Facebook CEO Mark Zuckerberg

Facebook on Wednesday updated its S-1 document to the Securities and Exchange commission for its planned initial public offering, and it’s a veritable data dump of new information about the social networking company. The good news is, we’re digging through it so you don’t have to. Here are some of the more interesting tidbits disclosed in this latest regulatory filing:

• The rent is really dang high.You think you spend a lot of money on rent? According to the new filing, Facebook’s new Menlo Park, Calif. campus is costing the company well over $1 million per month for the next 14 years (the 15 year lease began in February 2011.) The company’s monthly rent will actually go up as time goes on, from $1.175 million/month now to $1.9 million/month in 2025, because ostensibly Facebook’s revenue will grow at the same time. The company is, however, getting a million square feet of space for that money, so in context it’s not that ridiculous.
  

  Graph representing Facebook's property rent (click to enlarge)

• Facebook controls even more of its data center strategy than you think. A couple years ago, rumors started buzzing about how a Delaware-based company called Vitesse was behind the planning of Facebook’s Prineville, Oregon data center. In 2011 Facebook eventually came clean with the details of all the ins and outs of the massive data center as part of its Open Compute Project, and now it’s totally clear that from day one it has been completely in charge of the effort: Vitesse is actually a wholly-owned subsidiary of Facebook, according to the newly filed S-1 documents.
• Facebook wears the pants when it comes to Zynga. The updated filings included tons of information about Facebook’s relationship with Zynga, the social gaming giant. Even though Zynga has been asserting its own independence from Facebook, the details of the contract between the two companies shows that Zynga can never quite become a standalone business if it wants to maintain ties with the social media king. These clauses are especially key:
  

  “All Zynga Users must have a valid (e.g. real; not suspended) FB account. Zynga will require all Zynga Users to connect their Zynga account to their FB account. In addition, Zynga will require all Zynga Users to be logged-in to their FB account with an active session to use or access any Covered Zynga Game, Zynga Mobile Game or any Zynga Property” [except in limited situations.]

  and

  “Zynga Users who are not Facebook Users must create a FB account.”

  and

  “Zynga may not prompt any users on the Facebook Site to create, log-in with, register for or otherwise use Zynga Credentials on the Facebook Site.”

• Zuck, Sheryl Sandberg, and the other execs have it pretty good. Of course, you already knew this. But the new S-1 shines a bit more light on the compensation packages of Facebook’s executive team. Mark Zuckerberg’s base salary for 2012 is $500,000 (which was shown in the initial S-1) and the new filing shows he is eligible for a semi-annual bonus of 45 percent of that salary based on his performance; COO Sheryl Sandberg’s salary is $300,000 and she is also up for the 45 percent twice yearly bonus. They each get 21 days paid vacation annually (this is on par with the rest of Facebook’s employees.)

We’ll continue to pore over the documents and will update this story with any more gems we come across. And keep checking in at GigaOM for our full Facebook IPO coverage.

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There has been a lot of attention — to say the least — paid to Facebook’s long-awaited public stock offering, which could put a valuation on the company as high as $100 billion. For the first time, average investors will get a chance to own a piece of the massive social network and its multibillion-dollar revenue stream. But in a very important way, Facebook still remains a private company. Why? Because it is controlled by CEO Mark Zuckerberg through a special class of stock that gives him super-voting rights, and he also controls the board. In other words, you may own stock in the company, but you have virtually no say in what happens to it.

As described in the Facebook prospectus, when new shareholders buy stock in the company, once it is publicly traded they will get class A shares, which carry a single vote each. Mark Zuckerberg and the rest of the early investors in the company own class B shares, which have 10 votes each. The co-founder and CEO has about 28 percent of this class of stock; but he also has voting agreements with a number of other Facebook insiders and co-founders that give him about 57 percent of the votes in the company.

Zuckerberg retains control forever, even after his death

And what happens when other holders of the class B super-voting stock decide to sell their shares, as some early investors will no doubt do when the company starts trading publicly? At that point, they are automatically converted to class A shares, which means Zuckerberg’s control over the voting structure effectively remains the same. And the Facebook founder even has the right to transfer control of the company to a handpicked successor after his death.

Facebook is far from the only tech superstar to choose this kind of tiered structure: Larry Page and Sergey Brin retained control of Google after it went public by owning super-voting shares that gave them 10 votes per share, although the two have said they will be selling some large chunks of their stock over the next couple of years, which will reduce their control. Zynga also has super-voting shares that give founder and CEO Mark Pincus 10 votes per share, just as LinkedIn’s and Groupon’s founders have votes that come with 150 votes each.

