On Groupon, Google and the ever increasing pace of value creation

By November 30, 2010Advertising, Exits, Google

When I first heard the rumours that Google might acquire Groupon for $2.5bn yesterday I tweeted that it would be a big change of strategy for GOOG to put feet on the street.  If space had permitted I would have expanded the tweet to include something about the price of the deal.  Picking up on those points, if this deal happens (and the latest rumours are that it will), it is remarkable for two reasons:

  1. Google’s strategy up to now has been to build technology solutions that to a large extent sell themselves and certainly don’t require an army of sales people.  Google has sales people for their larger Adwords clients, but their function is to help clients get the most out of Adwords and has more in common with account management than sales – remember also that price of advertising on Google is set by the auction process. 

    To date Google’s employee base has overwhelmingly been highly educated and highly paid, and not wanting to break from this tradition has always seemed to me to be somewhat axiomatic for the worlds largest search company.

    But to get into local you need feet on the street.  Most of the worlds small local advertisers are not yet at the point where they will self serve as small businesses do on Adwords – and Google’s desire to get into local has been clear for some time.  Now it looks like they have decided they can’t wait for the world to get used to their preferred way of doing business.  Mohammed has moved to the mountain.

  2. According to Kara Swisher the deal value will be $5.3bn, including a $700m earn-out.  The pace of value creation at Groupon eclipses anything we have seen before.  According to Crunchbase, the company was founded two years ago in November 2008, and to go from $0 to $5.3bn in 24 months is a) amazing and b) testament to the ever increasing pace of change.  The previous record holders were Skype ($2.6bn in 25 months) and Youtube ($1.7bn in 13 months).

    Groupon has raised more money than either of those two (around $170m) and at a rumoured $50m per month is generating far more in the way of revenues than they were when they were acquired.

Is the valuation sensible?

That is a tough question.  The billion dollar question (literally) is how far you extrapolate their fantastic growth rate into the future and what price you put on dominating the local market.  One thing I will say is that the folk at Google know what they are doing.

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  • As Fred Wilson commented yesterday, Groupon is a great fit for Google. You are absolutely correct Nic the only way to reach small local business who have their heads down in their business is to get feet on the ground. This deal (if it’s true) isn’t about discount vouchers it’s about Google being the major player in “online to offline”.

  • I still believe that youtube is the best acquisition by google. No Competition and has a great revenue model if filled with ads. I just hope that google did not make a mistake. i still like the original google where they innovate not acquire

  • Re valuation, back when I was an Internet analyst, I blew people’s minds by arguing that you couldn’t make sense of a revenue multiple without an understanding of gross margins. Amazon, for example, has inherently lower margins (due to having to pay for COGS and postage) than Yahoo (which was very high gross margin).

    I don’t know that Groupon business model well enough. Is it an inherently 80% gross margin business like Yahoo or a 25% gross margin business like Amazon?

  • Rumour has it gross margins are around 50%, but I would expect them to trend down to Amazon levels over time.

  • I think $6 billion is too cheap for Groupon. Ive posted my computations here http://finance-tutor.com/finance-news/busines-valuation/