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Groupon has been in the news a lot recently, with most of the attention focused on its unique business model and its plans for a public stock offering. I recently wrote about Eric Lefkofsky’s visit to Northwestern to speak about technology-enabled innovation and it is very interesting to see how the two perspectives of the company are clashing.
The newest issue of business is Groupon’s plan to go public. With an initial public offering (IPO), Groupon expects to raise another $3 billion and achieve an overall valuation of $30 billion. Just months ago, the company turned down Google’s offer of $6 billion. According to Lefkofsky, Groupon’s valuation would have grown too quickly in the time that it would have taken to make and carry out the deal. At a valuation of $30 billion, Groupon will have a bigger initial launch value than Google when it went public years back. Let’s hope that this isn’t yet another sign of an impending tech/internet bubble.
Especially interesting about Groupon is its less-than-spectacular financials. Because of the nature of Groupon’s business model and strategy, it spends a large chunk of its revenue flow on marketing. The company seeks to create a customer base as large as possible, simultaneously expanding its market and ability to provide more deals to more individuals. With this, they hope to change the world of commerce and at the same time, turn out a large profit for its shareholders and employees alike. Lefkofsky argued that Groupon was Google’s largest customer, with its method of maximizing its consumer base.
With this marketing budget, however, Groupon has actually been losing money for the past few years. According to Bloomberg, the company has recorded over $540 million in operating losses since 2008.
In order to hedge against these gloomy statistics, Groupon is using an alternative financial measurement to woo potential investors. Called the adjusted consolidated segment operating income, or adjusted CSOI for short, the figure excludes marketing and acquisition-related costs. Under this alternative figure, the company is seen as profitable, raking in $60 million last year and $80 million in Q1 of 2011 alone. Groupon argues that its marketing costs will decrease as it saturates the market and establishes solid footing for its consumer base.
Underwriting this titanic effort of an offering is Morgan Stanley, which was also responsible for LinkedIn’s highly successful public debut. It has been tough for the bank indeed:
Internet startups are notoriously difficult to price. There are few direct competitors to base an IPO valuation on, and the private-market valuations that do exist for social media companies — a new phenomenon — are based on just a handful of trades made by a small group of investors, which makes it hard to say whether they represent true demand in public markets.
It will definitely be exciting to see how Groupon fares once the legal issues get sorted out and the company finally goes public. One last aspect that has been featured in the news prominently as of late is the fates of Lefkofsky and his crew. The two co-founders, Lefkofsky and Brad Keywell, have cashed out some of their shares in order to fund their joint venture, Lightbank. This new venture capital firm focuses on providing human capital to fledgling start-ups in order to help them grow and prosper. The two entrepreneurs are some of the most knowledgeable in the field and should be able to make some great success stories for newcomers into the technology industry. Lefkofsky himself has already become one of Chicago’s big success stories, set to become the richest person in Chicago when Groupon goes public with his estimated $6 billion in shares.
It will only be a matter of time before the world sees how Groupon can transform commerce.
His main five reasons are as follows:
1) An unfinished e-book isn’t a constant reminder to finish reading it.
2) You can’t keep your books all in one place.
3) Notes in the margins help you think.
4) E-books are positioned as disposable, but aren’t priced that way.
5) E-books can’t be used for interior design.
It definitely seems that e-books aren’t going to phase out books any time soon, but it will be interesting to see how much of an impact the technology has on the bookstore and publishing industries. I know that I’ll be hopping on the bandwagon soon with an iPad.