5 ms·

Why Groupon is Worth $25 Billion

42 points by jamesjyu 15y ago

meterplech 15y ago
It's a pleasure to see someone take the stand and go against the rash of blog posts and articles against Groupon. The main point of this article is that Groupon has value in connecting the online and offline world. Even if people use Yelp to decide on a restaurant, or search Google to figure out where it is- those companies never get profits from that because the restaurant never knows what sent the customer. Groupon is able to monetize the online to offline sale by clearly letting the business see that Groupon brought in a customer. He also says that while the daily deal structure might be risky/dead they can easily pivot to other online to offline connections like instant deals to your phone while walking by a restaurant. Personally, while I think that monetizing the online to offline transaction could be a huge business opportunity I don't know if I am willing to risk money on watching Groupon make the pivot. If daily deal as a model is crumbling (which many people have blogged about), then you are betting a whole lot that the database of merchants and customers can be leveraged in a new business model.
- cletus 15y ago
  > It's a pleasure to see someone take the stand and go against the rash of blog posts and articles against Groupon. Just because an argument is contrarian or counterintuitive doesn't make it right.
  - rmobin 15y ago
    I don't think he implied that. And I agree with his sentiment - for those of us who haven't made up our minds on Groupon, it's nice to see a view from the other side.
- alain94040 15y ago
  Yes, Groupon has potential value. My strong objection is to the fact that they are going public before proving that value. It used to be that you couldn't go public until you had at least 3 quarters of profitability. Sometimes our elders are indeed wise.
raganwald 15y ago
I have trouble with these sorts of arguments. Hopefully I'm not putting up a strawman, but this is what I read: 1. There's a massive opportunity for *X*. 2. Nobody is doing X, including business *Y*. 3. Y is well-positioned to transition (or "pivot") to X if it chooses. 4. ... 5. Profit. Even though I might agree with points 1, 2, and 3, there are a lot of moving parts and uncertainties between steps 3 and 5, what the fictional Reginald Jeeves calls "imponderables." I think that investing in a company on the basis of what it might do if a new market pans out is sound reasoning when making a VC investment. If you make ten such investments, perhaps one or two of them will pan out and you will make enough of a killing on them to pay for the others. However, I do not think this is sound reasoning when picking stocks in the public market. I think you have enough trouble just trying to figure out if a public company can succeed doing the business they're currently trying to do, much less a whole new business they haven't tried yet.
- joe_the_user 15y ago
  Actually, this is first Pro-Groupon argument I found remotely convincing. The point isn't so much that it shows Group will succeed, merely that it makes an argument that they could succeed. A Ponzi or pyramid scheme inherently cannot succeed. If an enterprise is Ponzi scheme, the smartness of the management, the prowess of the employees, the enterprises' momentum and everything else does not matter. But if an enterprise is not a Ponzi scheme, you can start looking at these factors. Groupon may or may not succeed like Amazon. But if there is a massive opportunity "out there", this means it is not completely irrational for investors to give them rooting around in this market until they succeed or convincing fail.
  - raganwald 15y ago
    I'm prepared to agree that the post makes an enthusiastic case for points 1, 2 and 3 with respect to Groupon :-) And I think that the expression "Ponzi Scheme" is ridiculous, and you don't need this essay to know that Groupon are not paying dividends to public shareholders with money they raise selling stock to other shareholders.
    - 15y ago
lotusleaf1987 15y ago
They have a list of some ~60,000 merchants, email addresses in the tens of millions, no patents or 'moat', and they're trying to sell a dollar for fifty cents and make a profit. Also, how do you scale when you have 8,000 employees? That's a huge fixed cost. And these aren't huge barriers to entry for your competition--Twitter/Facebook/any website with an audience can basically do this. I don't see how their model is sustainable and the entire premise of their success seems wrested on Groupon succeeding at things they haven't demonstrated yet. Also, I see Groupon as a sales company, not a tech company.
- lurker19 15y ago
  Salespeople are marginal costs, not fixed costs, and that is why they do not scale. (Unless those salespeople are converting prospects into long-term renewal sales) Engineering and design is a fixed cost.
Uhhrrr 15y ago
