Tag Archive for company valuation

Groupon bashing unleashed

Only two weeks ago, local-deal start-up Groupon was acclaimed as an unprecedented eCommerce success and its IPO was as hotly anticipated as Facebook‘s. Since then, however, Groupon’s S1-Filing disclosed a cumulated $540 million loss on a cumulated $1.4 billion Gross Transaction Value. Suddenly, all love for the eCommerce posterchild seems lost and every aspect of the business is slashed. I believe critics should have been wiser earlier and the investment bankers who hyped up Groupon are to blame.

Bertolt Brecht Picture from Bundesarchiv Source Wikipedia

Bertolt Brecht Picture from Bundesarchiv Source Wikipedia

“Do not let anybody put you on a pedestal because once people realize you’re just human, it’s you that they destroy, not the image they created”. Groupon’s CEO Andrew Mason should probably meditate this thought from German author Bertolt Brecht.

Andrew Mason and Groupon, the company he co-founded in 2008, became the talk of the town after the company raised $135 million in April 2010 and, even more so, after it raised a whopping $950 million in January this year. With over 80 million online subscribers in more than 40 countries, Groupon dominates the booming local deal market it has contributed to create. Until recently, most observers were in awe. To name but one example of the Groupon-groupies: Last August Groupon was described by Forbes as the “fastest-growing company in Web history” and “what the dot-com boom was supposed to be all about“.

Well, now it seems that Groupon is rather exactly was the dot-com bust was about: a completely inflated valuation. Since Groupon has released its S1-Filing and revealed a cumulated loss of $540 million, criticism is raining on every aspect of the business. Worse, the critics are among the most influential voices in finance and eCommerce: Bloomberg, The Street, Marketwatch, The Economist, the FT, the Wall Street Journal, thisismoney.co.uk, Huffington Post, TechCrunch and more.

Below I review the 5 most critical points why Groupon is overvalued: 1) Inflated revenue and income; 2) Lack of merchant and customer lock-in; 3) Bad deal for private IPO investors; 4) Leadership flaws; and, most importantly, 5) Lack of financial value multiplier Read more

Is Groupon’s valuation justifiable?

Not really.

Local deals’ leader Groupon is currently valued at $15 to $20 billion for an estimated $1 billion 12 month revenue and LivingSocial at nearly $3 billion for half that. A lot of people are raising the issue of whether Groupon’s valuation is justified.

Firstly, it’s unclear what could prevent the many competitors from chipping away at Groupon’s first entrant’s lead. Next to LivingSocial, there are more than 500 competitors in the US alone, not least Google itself with Google Offers.  Groupon is well-established in North America and in major cities around the world. It still leaves plenty of room for more local competitors, for example in smaller cities.

Groupon’s main IP assets are claimed to be 1) its superior analytics to match user profiles to deals, 2) great email marketing, and 3) an “industrialized” sales process. It sounds good, but not really like something that a Google or an Amazon could not replicate.

The most important question is whether Groupon really create merchant and customer loyalty. Groupon claims on its Web site that 97% of its merchants come back for more. I’ve been told that Groupon users are quite addicted to it. However, the main motivation of merchants and customers still seems to be Groupon’s lead in numbers of deals and numbers of customers. There does not seem to be any other major customer lock-in, not major switching costs that would prevent merchants and users to lessen their engagement with Groupon. Groupon seems to be maintaining its lead by spending the $1.15 billion it raised on sales and advertising, i.e. by burning cash rather than creating sustainable merchant and customer loyalty.

According to Compete, LivingSocial’s (main?) Web site had 60% fewer online visitors than Groupon’s in March 2011. But LivingSocial’s has a much larger number of active Facebook followers (3 million or three times more in March 2011) — which could bring more sustainable customer stickiness. LivingSocial already enjoys a 25% higher satisfaction rating on FaceBook.

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