So are multiple-voting shares good or bad? That depends on whether you believe that giving a 27-year-old entrepreneur almost complete control over the fate of a $100-billion company is a good thing or not. In terms of what is called “corporate governance,” multiple-voting shares are seen as a large risk factor, in part because of what some corporate raiders like Conrad Black have done to their companies by controlling them so completely.

Is giving the CEO ultimate control good or bad?

In Silicon Valley in particular, where entrepreneurs are seen as a special breed, retaining control over your company is viewed as a positive thing. Zuckerberg has been congratulated by many insiders for managing to keep an iron grip on the company through multiple rounds of financing. And this perspective is understandable for entrepreneurs, many of whom are afraid that their successful company will be taken over by VCs or others who don’t have its best interests at heart, as Apple was early in its history.

But when you are a public company, retaining that much control not just only the votes but also over the board of directors — Zuckerberg has the right to nominate a majority of the board as a result of voting agreements with other shareholders and founders — can be a dangerous thing. Although Steve Jobs didn’t control his board in the same way Zuckerberg does, Apple’s board of directors was criticized for keeping the details of Jobs’ illness hidden from investors and also for approving the repricing of options in a way that arguably went against the interests of common shareholders.

Did the kind of control that Steve Jobs wielded over Apple ultimately result in some incredible, world-changing products? Sure it did. And shareholders who have seen their investment multiply a hundredfold are likely unconcerned about any of the board or option irregularities. But does the end always justify the means?

Selling shares to the public is supposed to come with a certain amount of responsibility to those shareholders, and they should have the ability to hold a CEO and a board accountable if decisions are made that go against their interests. But controlling almost 60 percent of the votes and a majority of the board means Zuckerberg gets to fundamentally do whatever he wants with Facebook — and public shareholders are just along for the ride. Investors should be aware of that before they decide to buy a ticket.

Post and thumbnail photos courtesy of Flickr user Faramarz Hashemi

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Updated: If there’s one thing that has been sucking most of the oxygen out of Silicon Valley — and Wall Street too — over the past few months, it’s the growing frenzy over Facebook’s IPO filing, which is rumored to be taking place as early as today, and is expected to put a price tag as high as $100 billion on the giant social network (Update: The Facebook S-1 prospectus is here). But apart from the rampant speculation about the company’s ultimate valuation and who will benefit the most, the bigger question about the offering is whether it marks the beginning of a new era of growth for Facebook. Or is it just a massive cashing-out exercise, and a sign that this generation’s version of AOL has finally peaked?

The fact that Facebook’s stock issue is expected to be one of the largest technology offerings of all time — as much as five times the size of Google’s $1.7-billion initial share issue in 2004 — reinforces that this is a company that is already a behemoth in terms of its market power and sheer size. Not only does it have close to a billion active users, but it has more than 3,000 employees, and revenues that are estimated to be in the $4-billion range. The company already controls almost 30 percent of the display advertising business, giving it almost three times the share that Yahoo has.

Facebook doesn’t really need to go public at all

For many technology companies that go public, the IPO is a necessary step on the road to scaling the business — an injection of financing that allows the company to grow, move into new markets, hire staff, etc. But Facebook has no real need for this kind of financing, if it ever did: The company has already raised several billion dollars worth of funding from Goldman Sachs, Russia’s Yuri Milner, China’s Li Ka-shing, and various syndicates of private venture capitalists, and is widely traded on private stock exchanges such as SecondMarket. It could certainly continue to do this without any trouble, given its ongoing growth, and at one point it looked like Facebook might never go public at all.

More than anything, what the Facebook IPO seems to represent is an opportunity for all of those initial backers — and many of the company’s own employees — to cash out. While many public stock offerings are orchestrated to allow this to happen, the sheer scale of Facebook’s IPO puts it in a category all by itself. And if the thousands of millionaires and dozens of billionaires who are created by the offering eventually put some of that windfall back into the startup scene, perhaps it will be worth it.

But surely some investors will stick with the company, to watch it grow even further? Undoubtedly some will — but that raises the $100-billion question for investors of any kind looking at this offering: How much bigger can Facebook possibly get? It already has a committed user base of close to one billion people, and it controls a massive chunk of the online display advertising market. Yes, both of those numbers are still growing, as users in other countries discover the network, and advertisers move their campaigns to Facebook in an attempt to benefit from social activity there. But how much growth is left?

Already, there are anecdotal signs that some are giving up on the network because it is simply too noisy. Younger users are said to be leaving for newer platforms like Twitter and Tumblr, in part because they want to avoid their parents — who are all on Facebook.

Where does Facebook look for growth now?

The biggest single challenge for Facebook is to find a way to generate more and more revenue from those billion users. Social games are well-established thanks to Zynga and others, so there is little likelihood of a major moon shot coming from that segment of the market that will propel Facebook’s growth into the stratosphere. Could it become a bank, by building on and expanding its virtual currency, Facebook Credits? Perhaps. But the most obvious route to growth is to grab a larger share of the advertising market, and that’s what its “frictionless sharing” apps are designed to do.