That the possible market for Groupon is big is without dispute. The reason people aren't sure about its prospects is that their reach still pales next to that of Google, Amazon, eBay, Yahoo, etc., and they're still not doing anything that can't be copied.
mwbiz 15y ago
So the $25B number is entirely made up then? There seems to be nothing in the article to justify this number.
- georgemcbay 15y ago
  One thing that was in the article is this... "The real innovation Groupon brought to the table wasn't in advertising deals per se, it was their ability to profit off of closing the attribution loop in online-to-offline commerce." To paraphrase Inigo Montoya, I'm not sure that "p" word means what he thinks it means.
rkon 15y ago
Again, if this really is a 'land grab' as he claims, why did they pay out hundreds of millions to early investors? Why not spend that money grabbing more land? Assuming he's correct, the returns would be several times greater if they continued investing rather than issuing huge payouts. It seems like a huge red flag to me -- a sign that even the earliest investors see Groupon as a big risk and want to hedge their bets.
- jtbigwoo 15y ago
  Does anybody remember how Yahoo/Google/Ebay handled this? I know their early investors got rich, but were they cashed out before the IPO?
  - btilly 15y ago
    For Google and EBay, they were making money hand over fist (the main problem they had when Meg Whitman joined was opening envelopes full of cash fast enough) and growing rapidly. Nobody wanted to cash out. I don't know what the story was with Amazon.
deleted 15y ago
[deleted]
m104 15y ago
Read the whole article, but wanted to stop after the second paragraph. Choice quotation: "The real innovation Groupon brought ... was their ability to profit off of closing the attribution loop in online-to-offline commerce. And this is a huge land grab that others had completely missed." That's funny, because I thought that Groupon showed just the opposite of that. How exactly has Groupon proved that there's a profitable business in hooking up customers and businesses with slash-and-burn deals? Even taking half of the revenue, Groupon is bleeding money and admits that it is going to have to invest even more to keep up the growth curve. I get that Groupon is popular, sure, but they'd be even more popular if they didn't take 50% of the coupon revenue. Of course, they'd be out of business sooner, as well. The "naysayers", like myself, are pointing out that Groupon (willfully or otherwise) hasn't found a balance that allows them to grow and actually turn a profit. What they have done is grow their userbase at an astonishing rate by raising and spending huge chunks of cash. That's not a business, that's a party. And parties, while fun to attend, are a bitch to clean up.
- mgkimsal 15y ago
  Even taking half of the revenue, Groupon is bleeding money and admits that it is going to have to invest even more to keep up the growth curve. I live in a moderately large regional area - Raleigh/Durham - close to a million people in the metro area. I've gone to groupon.com several times, and each time it doesn't seem to remember me - I end up putting my email in again each time, and then I'm shown a few 'deals', but nothing to suggest they're 'daily' (maybe they are, but I can't easily tell). When I hear 'daily deal site', I'm sort of expecting to get emails daily with a deal. I've given my email address. I want these things. If they can't make that happen in a metro area with nearly a million people, and having a large org (8,000 people?!) I just don't get how this will survive long term, other than perhaps by name recognition (it's a damn catchy name).
mgkimsal 15y ago
The same can be said for services like Yelp. Yelp might drive people to restaurants, but it doesn’t benefit Yelp if merchants don’t attribute the new customer to Yelp. And how would they know? It’s not like you walk in the door and tell the restaurant owner you just located them on your iPhone via Yelp’s app. Foursquare hasn’t solved this either, despite having 250K merchants signed up and literally inventing the act of announcing your presence to the world. Both are great companies solving problems, but only Groupon has closed this attribution loop. Hrm... maybe because most service companies that care ask how you found out about them in the first place? Well, most should. The fact that most companies don't try to determine that source when they're serving you (restaurants, haircuts, pet spas, printers, etc) is more an indication of really not understanding business and marketing in the first place. Outsourcing some of that - in this case, to groupon - may be a short term win, but you've just handed over your customer relations to a third party who has no real incentive to get those customers back to you any time soon. Small service businesses need a strong CRM process. I don't think groupon is it, although it could morph in to that.

