Groupon’s IPO as Vindication


DIGITAL DUE DILIGENCE – It’s a little bit surprising that basically every mainstream critique of Groupon over the last few months was completely wrong.

  • Groupon was blasted for having an unsustainable, commoditized business. Their no. 3 competitor BuyWithMe just laid off most of its staff and engineered a quick sale to Gilt Groupe.
  • Investors called Groupon’s accounting shaky because they highlighted operating profits excluding some marketing expenses on the grounds that their marketing expenses were abnormally high. The next quarter they drastically cut their marketing spending and got the business to basically break even.
  • Groupon faced criticism for recording the full value of a voucher as revenue, rather than the half that went to them rather than the merchant. That has no effect on net profits, but in a way it’s more conservative: at least according to Nicholas Carson’s amazing profile, they recorded the whole number as sales because they’re on the hook for the whole number when customers demand refunds.
  • Plenty of analysts derided Groupon as a single-product company; outside of standard daily deals, they wouldn’t be able to produce any compelling products. Ironically, the opposite is true: Groupon’s new product lines are hiding a small decline in their core business.
  • Some of their executives cashed out early—which is part of why Groupon’s management is so comfortable taking the kind of risks that lead to wild swings in valuation and customer sentiment. None of the key players at Groupon are putting their standard of living at risk, so they can afford to bet wildly. LivingSocial’s investors start scheming for ways to let their CEO cash out a little, too.

There are plenty of legitimate concerns about Groupon. The long-term future of their business is unpredictable: it’s hard to tell where the daily deal business will stabilize, and how much of it they’ll own. And the daily deal business is an information asymmetry business, which puts Groupon in direct competition with a surprising number of players: everyone from Yipit (who can aggregate all the Groupon-esque deals and appeal to buyers who are less sensitive to the time it takes to find a good deal) to Yelp (no, not Yelp Deals: plain old Yelp, which connects customers with local businesses just like Groupon).

Thanks to media myopia, most observers have focused on fairly irrelevant problems at the expense of the ones that matter. In about three years, Groupon has built a business worth over $10 billion and upended the local marketing industry. Where they go next has a lot to do with the next round of creative destruction, not so much the trivial issues of what extra numbers they report or how easy their business looks from the outside.

It’s hard to say that they’re not overhyped—we’ve all lived through a Groupon hype cycle. It’s hard to say they’re not a real business—they’re approaching breakeven while their competitors are liquidating. The worst you can say about them is that they’re an attention-grabbing company in a volatile industry, and they’re way down from their 52-week high.

That puts them in the same club as OpenTable, Netflix—and, circa 2002.

Cross-published at the Digital Due Diligence blog. The views expressed in this bylines are Byrne Hobart’s own and do not necessarily represent Yahoo!’s opinions


  1. I dont get the article. You saying the IPO vindicates them, but at the same time there are concerns? Uh.. how about the concern that the business model is dead, doesn’t work, that they owe more money to merchants than they had cash.. so the business model is a negative business model.

  2. Hi Byrne,

    A completed IPO signals nothing other than an investment bank’s ability to find a home for the IPO’s shares and the “Greater Fool” theory in action.

    Ultimately, only time will tell if Groupon is a real business or if Google dodged a $6 billion bullet…


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