IPO

Why I Wouldn’t Buy Into Groupon’s IPO

By Mark Evans in Social Media No Comments Tags: , ,

Groupon logoIf you could buy into Groupon’s $750-million IPO would you do it?

Most people would probably say “Absolutely” given Groupon’s strong brand and its dominance of the group-buying marketplace. Not me.

There’s no doubt Groupon shares will pop after they start trading but this will be a matter of supply-demand and the reckless enthusiasm of retail investors as opposed to a focus on fundamentals. You also have to remember IPO offerings tend to be priced to generate a first-day pop so investors feel better about their purchases and the company gets to bask into the glory of a successful offering.

But don’t be fooled by GroupOn’s market stature or the sexiness of its IPO. Groupon smacks of the crappy IPOs that suckered too many investors during the original dot-com boom.

Why the skepticism? Fundamentally, I don’t think Groupon is a good business with solid fundamentals. Its balance sheet clearly demonstrates it is spending way too much money on marketing to acquire new customers. In the first quarter of 2011, it lost $146.5-million after being $413-million in the red in 2010.

Second, it’s a business that will have a difficult time scaling. The company has more than 7,000 employees, and the more it grows, the more employees it will need.

Third, the marketplace is ultra-competitive and the barriers to entry are low. While Groupon is the market leader, there are plenty of strong rivals, including many who raised large amounts of venture capital. It means Groupon will need to continue to aggressively spend on marketing to grow or even maintain market share.

Fourth, I’m not convinced the group-buying phenomena will maintain its sexiness or appeal. For consumers, group-buying has been a novelty but pretty soon that will start to wear off. At the same time, many Groupon customers will fall off the bandwagon after realizing they haven’t taken advantage of the services they have purchased.

For companies, Groupon won’t make a lot of sense because offering deep-discount to attract customers on the belief they will stick around to buy products or services at regular prices isn’t a good way to do business.

Finally, the struggling U.S. economy will have a major impact on consumer behaviour. U.S. consumers have taken a cautious approach to spending so it’s uncertain whether they will be attracted to the kind of deals Groupon is offering, even if there are attractive discounts.

For more on Groupon’s IPO, check out VentureBeat, which has a cool infographic via Online MBA about the company’s history. BusinessInsider also has a good post looking at Groupon’s financials.

GroupOn IPO, Anyone? Count Me Out

By Mark Evans in Advertising/Marketing, Social Media 2 Comments Tags: , ,

GrouponSo, 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”.

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LinkedIn and the Downside of an IPO

By Mark Evans in Social Media No Comments Tags: , , ,

The world is abuzz, aflutter and agog about LinkedIn’s IPO, which saw the price of its shares more than double to $94 from the offering price of $42. LinkedIn is now worth a staggering $8.9-billion, or 40X revenue.

To some people, the LinkedIn IPO harkens back to the original dot-com boom when valuations were sky-high and investors were completely irrational. That may be true but remember most of the IPOs done a decade ago were crappy companies with little or no revenue that played upon the bubbly enthusiasm of this new thing called the Internet. LinkedIn, on the other hand, has revenue, 100 million users and a global brand name. In other words, it has fairly strong fundamentals.

But as people sober up from LinkedIn’s spectacular debut yesterday, here are a few thoughts:

1. The biggest thing about being a publicly-traded company is everything you do is on the table. There are no secrets anymore that can kept behind the scenes like when you’re privately-owned or VC-backed.

At the same time, there are expectations to meet from investors and analysts looking for certain finance results. If you exceed targets, you’re rewarded; if not, you’re penalized. For publicly-traded companies, it puts pressure on them to perform, and may get them to do things such as raise prices or introduce new services to drive revenue.

2. While LinkedIn had strong revenue ($243.1-million), I think companies that don’t have strong revenue will have a more difficult time doing an IPO unless they also have a compelling brand. Facebook could do an IPO in a heartbeat, and I think the enthusiasm among investors would dwarf LinkedIn’s.

Twitter could easily do an IPO based on its user base and brand recognition. The only problem is Twitter’s financial fundamentals may be an issue because it’s still not generating enough revenue. This explains some of the strategic decisions Twitter has made recently.

3. There will likely be a flurry of IPOs as entrepreneurs and, as important, VCs try to take advantage of the LinkedIn IPO to pull some money off the table. My advice to investors is to be pragmatic and careful, and be prepared to get stung if you’re not prepared.

More: The New York Times has a good piece on LinkedIn’s IPO with a great first paragraph: “It’s not 1999, but the big Internet I.P.O. is back.”

All Aboard the Groupon IPO Bandwagon!

By Mark Evans in Social Media 2 Comments Tags: , ,

So what is Groupon worth? Apparently, $15-billion based on reports about its plans for an IPO.

