Would You Vouch for Groupon?

posted on 24 January 2011 by Alice Thomas

Now as much as at any other time, we are aware of the cycles of boom and bust upon which our economy rides high and crashes low. The pattern of events which precedes a crash is often the same: investors are caught up in a frenzy of hype and buzzwords, and often without researching how realistic companies' profit projections actually are, or how solid businesses are underneath the bonnet, stock issues are snapped up by eager investors, hoping to make big gains for little investment. 

These factors were all present in the lead up to the first tech crash of the early naughties, when hundreds of technology companies folded within months of holding IPOs, resulting in the NASDAQ Composite dropping 78% in the 30 months from March 2000 to October 2002, crushing stocks which represented billions of dollars of investment. The internet, with its limitless potential to bring together investors and entrepreneurs, means that there will always be new frontiers and investors will, as always become animated over the hype surrounding these ventures. Collective investor memories are short and after just over a decade investors are gearing up to put their money behind the new wave of technology companies - this time the majority of which aren't dealing in e-commerce and financial transactions, but the social web - or web 2.0. With the hype surrounding this new wave of internet ventures, and the anticipation over when these companies will go public, I can't help wondering if we shouldn't expect to see a Dot.com crash 2.0. 

A case in point: Groupon- How much is it really worth?

In 2008, Groupon was founded by Silicon Valley's latest wunderkind Andrew Mason, a Northwestern University alum with a degree in Music, 'the uselessness of which was [his] chief inspiration not to be useless'. His entrepreneurial debut was an ultimately unsuccessful website called The Point, which allowed people to organise group donations of time or money to a charity, local enterprise or political cause, as long as enough people committed to doing the same - or 'tipping point' was reached.

 Mason's next idea, 'Groupon' (the name is an amalgamation of the words group and coupon), works along this same (recently patented) tipping point idea, through Groupon retailers offer a discount coupon for a service or product which is only released to Groupon subscriber when a pre-determined number of people commit to the offer, thus reducing the risk to the retailer. With markdowns of up to 75%, Groupon claims its subscribers spend, on average 60% over the value of the 'groupon', meaning that Groupon's 50-50 cut of the profits is making them real money. 

In fact, Groupon is one of the most successful of this new wave of social start-ups, having turned profitable in just over 12 months, and 95% of deals now 'tipping', the company has 'sold' more than 26 million groupons worldwide, saving consumers $850million in the US alone. 

There has been much speculation over the future of Groupon in terms of funding, with rumours of an IPO as early as this spring. The company recently snubbed a buyout bid from Google worth an estimated $6billion (more than twice the value of Google's next highest buyout bid). What is clear, however is that Groupon's boundless enthusiasm for expansion (it's currently moving into an average of 35 new cities per week), means that it needs significant amounts of investment behind it.

Fortunately, they've raised $950million in what became the second highest funding round in history, bringing in firms such as Greylock Partners and Russian telecoms giant Digital Sky Technologies, both of which also invested in Facebook and Zynga, (the company behind  hugely successful online games such as Farmville and Mafia Wars, among others).

However, creating a successful internet-based business can seem like the easy part in comparison to the epic task of maintaining that success over a number of years. We've witnessed countless examples of zeitgeist websites fading into obscurity; Hi5 or Bebo for example have been completely usurped by the runaway success of Facebook and while MySpace held on valiantly for years, it seems its days are now numbered too. Here's hoping that Groupon doesn't meet the same fate as Friends Reunited which was bought by ITV at the height of its popularity in 2005 for £175million and was sold just four years later for £25million.