After an agonizing six months of rumors and rebuffed multibillion-dollar takeover attempts, Groupon has filed what has to rank as one of the most eagerly-awaited initial stock offerings of the last decade. The issue will either stand as a beacon of hope to technology and Internet stocks of all kinds, or as a giant warning sign indicating a huge bubble of irrational exuberance. Those who are trying to find evidence of the former will point to Groupon’s rocket-fueled growth rate, while the bubble-busters will argue that the company’s IPO prospectus is full of giant red flags that should make prospective investors stop and think, if not run in the other direction.
The revenue growth Groupon has been able to produce during its short life is fairly astonishing. As my colleague Ryan has detailed in his post about the filing, the company has gone from about $30 million in revenues in 2009 to a massive $644 million in the first quarter of this year (and the latter figure is almost as much as the company made all of last year). That likely makes it one of the fastest-growing companies in recent memory. Other stats are equally impressive: The company has 83 million subscribers, about 7,000 employees and is in 43 different countries. That’s the good news.
Losing money and still spending freely
The bad news comes in several flavors. The conventional bad news is that Groupon has already lost a gargantuan sum of money despite all that growth: over half a billion dollars, to be exact. And there are few signs that it is going to turn profitable any time soon. In fact, the prospectus details how the company is spending equally huge amounts on marketing — more than $200 million in the first quarter alone, as much as it spent in all of 2010. As more than one observer has pointed out, Groupon’s business model has relatively low barriers to entry, which makes marketing even more crucial.
The less-conventional bad news has been pointed out by All Things Digital and others: namely, Groupon insiders have already cashed out of the company on a fairly massive scale. The company has raised a total of $1 billion in financing just a few months ago, from Andreessen Horowitz and other backers who were eager to participate in its meteoric growth, and almost all of that money is gone. Groupon didn’t spend it on hiring new writers (to add to its editorial staff of almost 1,000); instead, a huge chunk of it went to the founders and early financial supporters such as Eric Lefkofsky.
For some, this kind of insider selling in advance of an initial offering is a giant red flag. Why would those investors and co-founders be so eager to cash out if the growth potential for the company was as enormous as the prospectus makes it out to be? One possible answer is that the insiders who took money off the table simply wanted to hedge their bets. And they haven’t sold their whole stakes by any means — Lefkofsky is still the largest single shareholder with more than 20 percent of the company. It may even have been an incentive designed to make up for the fact that Groupon turned down a rumored $6-billion acquisition offer from Google not long ago. (Financial analyst and blogger Paul Kedrosky also notes that secondary markets such as SecondMarket allow anyone to sell off their holdings at any time, without alerting anyone about their intentions.)
For some, however, that selling — however justifiable — is still going to look like insiders don’t have much faith in Groupon’s future success. The “risk factors” section of the prospectus provides plenty of other ammunition as well: The company says that the daily deals market is relatively new and “may evolve in ways that are difficult to predict,” which could turn out to be the understatement of the year.
Groupon Co-Founder and CEO Andrew Mason’s letter to shareholders is also filled with both his trademark wit (he says “after selling out on our original mission of saving the world to start hawking coupons, in order to live with ourselves, we vowed to make Groupon a service that people love using”) but also a substantial number of warnings about how it’s going to be “a bumpy ride,” etc. Among other things, Groupon is facing more and more competition, including some from its would-be acquirer Google.
Bumpy, money-losing ride or not, there are undoubtedly dozens of companies who are hoping Groupon’s offering stays healthy enough to let them tap the public markets for similar-sized bonanzas before the bubble parade is over.