So, GroupOn is jumping hard on the IPO bandwagon in a deal that values it at $30-billion. There’s no doubt it will attract a flurry of investors hungry to get a piece of the action.
This group will not include me. Why? Despite GroupOn’s high profile and 83 million e-mail subscribers, I’m not convinced it has a rock-solid business or enough of a competitive edge to justify its valuation,
Truth be told, GroupOn is an e-mail marketing company that has enjoyed first-mover advantage to become the industry leader. These days, however, there is no lack of competition. The barriers to entry are low, many players are also well-financed, and niche players are appearing to make competition even that much intense.
Another thing that would trouble me as an investor is whether GroupOn’s service will remain appealing to companies using it to drum up more business. Sure, there are success stories of how a muffin maker attracted thousands of new customers by offering a free muffin via GroupOn. But there are also lots of stories about companies that have taken a financial bath because they were forced to offer incredible deals to satisfy GroupOn’s needs.
In other words, consumers love GroupOn because the deals seem so good – assuming they actually take advantage of the purchases they make – while companies struggle whether GroupOn makes sense economically.
At the same time, GroupOn has demonstrated it is a business that can’t easily scale. Last year, it had $710-million in revenue but it also employs 7,000. To support its growth, GroupOn needs to hire more people. At the same time, GroupOn also needs to aggressively spend on marketing to attract consumers and businesses.
There is no doubt GroupOn is an interesting business experiencing strong revenue growth. With a $30-billion valuation, however, I’m far from convinced it is a good investment or a slam-dunk long-term business proposition.
For more thoughts on GroupOn’s IPO, check out Business Insider and GigaOm’s Mathew Ingram who asks if “Is Groupon Selling Tickets to the Bubble Parade?” while highlighting that GroupOn continues to spend aggressively on marketing while it racks up losses.
For some other thoughts on the GroupOn IPO, check out this video. What struck me was someone who asked why GroupOn was in a rush to do an IPO because “we’re way beyond paying the mortgage here”.