Many advertisers, however, seem to be unconvinced — at least so far — that Facebook’s social advertising is worth paying very much for. The social network has a large share of the market, but its click-through rates and other metrics of engagement are still relatively low, and that is likely keeping a lot of money on the sidelines. Facebook has to prove that the benefits of targeting users through their social activity is worth more than their existing ads, and there are still skeptics who believe users who are sharing personal thoughts and behavior are fundamentally not interested in or receptive to traditional advertising.

All that comes on top of continued competition from Google, which already has a massive advertising base and the algorithms to parse search and behavior with equal precision — and is busy building a social platform that will give it both activity information on millions of users and a built-in identity structure for keeping those users in place. By comparison, Facebook’s walled garden could start looking even more like AOL than some believe it already does, and we all know how that movie ends.

Post and thumbnail photos courtesy of Flickr users Franco Boully and Rosaura Ochoa

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As of Sept. 30, Gogo is installed on 1,177 planes, representing 85 percent of the Internet-equipped commercial planes in North America. It has inked deals with nine of the ten North American airlines that provide connectivity to their passengers. Since launching in 2008, Gogo has enabled 15 million in-flight sessions to more than 4.4 million unique users.

Through the first three quarters of this year, Gogo has generated $113.8 million in revenue, an 89 percent  increase over the same period in 2010. It has also posted an operating loss of $26.5 million, down from $66.4 million from the previous year. Almost all of the planes Gogo is equipped on are on 10-year contracts, and Gogo has contracts to be installed on 525 additional aircraft.

Gogo is poised to capitalize on the growth in air travel, the increasing dependence on connectivity everywhere and the growing willingness of consumers to pay for Wi-Fi access in the skies. Gogo said only 16 percent of commercial aircraft in North American and 6 percent of commercial aircraft internationally were equipped with in-flight Wi-Fi last year. And with the increasing use of Wi-Fi enabled devices like smartphones and tablets, the demand for in-flight connectivity is only growing.

Looking ahead, Gogo plans to build out its footprint, offer more streaming content and e-commerce opportunities and upgrade its air-to-ground and satellite technology. And it plans to expand internationally, including through a partnership with Inmarsat’s Global Xpress satellite broadband service.

Risk factors include Gogo’s reliance on good relationships with healthy airlines. Currently, Delta represents 45 percent of revenue this year. The company also needs to make good on technology improvements to ensure it can stay ahead of demand. It’s already experiencing capacity constraints at times.

Gogo did not say how many shares it plans to sell or its expected price. But it’s another sign that the IPO market, while hurting, is still moving forward thanks to Groupon , Zynga and others.

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Mark Zuckerberg at Facebook headquarters, April 2011

As the 2011 calendar year winds down, Facebook is said to now be making concrete steps toward its planned initial public offering.

On Monday afternoon the Wall Street Journal published a report stating that Facebook plans to publicly list its shares on the stock market in spring 2012, specifically looking at “dates between April 2012 and June 2012.” Facebook’s CFO David Ebersman is currently in talks with investment banks angling to underwrite the IPO, but the company has not entered into any mandates yet, according to the WSJ. The IPO will reportedly value the company at more than $100 billion.

Are you surprised? You shouldn’t be. This is all in line with a number of previous reports that the social networking company’s IPO could occur around the time this coming spring when it will be forced to publicly disclose detailed financial information anyway. As we wrote this past summer:

Facebook has said it expects to have more than 500 private shareholders by the end of the 2011 calendar year. Once a private company with more than $10 million in assets exceeds 500 investors, it is required to begin filing financial reports with the Securities and Exchange Commission, much like public companies are required to do. Under this regulation, known as the 500 investor rule, Facebook will likely be forced to begin filing financial reports with the SEC by April 30, 2012.

Meanwhile, Facebook’s top brass has not been shy about the company’s plan to eventually hold an IPO. In an interview earlier this month on the television program Charlie Rose, Facebook founder Mark Zuckerberg said an IPO would serve as a reward to his employees. He also acknowledged that a liquidity event — typically either an IPO or a sale — is a trade-off that companies make when they take on venture capital:

You know, we’ve made this implicit promise to our investors and to our employees that by compensating them with equity and by giving them equity, that at some point we’re going to make that equity worth something publicly and liquidly, in a liquid way.

That’s why, as much as people may worry about what Facebook will become once it’s under the microscope of public market investors, a big IPO like the one it is said to be planning is practically a given for a company that has raised more than $2.3 billion from investors. Its price is just too high for the majority of potential acquirers out there. Now, I still say that it’s in the realm of possibility that Microsoft could make Facebook an offer it can’t refuse; but chances are, the Facebook IPO buzz will become a reality at some point soon.

