Has Groupon helped or 'done zilch' for Chicago tech?
FORTUNE -- Last week Erin Griffith wrote that a 2013 IPO for flash sales site Gilt Groupe would be huge for the New York City tech scene. Venture capitalist Greg Gretsch followed up by tweeting that the IPO itself must be long-term successful for it to matter in NYC, since Groupon's IPO (GRPN) "has done zilch for the Chicago tech scene."
First, let's all acknowledge that a 2013 Gilt IPO is only slightly more likely than a Denver Broncos Super Bowl win next month. But, beyond that, my gut was that Greg's dismissal of Groupon's impact was wrong. So I reached out for a couple different sets of numbers.
To support his point, Thomson Reuters reports a 28.36% drop in the amount of venture capital disbursed to Chicago-area startups between the first nine months of 2011 and the first nine months of 2012 (and a 28.36% fall in the number of companies):
Source: Thomson Reuters
On the other hand, Groupon's ability to create liquidity for founders and early investors helped lead to the creation of seed-stage investor Lightbank, which says that it has backed more than 50 companies out of its $200 million fund (around 1/3 of which are in Chicago).
Thirteen of the total portfolio already has secured Series B funding, including Chicago companies Belly and Sprout Social. No Groupon, (probably) no Lightbank.
I'm not arguing that Belly, Sprout Social or any other Lightbank-backed Chicago company will become a billion dollar behemoth, but they've got a better shot at it than if Groupon had not existed. Not to mention the thousands of people working at Lightbank-backed companies that might get a future entrepreneurial itch.
So let's leave this as a "remains to be determined" for now…
What a scam! Forbes article on pre IPO bankruptcy issue.
Groupon Dodged Bankruptcy With Its IPO
Groupon CEO Andrew Mason Thanking Heaven They Didn't Go Bankrupt
P.T. Barnum was one of the greatest advertising men of all time. When he built a traveling museum on a railroad car and took it across the country people flocked to see his exhibits for a small fee. When the car filled up and he couldn’t fit more people inside, he put up a sign to “See the Egress” with an arrow pointing through a door. If you didn’t know that “egress” was another word for EXIT you were surprised to find yourself back outside. Sounds just like those buying Groupon after the IPO. They are very unlikely to ever make a dime if they bought it in the after market where trading began at $28. Initially, only the flippers made money.
Groupon successfully priced its IPO at $20 per share, above the 16-18 range. The fantastic news for Groupon is that it will not have to go bankrupt this quarter. It had bills of $505 million at the end of September that were twice the $243 million cash they still had on hand. Of that amount, $463 million was short term obligations to the very merchants for whom they sold Groupons, their half price coupons.
Where they priced the Groupon deal is almost irrelevant. In another quote improperly attributed to P.T. Barnum, “There is a sucker born every minute.” This deal is Wall Street at is Best Worst in its quest to find suckers to buy this deal. The underwriters all knew the flaws but signed on anyway because they need the fees in a bad year. That includes Goldman Sachs who reportedly whispered estimates for 2013 of $0.84 , plus Credit Suisse and Morgan Stanley. Remember that Groupon has never turned a profit. The stock has traded as high as 31 for a nanosecond and hasn’t been able to hold it. That poor fool who bought those shares is not very happy.
Of the earlier Groupon holders, 95% are still stuck waiting to exit. Some months from now their lockups will end. Expect them to rush for the door at the first possible moment. It is telling that even with such a large group of 11 lead underwriters the deal had to be cut back to 5% of the shares outstanding to get it sold.
Also remember that 95% of all merchants who use Groupon never come back. That means the company must replace almost all of its business all the time. That’s a very tough model and why they are no longer growing. First they insist the merchant offer his goods or services for half price. Then they charge 40-60% of the coupon value for what they are doing to promote his business. A service that might normally be $100 is marked down to $50, they take half of that, so the vendor gets $25 for the $100 service. After his costs for rent, labor and materials, he loses money. Since, he is highly unlikely to ever get a repeat customer, he simply stops doing it. As for the customer, very often the coupons you receive are for good deals that are not convenient to where you live. If it is cheap enough, you might go once but you don’t go back. You just look for the next discount offer.
While this is not a sustainable or well considered business model, it has already made the founders supremely rich. Even so, two Chief Operating Officers bailed on the company during 2011. One left just weeks ago even knowing that an offering was imminent and her more than a million shares would be worth a lot on paper. One might surmise that she didn’t want her long term career path tainted by the smell of this company.
Groupon will take years to play out but my guess is that it will not have a happier ending than Rupert Murdoch’s purchase of My Space in 2005 for $580 million. In 2011 we saw the unwinding of that transaction: “We paid $600 million,” Murdoch said. “We could have sold it for $6 billion a month later.”
In fact, News Corp. sold it recently for $35 million to a group including Justin Timberlake for a 94% loss on its purchase price and more if you count what they spent to “fix it” when other social media sites passed it by.