42 points by jamesjyu 15y ago

It's a pleasure to see someone take the stand and go against the rash of blog posts and articles against Groupon. The main point of this article is that Groupon has value in connecting the online and offline world. Even if people use Yelp to decide on a restaurant, or search Google to figure out where it is- those companies never get profits from that because the restaurant never knows what sent the customer. Groupon is able to monetize the online to offline sale by clearly letting the business see that Groupon brought in a customer. He also says that while the daily deal structure might be risky/dead they can easily pivot to other online to offline connections like instant deals to your phone while walking by a restaurant. Personally, while I think that monetizing the online to offline transaction could be a huge business opportunity I don't know if I am willing to risk money on watching Groupon make the pivot. If daily deal as a model is crumbling (which many people have blogged about), then you are betting a whole lot that the database of merchants and customers can be leveraged in a new business model.

cletus 15y ago
> It's a pleasure to see someone take the stand and go against the rash of blog posts and articles against Groupon. Just because an argument is contrarian or counterintuitive doesn't make it right.
- rmobin 15y ago
  I don't think he implied that. And I agree with his sentiment - for those of us who haven't made up our minds on Groupon, it's nice to see a view from the other side.
alain94040 15y ago
Yes, Groupon has potential value. My strong objection is to the fact that they are going public before proving that value. It used to be that you couldn't go public until you had at least 3 quarters of profitability. Sometimes our elders are indeed wise.

raganwald 15y ago

I have trouble with these sorts of arguments. Hopefully I'm not putting up a strawman, but this is what I read: 1. There's a massive opportunity for *X*. 2. Nobody is doing X, including business *Y*. 3. Y is well-positioned to transition (or "pivot") to X if it chooses. 4. ... 5. Profit. Even though I might agree with points 1, 2, and 3, there are a lot of moving parts and uncertainties between steps 3 and 5, what the fictional Reginald Jeeves calls "imponderables." I think that investing in a company on the basis of what it might do if a new market pans out is sound reasoning when making a VC investment. If you make ten such investments, perhaps one or two of them will pan out and you will make enough of a killing on them to pay for the others. However, I do not think this is sound reasoning when picking stocks in the public market. I think you have enough trouble just trying to figure out if a public company can succeed doing the business they're currently trying to do, much less a whole new business they haven't tried yet.

joe_the_user 15y ago
Actually, this is first Pro-Groupon argument I found remotely convincing. The point isn't so much that it shows Group will succeed, merely that it makes an argument that they could succeed. A Ponzi or pyramid scheme inherently cannot succeed. If an enterprise is Ponzi scheme, the smartness of the management, the prowess of the employees, the enterprises' momentum and everything else does not matter. But if an enterprise is not a Ponzi scheme, you can start looking at these factors. Groupon may or may not succeed like Amazon. But if there is a massive opportunity "out there", this means it is not completely irrational for investors to give them rooting around in this market until they succeed or convincing fail.
- raganwald 15y ago
  I'm prepared to agree that the post makes an enthusiastic case for points 1, 2 and 3 with respect to Groupon :-) And I think that the expression "Ponzi Scheme" is ridiculous, and you don't need this essay to know that Groupon are not paying dividends to public shareholders with money they raise selling stock to other shareholders.
  - 15y ago

lotusleaf1987 15y ago

They have a list of some ~60,000 merchants, email addresses in the tens of millions, no patents or 'moat', and they're trying to sell a dollar for fifty cents and make a profit. Also, how do you scale when you have 8,000 employees? That's a huge fixed cost. And these aren't huge barriers to entry for your competition--Twitter/Facebook/any website with an audience can basically do this. I don't see how their model is sustainable and the entire premise of their success seems wrested on Groupon succeeding at things they haven't demonstrated yet. Also, I see Groupon as a sales company, not a tech company.

lurker19 15y ago
Salespeople are marginal costs, not fixed costs, and that is why they do not scale. (Unless those salespeople are converting prospects into long-term renewal sales) Engineering and design is a fixed cost.