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According to a report published Tuesday in the Financial Times, an IPO is in the cards for Gilt Groupe, and at this point it’s just a matter of timing. The FT quotes Gilt Groupe CEO Kevin Ryan as saying:

“We are certainly plenty big enough to go public. The question is, is it the right time, do you want to spend the time on that? We’d look at the process in 2012… I think it’s entirely possible that in 2013, depending on the markets and depending on how things are going, that we would look to go public.”

But if and when Gilt holds an IPO, should it really be seen as a big tech industry story? For me, covering Gilt Groupe brings up the same questions I had when the tech press was gaga over the Groupon IPO a couple weeks ago. Yes, both companies have raised hundreds of millions of dollars from the same kind of venture capital firms known for backing the tech industry’s most rigorously engineering-focused firms.

But only five percent of Groupon’s total employees work in technology; the bulk of its human resources go toward efforts such as sales, editorial and customer service. Gilt hasn’t published a breakdown of exactly how its workforce is deployed, and it does seem to have a strong engineering team and culture as evidenced by its “Technologie” blog and hackathons — but it’s ultimately a discount retailer. The fact is, Walmart has a very solid IT team too, but the tech press does not typically cover all the ups and downs of its stock price.

Of course Gilt and Groupon could very well grow to become more tech-centric in the same way that Amazon has evolved over time. But right now, should they really be put into the same category as the Facebooks, Microsofts and Googles of the world?

I don’t know the answer, but I think it’s worth some critical thought and discussion. As more straight consumer products and retail companies become savvy to the web and mobile technology, it will be interesting to see how the lines continue to blur around what we think of as a “tech company.”

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Lise Buyer, founder of Class V Group, which counsels startups on IPO strategies, says people with only a decade of IPO experience have a skewed view.

“There is so much talk about how the IPO market is broken. Well, go back 20 years, look at the data. Maybe when times were abnormal isn’t now, but the 1995 to 2000 bubble,” said Buyer, who compiled the data for an E-trade-sponsored panel at the GigaOM RoadMap Conference. Buyer knows a little something about IPOs. She was a buy-side analyst for T. Rowe Price before joining Google  to help guide that company to its wildly successful IPO in 2004.

In her view, 75 percent of those “bubble” companies — names like Pets.com, Webvan and other poster children of dot.com bomb excess — should never have gone public to begin with.

The recent Groupon IPO  may be a sign of the bubble resurging. Skeptics point to the fact that $900 million of the $1.1 billion Groupon raised  went to early investors. The perception that only a privileged few insiders can actually make money off an IPO is something that could break the IPO market.  Many wrote at the time of the launch that new investors should run, not walk, away from Groupon shares.

Buyer said that’s the kind of thing that could really kill the market for IPOs. Her view is that companies have to earn an IPO, do the research, do the investment, and be transparent about it.

On the other side of the aisle are those who say it’s already way too hard to go public. Count among them panelist Michael Moe, CEO and founder of GSV Capital. Moe said  regulations and red tape are keeping even big tech companies out of the IPO race. They want to stay private longer, to avoid these hassles.

“Sarbanes-Oxley is just one issue. I don’t know a CEO in Silicon Valley who wants to be public,” he said. Currently, a  privately held company with more than 500 investors must share financial information with them. There is a move afoot to boost that limit to 2000 investors.

Staying private longer lets companies mature and build a better business, according to Moe. “Investors want more mature companies. That genie is not going back in the bottle.”

Others argue that as companies take on investors, they take on responsibilities. “By the time you have 500 investors, it’s not just your buddies anymore and they need to know what you’re doing,” Buyer said.

The idea that the “poor, struggling Zyngas and Facebooks of the world” can wait till they have 2,000 investors before they have to disclose, doesn’t pass the smell test for her.

Companies that want to go public have to jump through the hurdles and prove themselves.

Bottom line from Buyer: “You’re not entitled to go public, you have to earn the right.”

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Groupon has set the final price for its impending initial public offering on Friday at $20 per share, AllThingsD’s Kara Swisher first reported, followed by other news outlets . That’s higher then the Chicago-based daily deal website’s previous estimated per share price of $16 to $18.

The rumored share price will give Groupon an overall market capitalization of $12.6 billion, well above the projections some Wall Street analysts have made of the company’s value. And as Scott Austin from the Wall Street Journal put it: the valuation is nearly half of Google’s $24.6 billion at IPO.

But of course, the beauty of the stock market is that ultimately the larger investing public decides how much a company is worth — regardless of what the experts say. Tomorrow could be a very interesting day for people in both the tech and financial spheres.