$15-billion!

We’re talking about a company that has sky-rocketed in the past couple of years, riding an idea that, ironically, was all the rage during the original dot-com boom but failed to resonate with consumers.

$15-billion begs a few of questions:

1. What is Groupon’s secret? Are there that many people looking for deals? Has Groupon tapped into the discount seeker in everyone with a service that is simple yet increasingly ubiquitous? Is there really that much interest in bikini waxing and tanning bed offers?

2. Does Groupon have staying power? Sure, it’s the top dog but the group-buying market is fiercely competitive. Everywhere you turn, there’s a new group-buying service banging the discount drum.

3. Can Groupon scale? Unlike many online businesses, Groupon is people-powered. It needs people to reach out to small businesses to feed the enormous appetite for deals. The more Groupon grows, the people it needs to hire.

4. Is Groupon worth $15-billion? If investors are willing to accept this valuation, then it’s worth $15-billion.

The other fascinating thing about Groupon is the impact it will have on the financial dynamics of the social media and high-tech sector. Groupon’s apparent interest in an IPO may just be the “finger in the dyke”. If Groupon does do an IPO and it’s successful, it could release a wave of other social and high-tech IPOs looking to take advantage of the enthusiasm and demand for new investment opportunities.

As much as I don’t want to ruin anyone’s party, investors should try not to get too carried away. History does have a habit of repeating itself so the growing euphoria for online IPOs should be approach with pragmatism.

Is the High-Tech IPO Really Back?

By Mark Evans in M&A, Venture Capital No Comments Tags: , , ,

The high-tech IPO is a mysterious beast. It’s attractive, seductive and irresistible. But it’s also fickle, temperamental and not always well-behaved. Still, investors have a difficult time resisting the high-tech IPO even when the fundamentals aren’t solid or even exist.

In the coming months, it looks like investors will get another opportunity to test their obsession with the high-tech IPO as companies such as Skype and Hulu prepare for public offerings. If these IPOs are successful – and there’s plenty of indication they will be enthusiastically received – it could open the floodgates for all kinds of IPOs.

The question facing investors is whether Hulu and Skype are anomalies, or whether the high-tech IPO has really come back from the dead. Hulu and Skype are solid well-established businesses with revenue, subscribers and track records. They are market leaders in markets experiencing rapid growth, which makes them strong IPO candidates.

These are the kind of IPOs that, frankly, were few and far between during the dot-com boom when anything with traction was sucked into the IPO machine. Of course, many of these IPOs bombed because the companies that did them were more projects than businesses.

As much as Skype and Hulu have investors excited, I’m concerned they are the cream of the crop, and that the high-tech IPO landscape is pretty limited. For all the talk about how costs are lower so high-tech businesses can get started with less capital, the reality is the business landscape is dominated by free and freemium. This makes the marketplace volatile and uncertain because there are competitors willing to charge little or nothing to attract customers.

The companies that succeed in attracting users and revenue will no doubt be attractive and could do an IPO if they’re not acquired but how many of these kind of companies actually exist? Probably not as many as you would think.

But the other reality is there’s a lot of venture capital that has been tied up in start-ups. The VCs sense an opportunity to cash out so there will be tremendous pressure on start-ups to do an IPO. This could lead to a glut of public offerings, including many companies that probably don’t have solid enough fundamentals.

If investors should remember anything from the past decade, it’s caveat emptor because not everything with a pretty IPO bow on them is going to have a wonderful present inside.

For more on the IPO landscape, check out this story in the Financial Post.

The Return of the High-Tech IPO?

By Mark Evans in Social Media No Comments Tags: , , ,

It’s been a long time since the high-tech IPO was alive and well – probably going back to the original dot-com boom in the late-1990s when just about any start-up with a sexy story could convince investors to participate.

Since then, however, the IPO market has been popular as a skunk at a picnic. Sure, there’s been the occasional public offering but the amount of activity has been trivial.

For whatever reason, there are indications that the high-tech IPO market may be rebounding, and could propelled by some high-profile companies. Facebook, for example, has created a dual-class share structure that could position itself for an IPO; Twitter co-founder Biz Stone told a conference earlier this week that an IPO is possible at some point, and LinkedIn CEO Reid Hoffman said his fast-growing social network could do an IPO, although not in the “near-term”.

In the scheme of things, talk about IPOs seems strange given global economic conditions are still fragile, and many companies are operating in survival mode. That said, the time is also ripe for stronger companies to capitalize by making aggressively strategic and financial moves at a time when rivals are struggling.

It also doesn’t hurt companies such as LinkedIn, Twitter and Facebook have strong growth, as well high profiles – a recipe that will seduce many retail investors.

Links: TechCrunch, The Deal

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