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Originally published October 21, 2011 at 7:10 PM | Page modified October 21, 2011 at 7:19 PM

Groupon's star rose quickly, fell swiftly

Groupon is discounting its expectations for the IPO that in June was valued as high as $25 billion. In a regulatory filing Friday, the company said that it expects a valuation that is less than half that at between $10.1 billion and $11.4 billion.

The Associated Press

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NEW YORK — Only a few months ago, Groupon was the Internet's next great thing. Business media christened it the fastest-growing company ever. Copycats proliferated. And investors salivated over the prospect of Groupon going public.

Today, the startup that pioneered online daily deals for coupons is an example of how fast an Internet darling can fall.

Groupon is discounting its expectations for the IPO that in June was valued as high as $25 billion. In a regulatory filing Friday, the company said it expects a valuation less than half that, at between $10.1 billion and $11.4 billion.

It's the latest twist for Groupon's IPO, which was one of the most anticipated offerings this year. In June, after Groupon filed for the offering, the U.S. Securities and Exchange Commission (SEC) raised concerns about the way it counts revenue. Then the stock market plunged. Now Groupon faces concerns about the viability of its daily-deals business model. The novelty of online coupons is wearing off.

Some merchants are complaining they are losing money — and customers — on the deals. And competitors are swarming the marketplace.

"Groupon is a disaster," says Sucharita Mulpuru, a Forrester Research analyst. "It's a shill that's going to be exposed pretty soon."

Groupon shows what can happen when a startup experiences steroidal growth in an unproven industry. To its defenders, the Chicago company is a victim of its success, its stumbles emblematic of a business in infancy.

After all, Groupon has hordes of fans who rave about the company's deals and its liberal refund policy. And some merchants see the company as a way to get much-needed exposure.

But critics say the issues Groupon is facing are symptomatic of something more troubling: questionable accounting, an overvalued business model and an industry that is turning into the digital equivalent of junk mail.

Groupon is expected to go public Nov. 4. The company could not comment for this story due to the quiet period for its IPO, during which time company officials are barred by regulators from discussing anything about the firm.

Groupon also has faced trouble behind its own doors.

After only two months, its public-relations chief quit in August.

Two seasoned executives hired as COOs also left. The latest, former Google sales Vice President Margo Georgiadis, resigned after five months to return to Google. Her departure coincided with Groupon's announcement it was restating its revenue by around half.

After Groupon filed documents for its IPO in June, the SEC — and the investment community — began asking serious questions about the company. The first concern stemmed from how Groupon accounted for its revenue.

Groupon roughly splits the money it collects from customers with merchants. But in the filing, Groupon reported all of its gross billings as revenue. Standard accounting principles dictate Groupon should have used net revenue — the amount it keeps after paying the merchant.

Groupon's growth has no doubt been quantum. Since November of 2008 it has signed up 142.9 million email subscribers and has had more than 30 million customers. But only 20 percent of subscribers have purchased a Groupon. And only 10 percent have purchased more than one.

Meanwhile, the company's debt has skyrocketed. Groupon's ratio of debt to capital is 102 percent. By comparison, the ratio for social-networking site LinkedIn is about 30 percent and gaming site Zynga's is about 49 percent. "Those companies are all in normal territory," says Ed Ketz, a Penn State accounting professor. "But Groupon's is excessively high."

In Friday's filing, the company laid out third-quarter financial figures that showed it is getting closer to profitability. For the three months ended Sept. 30, Groupon narrowed its net loss of $10.6 million on revenue of $430.2 million in part by lowering marketing spending. That compares with a loss of $49 million on revenue of $81.8 million in the same period last year.

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