Groupon is only offering 34.5 million shares in its IPO, which is just 5.4 percent of the company’s 637.3 million shares outstanding. At $20 per share, the company will raise $680 million.

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Here are the facts: The pioneering daily deals website will trade under the ticker symbol “GRPN” on the Nasdaq stock exchange. Groupon has said in regulatory filings it will price its stock between $16 to $18 per share, giving the company a market capitalization of between $10.1 billion to $11.4 billion. Now, reports say that the actual IPO price may be a dollar or two higher than that range, given the strong demand for the stock.

Analysts say: Don’t believe the hype

But some analysts say that Groupon’s financial fundamentals don’t justify such a high valuation. Trefis, a website that calculates company valuations electronically, projects that Groupon is currently worth $7.9 billion, and should have a share price of $12.84 — nothing to sneeze at, of course, but well below both the official and rumored IPO targets. In order to be valued at $11.4 billion with an $18 share price, Trefis says, Groupon will need to grow its North American subscriber base at a much faster rate than it is currently on track to do.

Flesh-and-blood analysts are also skeptical of Groupon’s IPO valuation. Kenneth Sena, an analyst for investment bank Evercore Partners, has pegged Groupon’s central value at $9 billion; Henry Blodget, who had a (somewhat notorious) career as a Wall Street analyst before founding the Business Insider website, has placed Groupon’s central value at $7.5 billion.

First day jitters ahead

None of these estimates will sway Groupon from going public — or, for that matter, stop investors from participating enthusiastically in the IPO. No one denies that Groupon’s stock will get a lot of attention when it first goes public, especially in those first hours of trading. CNBC’s bombastic stock market commentator Jim Cramer said on his TV show last week:

“I think you’d be a fool not to try to get some shares in this deal and take advantage of it, so long as you sell on the spike in the first day. …I think you will get an initial pop, but after that you don’t want to be left holding the bag. So please, do get some shares in the deal. And then get out.”

Of course, Cramer’s record is far from impeccable when it comes to accurately predicting stock market activity. But lots of people out there do watch his show religiously and many of them do heed his advice — so it will be interesting to see just how high Groupon goes once it actually hits the public market.

One thing’s for sure: Groupon’s road to an IPO has been an interesting thing to track so far, and the company’s actual stock market debut promises to be an exciting event as well.

Feature image of Wall Street subway sign courtesy of Flickr user epicharmus.

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The company will only offer a small five percent of its common stock to investors. For now, it looks like Groupon is intent on going public raising a lot less than its original goal of $750 million, and it’s at much smaller valuation than the $25 to $30 billion bandied about earlier this year. But the company is showing that it’s making progress with a business model that many have questioned.

According to its third quarter data, Groupon, which will list on the Nasdaq, has managed to boost revenue by 426 percent year-over-year to $430.1 million from $81.8 million, and revenue is up 9.6 percent from the second quarter, a more modest growth curve compared to previous quarters. The company also scaled back its net loss to $10.6 million from $49 million compared to the same quarter last year. The company’s marketing costs, which have been a cause for concern, was trimmed down to $181 million, compared to $432 million for the first six months of the year. But Groupon has managed to keep growing, increasing its subscribers to 143 million up from 21 million a year ago and 116 million in the second quarter. Groupon now has $244 million cash on hand, an 8 percent increase versus the second quarter, and up 255 percent over last year.

The company still faces a lot of questions about how it can move toward profitability. Andrew Mason, the company’s CEO, asserted in a controversial note to employees that got the attention of the SEC that it would be able to scale back its marketing costs over time. But the figure has still raised concerns with analysts who wonder if Groupon can keep subscribers while slashing marketing. The SEC has also taken issue with some of the metrics Groupon has used, which Groupon has since dropped.

Groupon critics will still find reason to worry about the business. BuyWithMe, another group-buying service, just laid off more than half its staff, and other competitors are dropping out, which may be good news for Groupon but also leads to questions about the viability of the market overall. But with the latest third-quarter numbers, Groupon has a better story to tell as it takes its road show to investors. Will it be enough to convince them that Groupon is legit? We’ll have to see when the company finally goes public.

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• Q3 2011 saw five venture-backed IPOs valued at $442.9 million, down 92 percent in dollar value compared to the second quarter of 2011 and a 65 percent drop in dollar value from Q3 2010.
• Four of the five IPOs were from the information technology (IT) sector versus 14 of the 21 IPO during Q2 2011.
• Of the four IT IPOs, there were two Internet companies, one hardware and one software company. Among the notable IPOs during the quarter: Zillow.
• Four of the five IPOs of the quarter were based in the United States, while Tudou.com is from China.
• For the third quarter, 101 venture-backed M&A deals were reported, 35 had an aggregate deal value of $6.3 billion.

