current $15-odd billion market value. After all, when Google went public, their IPO gave them a market capitalization of $23 billion. Seven years later, that number has ballooned to an unfathomable $200 billion. So it’s only fair to ask: Is Groupon next?

Well, there’s no shortage of skeptics who will tell you, in no uncertain terms: Groupon is no Google.

Groupon launched in 2008 and supposedly became profitable after only six months. At least, that was the statistic you would have found popping up in nearly every article on Groupon just one year ago. Today, you’d be hard pressed to find even a single reference to it. Things changed pretty quickly after Groupon filed for its IPO, earlier this year. Groupon’s days of glowing coverage are behind them now. The gloves have come off, along with the rose-tinted glasses. These days, ask anyone and they’ll tell you: Groupon has never made a profit.

Some doubt that it ever will.

From January through September of this year alone, Groupon has lost between $218 and $308 million, depending on who you ask. Not the prettiest numbers. Then again, it took Amazon.com a long time to reach profitability too. And, like Groupon, they underwent rapid expansion, had immense popularity with users, and were founded upon an unproven business model.

And if Groupon’s stock performance is any indication, plenty of people have faith the company will find profitability.

A Satirical Take on Groupon's Impressive Initial Public Offering

“Groupon’s model of discounted offers that are presold and require no inventory investment could actually be very profitable,” E-Commerce Analyst and Forbes Contributor Sucharita Mulpuru argues. “But it would also require being a significantly smaller company that would contradict the narrative that’s positioned it as the world’s fastest growing company.”

This all sounds remarkably familiar to me. That’s probably because, these past few weeks, I’ve been doing quite a bit of research for an upcoming feature on Amazon.com and its Founder/CEO Jeff Bezos (expect that story next week). If Groupon is anything like Amazon–and it has had a similar trajectory thusfar–then Mulpuru’s analysis is spot on. Groupon is hemorrhaging money right now. To slow the bleeding, you need to slow down the company.

It’s a lesson Amazon learned the hard way. Though they ultimately survived the Dot-com bubble, Amazon was far from immune when the bubble burst. The turning point came in early 2000, when the company announced record losses. Hundreds of employees were laid off. Several large, mostly-empty warehouses Bezos had built in anticipation of Amazon’s continued growth had to be shuddered. And–perhaps most importantly–shareholders got angry. There was an outcry for Bezos to grow up and face the music: All the growth and rapid expansion in the world couldn’t change the fact that Amazon had to stop losing money, or risk the same bleak fate as the dot-com casualties.

“Bezos took the criticism to heart,” Richard Brandt writes in his new book One Click: Jeff Bezos and the Rise of Amazon.com. And he really did. “We’re putting a stake in the ground: We’re going to become profitable,” Bezos boldly declared in an internal memo. Until then, his motto had been, “Get Big Fast,” something he considered crucial to becoming a market leader in a new industry. But explosive growth alone can’t keep a company going. Things had to change. Bezos took a giant step back. Through layoffs, cost-cutting measures, diversification, conservative strategic choices, and myopic focus, he was able to bring Amazon out of the red, and into the real world, the world of Wall Street: Where businesses actually make money.

Groupon has been hailed as the fastest growing start-up in history. Its industry–online Daily Deals/Social Coupons–is a relatively new one. Yes, Groupon is the industry leader. It proved the existence of a large, untapped market. But the competition is no longer limited to smaller sites like Living Social. After all, Google didn’t just abandon their local-deal ambitions after Groupon turned down their buyout offer. They got to work, putting Groupon in their cross-hairs. And now Amazon is in the daily deals game, too.

Andrew Mason claims that innovation will protect Groupon’s position as the industry leader. Even if he’s right–and keep in mind, he’s talking about out-innovating Amazon and Google–innovation alone won’t protect him from his shareholders. For all of the radical progress brought on by the last century’s worth of innovation, nothing has changed the fact that, on Wall Street, the bottom line always gets the last word.

Benjamin Christopher is a writer and artist based out of Los Angeles, California. He is currently Chief Blogger and Editor of thinkofthat.net. He is actively involved with several young start-ups, where he spearheads online-content creation.

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