Groupon announced their results yesterday and when considered at the highest level they aren’t bad. Revenues for the July-September quarter were $569m, up 32% on the year ago and losses narrowed considerably to $3m for the quarter. As I write this their market cap is $2.6bn. Most four year old companies would take that.
But Wall Street isn’t thinking about the fact that Groupon is only four years old, they are thinking about the promises made when the company IPOd a year ago, and they weren’t impressed, sending the shares down 17% in after hours trading to $3.25 (the IPO share price was $20). Their latest disappointment came because Groupon’s $569m revenue was below analysts expectations of $590m revenue quarter and because their core daily deals business was down 16% quarter and quarter and flat on the year ago period. (All the growth came from Groupon’s new direct ecommerce business.)
It’s the last point that’s most interesting to me. One of the great things about startups today is that they can create giant new markets in short periods of time. That’s of great value to the world in terms of innovation and job creation and enables entrepreneurs and their investors to make good money. It comes with a big challenge too though, which is understanding whether the market being created has legs and is structurally profitable.
What I think we’re seeing in the case of Groupon’s daily deals business is that there’s a good chance that consumers are tiring of receiving daily deals emails and the market is at least in part faddish. I think we might ultimately discover that the whole endeavour was not profit making. If I’m right and investors had known that at the time of the IPO, or even when they were asked to make investments at the venture capital stage, then they wouldn’t have invested. The problem is of course that it is hard to know.
In the case of Groupon there were always signs – from the earliest stages there were questions over the value being given to merchants, then about churn from email lists, then there were accusations that they built their email lists for volume rather than quality, and then they had a contrived IPO process with a very small (5%) free float.
There will always be situations when venture investors and public market investors make bad bets, but as markets are moving faster and faster with opportunites for ever greater and faster value creation we need to make sure we don’t lose our heads. If there are signs of weakness in a companies plans or business model they should be questioned, and the companies who are genuinely building for the long term will want to answer them openly and transparently. Those that won’t should carry a big risk premium, even if they are growing as fast as Groupon did and have some great elements to their story like Groupon did.
Groupon will be ok now, even if their IPO investors will lose nearly all their money. They have enough scale and a breadth of business that they won’t disappear and maybe even to innovate themselves into a good place. So for most of the participants this is not an unhappy story, even if it has been an uncomfotable one. But the biggest value in the story is as a lesson for the rest of us. I hope people take away the learning I’ve outlined here – that as times are changing faster we need to become more wary of holes in plans and business models – rather than looking at Groupon as evidence that sustainability isn’t important and that with money and marketing anyone can make a quick buck. That game is a crapshoot with poor odds and the success of an occasional outlier shouldn’t encourage others into the game.