It is not a surprise Kayak delayed its offering and the Groupon deal is on shaky ground. The broader economic troubles are slowing demand for all kinds of stocks and IPOs are no different.

In case you were wondering: what was the impact on startups? Nothing in the near term, especially for companies that are relatively small and are still in the early stages of their life.

In addition, the companies that are being accorded jaw-dropping billion dollar plus valuations also have their work cut out. The troubles with the Groupon IPO are indication that there are no quick exits, despite what you might read, and companies need to grow into their valuations.

From the M&A perspective, 2011 is turning out to be softer than 2010, though in pure deal numbers. So far 310 deals have been announced in 2011 versus a total of 431 deals last year. It shouldn’t surprise anyone if we see a rapid escalation in M&A activity, especially if the IPO window continues to be shut.

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According to a report in the Wall Street Journal, the company behind one of the most highly anticipated initial public offerings in recent memory — Chicago-based group-buying pioneer Groupon — is reconsidering its decision to go public due to the recent volatility in the stock market. While the IPO hasn’t been cancelled, a source told the WSJ that it has been postponed indefinitely, and the pre-IPO roadshow has ben cancelled. But was it market volatility that pulled the rug out from under Groupon’s public debut, or the repeated missteps by the company and its CEO, combined with growing skepticism about the viability of its business model?

There’s no question that global stock markets have been in upheaval recently, in part because of uncertainty about the financial health of European nations such as Greece, and how their instability could affect the euro and other global currencies. The Dow Jones Industrial Average is down by about 1,000 points, or roughly 10 percent, since Groupon first filed its S-1 securities document with regulators in early June, and August was reportedly the worst month for failed IPOs in more than a decade.

SEC inquiry into leaked memo

That said, however, the Groupon IPO has been facing a number of other significant headwinds as well, and these have a lot more to do with the Chicago startup’s business than with economic conditions. One of them is a Securities and Exchange Commission inquiry into the circumstances surrounding a leaked memo by Co-Founder and CEO Andrew Mason that made its way online recently. According to the WSJ, the regulator has been asking questions about the leak, since discussing the financial status of the company is a breach of what has come to be known as the pre-IPO “quiet period.”

That’s the second time the SEC has shown a more than passing interest in Groupon. After the company filed its S-1, the regulator also had discussions with the startup about its use of a controversial — and non-standard — financial metric called “adjusted consolidated segment operating income.” Although Groupon argued that this was justified by the way its business operates, using this metric made the company’s financial results look significantly better than they would have otherwise: instead of a $450-million loss in 2010, for example, Groupon showed an $60-million operating profit.

In his cheerleading internal memo, Mason defended the use of the ACSOI benchmark (which effectively removed the majority of the company’s marketing costs from its operating results), saying it reflects the fact that Groupon spends a lot on marketing its business — i.e., in acquiring new customers for its email group-buying offers — but that these costs aren’t important because they aren’t repeated. Said Mason:

Our marketing — at least the customer acquisition marketing that we remove from ACSOI — is designed to add people to our own long-term marketing channel — our daily email list. Once we have a customer’s email, we can continually market to them at no additional cost.

Not everyone buys this rose-colored vision of the company’s future, however — a future in which Groupon simply has to build a giant email list and then market offers to those subscribers at virtually no cost. The company’s many critics, including David Heinemeier Hansson of 37 signals, have noted that instead of going down as the operation grows larger, some of Groupon’s costs continue to climb as it grows larger.

If it doesn’t go public, Groupon will need more cash

And rather than staying steady or growing, business in some of Groupon’s mature markets shows signs of declining — which means more marketing might be necessary to keep current growth rates alive. For more analysis on that topic, please see the recent GigaOM Pro report I wrote about Groupon (subscription required).

If it does decide to cancel its IPO — which was expected to give the company a market value as high as $30 billion — the biggest issue for Groupon will be coming up with the financing required to keep its massive growth machine moving. According to some recent estimates, the company is close to running out of cash, because it is spending so much to hire new salespeople, market its services and acquire Groupon clones in foreign markets. And while the startup raised close to $1 billion in venture financing earlier this year, the majority of those funds went to early investors in the company as well as management, leaving virtually nothing for Groupon to use to fund its operations.

That was a risky bet when the IPO looked like a sure thing, but it seems even riskier now that the public offering could be on hold indefinitely — or even cancelled. If it doesn’t ultimately tap the public markets, Groupon could be saved from having to prove to the world how its business can become the kind of cash-generating perpetual-motion machine that Mason describes in his memo. But without that cash, it may never get the chance.

Post and thumbnail photos courtesy of Flickr users Groupon and Tracy O

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Pandora posted total revenue of $67 million during the second fiscal quarter of the year, more than doubling its revenue from the same period one year ago. Revenue from ads accounted for the lion’s share of Pandora’s Q2 sales, totaling $58.3 million.

