Expensive Lessons, But Then Most Market Lessons are Expensive
Groupon is a company that invented a new business, the business of e-mail direct Internet coupons. The business model is very simple. Groupon signs up merchants in various locations, offers a coupon for sale via e-mail to consumers in those locations and splits the proceeds with the merchant. Groupon gets a lot of money, the merchant gets customers who are still paying a good buck for the goods and services and the new customer base. The customer gets a good deal. Everybody wins, right!
Well that was conventional wisdom, and Groupon’s early investors and founders thought so, so much that they turned down a $6 billion offer from Google and decided they would go public because they thought the business was worth $20 billion. So what has happened since they did go public?
Groupon shares now have the dubious distinction of having fallen below their IPO price.
They’re down 14% at last check — for the day, that is — at $17.34 a share, below their IPO price of $20.
And somewhere out there is a poor sucker who bought that stock around its opening-day peak on Nov. 4 of $31.14. That’s only a loss of about 43%.
So what happened? Well first of all Groupon is not making any money. And companies that don’t make money usually are not worth $20 billion, or $12 billion or even $1 billion. But the big problem is this. There is no protection for the Groupon business model. Anyone who can hire a sales force, some programmers and rent some time on servers can get into this business. There is no advantage to being a national company, the markets are local.
The only advantage Groupon has is if their name becomes synonymous with the business, much the way Google has become a generic name for an Internet search. But even so, is that going to be worth very much? If Groupon ultimately tanks, and the company ends up being valued at a couple of millions, or even a couple of hundred million, and investors lose big time, well, at least they have the lessons they will have learned from all of this. That should mean something. And if a Time Machine is ever invented the Groupon founders are going to be first in line to go back to the day before that Google offer expired.