Uhhrrr 15y ago

That the possible market for Groupon is big is without dispute. The reason people aren't sure about its prospects is that their reach still pales next to that of Google, Amazon, eBay, Yahoo, etc., and they're still not doing anything that can't be copied.

mwbiz 15y ago

So the $25B number is entirely made up then? There seems to be nothing in the article to justify this number.

georgemcbay 15y ago
One thing that was in the article is this... "The real innovation Groupon brought to the table wasn't in advertising deals per se, it was their ability to profit off of closing the attribution loop in online-to-offline commerce." To paraphrase Inigo Montoya, I'm not sure that "p" word means what he thinks it means.

rkon 15y ago

Again, if this really is a 'land grab' as he claims, why did they pay out hundreds of millions to early investors? Why not spend that money grabbing more land? Assuming he's correct, the returns would be several times greater if they continued investing rather than issuing huge payouts. It seems like a huge red flag to me -- a sign that even the earliest investors see Groupon as a big risk and want to hedge their bets.

jtbigwoo 15y ago
Does anybody remember how Yahoo/Google/Ebay handled this? I know their early investors got rich, but were they cashed out before the IPO?
- btilly 15y ago
  For Google and EBay, they were making money hand over fist (the main problem they had when Meg Whitman joined was opening envelopes full of cash fast enough) and growing rapidly. Nobody wanted to cash out. I don't know what the story was with Amazon.

deleted 15y ago

[deleted]

m104 15y ago

Read the whole article, but wanted to stop after the second paragraph. Choice quotation: "The real innovation Groupon brought ... was their ability to profit off of closing the attribution loop in online-to-offline commerce. And this is a huge land grab that others had completely missed." That's funny, because I thought that Groupon showed just the opposite of that. How exactly has Groupon proved that there's a profitable business in hooking up customers and businesses with slash-and-burn deals? Even taking half of the revenue, Groupon is bleeding money and admits that it is going to have to invest even more to keep up the growth curve. I get that Groupon is popular, sure, but they'd be even more popular if they didn't take 50% of the coupon revenue. Of course, they'd be out of business sooner, as well. The "naysayers", like myself, are pointing out that Groupon (willfully or otherwise) hasn't found a balance that allows them to grow and actually turn a profit. What they have done is grow their userbase at an astonishing rate by raising and spending huge chunks of cash. That's not a business, that's a party. And parties, while fun to attend, are a bitch to clean up.

mgkimsal 15y ago
Even taking half of the revenue, Groupon is bleeding money and admits that it is going to have to invest even more to keep up the growth curve. I live in a moderately large regional area - Raleigh/Durham - close to a million people in the metro area. I've gone to groupon.com several times, and each time it doesn't seem to remember me - I end up putting my email in again each time, and then I'm shown a few 'deals', but nothing to suggest they're 'daily' (maybe they are, but I can't easily tell). When I hear 'daily deal site', I'm sort of expecting to get emails daily with a deal. I've given my email address. I want these things. If they can't make that happen in a metro area with nearly a million people, and having a large org (8,000 people?!) I just don't get how this will survive long term, other than perhaps by name recognition (it's a damn catchy name).

mgkimsal 15y ago

The same can be said for services like Yelp. Yelp might drive people to restaurants, but it doesn’t benefit Yelp if merchants don’t attribute the new customer to Yelp. And how would they know? It’s not like you walk in the door and tell the restaurant owner you just located them on your iPhone via Yelp’s app. Foursquare hasn’t solved this either, despite having 250K merchants signed up and literally inventing the act of announcing your presence to the world. Both are great companies solving problems, but only Groupon has closed this attribution loop. Hrm... maybe because most service companies that care ask how you found out about them in the first place? Well, most should. The fact that most companies don't try to determine that source when they're serving you (restaurants, haircuts, pet spas, printers, etc) is more an indication of really not understanding business and marketing in the first place. Outsourcing some of that - in this case, to groupon - may be a short term win, but you've just handed over your customer relations to a third party who has no real incentive to get those customers back to you any time soon. Small service businesses need a strong CRM process. I don't think groupon is it, although it could morph in to that.