Forget the hype: Groupon's IPO Cuts Mark it out as a Listing to Avoid

This week, everyone watched with baited breath as Groupon - previously seen as one of the hotter .com public offerings on the horizon - is revealed its IPO.

This week, everyone watched with baited breath as Groupon - previously seen as one of the hotter .com public offerings on the horizon - is revealed its IPO. Amid their intention to raise $510m for 5% of the company (down from $750m) and their diluted $11.2bn valuation, you may be forgiven for thinking that it looks like the bubble's about to burst for them but even at that new valuation, nothing could be further from the truth.

Of course, Groupon has always inspired criticism from those not inclined to be swept up in collective hysteria. Almost a year ago now, ran an exclusive which debunked the popular tech press myth that Groupon's annual run revenue rate was $2 billion dollars, valuing it at closer to $800m. The real number now seems to be closer to (just) $313m for 2010. However, sales for the first six months of this year have grown hugely to $688m - an extraordinary achievement even if it did involve nearly $500m of marketing costs.

More importantly , a recent joint study by Michael Mitzenmacher, computer science Professor at Harvard, and Yale post-doc Georgios Zervas (published earlier this month) questioned the worth of signing up with Groupon as a strategy for businesses. The verdict: all mouth and no trousers. They found that, following a Groupon deal, positive first time reviews increase massively, as do negative. It's a stalemate, a lot of fuss about nothing

However, nobody would seriously claim that, thus far, these kind of allegations have damaged Groupon's image. This is thanks largely to their undeniably infectious bluster, whipped up by charismatic CEO Andrew Mason and his team. Tactics like the rejection of an early $5.6bn offer from Google, and Mason's tidy line in Steve Jobs-esque inspirational interview tactics (sample quote 'I never really planned my life more than one month in advance. I try to chase whatever I think is the most interesting thing to do at the moment, and if it becomes less interesting, I find something else to do') have turned them into an apparent dynamo, an unquenchable force for growth.

This kind of showmanship is fine, but when it comes to going public, a business needs to have something to back it up, or it deflates very quickly. It's true that their predicted $12bn valuation is half of what they were shooting for when they originally filed their S-1 documentation, but it's still an astonishing 38 times last year's sales- a year in which they lost nearly a billion dollars.

Those who know me, or my career, might call me a hypocrite for pointing the finger. When I was growing my first major business, M.A.I.D., we went public back in 1994 with a £120m valuation - approximately 10 times the then current year revenues supported by 10 years of sustained business growth. It is important to note, however, that two previous banks gave us wildly different estimates on value before we selected the investment bank who was determined to get us the highest value..

However, the distinction is that we had consistently grown in profit. Any showboating tactics were just to help us get noise. Groupon, on the other hand, have lost $223m in just six months representing a cost of $1.30 for every dollar in revenue generated. It may be half their $413m loss from the first half of 2010, but its still pretty monumental. The revenue multiple, too, assumes enormous sales momentum. The moment a business goes public, it needs to show the kind of tangible proof of success Groupon just hasn't offered thus far.

In the end, this simply is not a business that's built to last; allegedly based on its ability to leverage 'excess' service capacity in local businesses, in reality those businesses are seeing their entire inventory being used by groupon members. For this, they're paying Groupon 50% of their take and all they're getting from them are swathes of fickle bargain chasers. Pretty soon, many of them are going to realise this, and then any number of interviews won't quash the shareholders' wrath


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