And while Pandora did not turn a bottom-line profit for the quarter — the company’s net loss was $1.8 million — it seems to be impressing Wall Street with the traction it has gotten thus far. On a phone call with investors and analysts after the stock market closed on Thursday afternoon, Pandora confirmed that pound for pound its ads are just as valuable as those broadcast on traditional radio.

One analyst said that in reading the company’s quarterly report, he calculated that Pandora is now “generating more ad revenue per 1000 hours than traditional radio is, with a tenth of the user base.” Pandora CEO Joseph Kennedy confirmed that the analyst’s calculations were “broadly correct” but added that it only pertained to the company’s web application, not its mobile apps. “It’s our belief that over the long term we can reach similar levels in mobile,” he said. Pandora saw 1.8 billion total listener hours in the second quarter, across approximately 100 million registered users. For the full year, Pandora expects to make between $270 million and $275 million in total revenue.

During the call, Kennedy also stressed that Pandora is still very small compared to traditional radio broadcasting — and that for investors, that should be a good thing. “We’ve penetrated less than four percent of the U.S. radio market. We simply have tremendous room to grow.”

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Ever since Groupon turned down a $6-billion takeover offer from Google earlier this year, the markets have been eagerly awaiting an IPO filing from the group-buying sensation, one of the fastest-growing companies in recent memory. But not everyone liked what they saw when Groupon filed a prospectus for its initial public offering — which could value the startup as high as $20 billion. Some critics say the company is close to being insolvent and that its business model is a kind of elaborate Ponzi scheme, disguised by accounting tricks. One thing seems clear: The pressure is mounting for Groupon to prove that it isn’t just a late-1990s-style hype machine.

There’s no question that Groupon is growing at an incredible rate when it comes to both revenue and subscribers: In its most recent securities filing, the company said its revenue in the second quarter rose by 36 percent, to $878 million, more than twice what it generated in the same period a year earlier. Producing almost a billion dollars in revenue in a single quarter after less than five years in existence is almost unheard of. If Groupon continues to grow at that rate, it could generate revenue in 2011 of more than $5 billion. And the number of subscribers is also growing rapidly: The company now has over 115 million, or twice what it had in December of last year.

Profitability remains a question

That’s the good news. The bad news, as more than one critic has pointed out, is that Groupon’s ability to actually make any money on all of this growth remains a gigantic question. In a recent post at the Harvard Business Review site, Rob Wheeler — a fellow with Harvard’s forum for growth and innovation — said that Groupon’s business model doesn’t appear to be viable, in the sense that it may never actually make money, despite all the growth in revenue and subscribers.

If anything, the fact that Groupon is witnessing decreasing revenue per merchant and fewer Groupon purchases per subscriber in its maturing markets suggests that growth may actually decrease Groupon’s value to its customers.

The company has also received a lot of criticism for painting its business with too favorable a brush by using its own customized accounting methods. When Groupon filed its S-1 regulatory documents, critics quickly latched on to the company’s use of an unusual financial metric it called “adjusted consolidated segment operating income,” or ACSOI. This effectively allowed it to exclude subscriber-acquisition costs, including the hundreds of millions of marketing dollars that are spent to promote Groupon deals.

The impact on the company’s financial health was miraculous: Using its own benchmark, Groupon said it had operating income of $60 million for 2010 and $81 million for the first quarter of 2011. Using standard financial methods, however, the company actually had an operating loss of almost half a billion dollars in 2010 and lost a further $100 million in the first quarter of this year.

“Fairy-tale” accounting and big cash payouts

After some discussion with the Securities and Exchange Commission and a substantial amount of criticism of what some described as its “fairy-tale” accounting methods, Groupon filed an amended prospectus that played down the more favorable benchmark — which CEO Andrew Mason admitted was “unconventional” — and substituted generally agreed-upon standards. The company has also been criticized for paying out more than $800 million from a recent financing round to early investors and Groupon management when the business is still losing money at a tremendous rate.

Former Wall Street analyst Henry Blodget — who played a key role in the first tech-stock bubble in the late 1990s and now runs the site Business Insider — argues in a recent blog post that Groupon is only going public because it is close to running out of money and needs the cash. Blodget says that while the company is technically cash-flow positive, it is operating under a “working-capital deficit,” meaning its assets are insufficient to meet its obligations, which amount to $680 million and include close to $400 million that it has to pay to the merchants who signed up to offer Groupon discounts. Says Blodget:

As long as Groupon sells enough new Groupons in one quarter to pay all the bills it racked up in the prior quarter, it will not need additional cash. But if the company’s growth stumbles, or if competitive pressure leads to Groupon’s gross profit margin getting squeezed, look out.

Fans of Groupon, of which there are still a few — including David Pakman, a venture capitalist with Venrock — argue that there are other companies that have also lost money for a considerable amount of time and gone on to become business powerhouses. Facebook, for example, spent a long time growing its user base and expanding into different markets, and there was a lot of speculation that it would never make money, as there was with Amazon. Google is another famous example of a company that had many skeptics and no obvious business model, until it discovered advertising based on search keywords (an idea pioneered by Bill Gross at Overture).

But Groupon does have a business model. The question is, is it a model that takes time to prove itself, like Facebook’s, or is it a flawed model?

A lack of network effects?

So is Groupon a similar kind of business? Wheeler doesn’t think so. In his HBR post, he argues that Facebook and Amazon were able to focus on growth and then generate profits later because they benefited from network effects — in other words, early adopters helped the business grow, and the value of those services increased with more users. Although it is a “group-buying” business that relies on user numbers to trigger deals, Wheeler says that Groupon doesn’t really benefit from network effects at all, and there are growing signs that its value may actually be decreasing rather than increasing as it gains more users. He even makes a comparison to Pets.com, the poster child for dot-com bubble excess.

Groupon CEO Andrew Mason has said that the hundreds of millions of dollars being spent on marketing and expanding the user base are not a loss but an investment and that this will start to pay off once Groupon achieves a certain scale. But that is looking to some like an increasingly risky bet. Will Groupon be able to prove the doubters wrong, or will it become the new millennium’s version of Pets.com?

Post and thumbnail photos courtesy of Flickr users Groupon and Refracted Moments

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But some financial industry experts say the current market volatility doesn’t necessarily mean the IPO window is closed for prospective newcomers such as Zynga. Here are a few main takeaways from conversations I’ve had with senior bankers about the current financial environment:

• Look around; It could be worse. Although the market for publicly traded U.S. tech stocks may be battered, many still believe that the sector is likely to fare better than most others in the long-term. That’s why a lot of money managers — the big investors in today’s stock market — will continue to invest in technology, and have an appetite for more tech IPOs. “If you’re an asset manager, you have to put the money to work somewhere. You can’t put it in the mattress,” Paul Deninger, a senior managing director of investment bank Evercore Partners said. “Whether the market is good or bad, many investors are going to be looking at stocks relative to their other opportunities. And on a relative basis, the growth potential of these [technology company] IPOs is still extraordinary.”

• Delays may not indicate fear. “This environment is really only a couple of weeks old, and the IPO process takes a while,” Morgan Keegan managing director Peter Falvey said. “Even in more normal times, it is very, very difficult to price IPOs.” And while some companies may be waiting on the sidelines a bit longer before going public, it may not be because of a lack of appetite for their stock: They could just be waiting for another lull in the financial news cycle. “Companies going public also want to make it a marketing event,” Falvey pointed out. “Right now, people are only talking about the general volatility in the markets.”

• For new tech stocks, it’s a correction, not a crash. Though the recent downward impact to newly public Internet companies has been especially severe, that doesn’t have to mean that all web companies will suffer a similar fate in the future. Newly public companies such as LinkedIn debuted at such sky-high stock prices that they may have been destined to come down at some point or another. “The hit that LinkedIn took could just be an example of the market taking the air out of the stock,” Deninger said. That means that future IPOs don’t have to be delayed — but that they must be priced more carefully to avoid a similar fate. “In the tech sector there’s been some criticism over the pricing of some of these companies,” Falvey said. “It’s exacerbating what is already a difficult problem.”

At the same time, it can’t be stressed enough that it’s still too early to know exactly how this will all play out for the Internet industry and the economy at large. But for people who work in technology and new media, it may be good to hear that the industry’s recent wave of good fortune may not be crashing down just yet.

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As of noon Eastern Time, the Nasdaq composite index was down about 3.5 percent and the New York Stock Exchange index was down 4 percent from their closing prices last week — but newly public tech companies Pandora, LinkedIn, Zillow were all down significantly more than that.

Internet radio company Pandora’s stock was down 7.5 percent as of noon ET Monday, while real estate website Zillow showed a 6.5 percent decline. Professional social network company LinkedIn has been probably the most warmly welcomed company to the stock market since its IPO in May, but it was also one of the hardest hit in Monday’s sell off. LinkedIn stock was down nearly 11 percent as of noon ET Monday, trading at around $80 per share.

If the current activity is any indication, newly public Internet companies are among the first to go when investors start pruning their portfolios. Could this halt the ongoing initial public offering wave that has been building in the tech industry for several months? What does this mean for Internet companies such as Zynga and CafePress that are currently in the IPO pipeline? Share your thoughts in the comments.

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