Groupon, Is this Another WebVan?

I’ve read quite a few posts and articles over the last week since Groupon filed it’s S-1 to go public. I guess it’s not surprising that S-1 filing generally generates some interesting conversations, it is often the first deep look into a company’s finances. The fact that Groupon is the fastest growing company in US history based on revenue just puts this filing under a bigger microscope. 

Groupon’s business model is simple, sing up merchants to offer deeply discounted deals to an ever increasing number of potential customers. Groupon sells the deals, collects the money and pays back half to the merchant. From the merchant’s perspective it’s a customer acquisition play – draw in new customers with the deal and try and keep them after the sale. The location centric nature of the deals helps build a more compelling offer, of course. Now there’s nothing in what I just described that would be (or I should say has been) hard to duplicate, LivingSocial, for one, has a very similar model and is the #2 competitor in this new space. 

Looking at the S-1 there are a few things that do look, well, not so good (some have even referred to it as a ponzi scheme, but that’s pretty harsh): 

• Like many fast growth companies it’s not yet profitable. In Q1 for example, there was a net loss of $102M on revenues of $644M. 
• It is about $230M in debt, with current assets of $290M ($208M in cash) and liabilities of $520M ($290M in merchant accrued merchant payables – money owed to merchants for services they have already provided).
• Most of recent funding rounds have gone to buy back founder and early investor shares. In series F + G rounds from April and December of 2010 the company raised a total of $1.08B. Of that amount only $150M went for working capital, the rest ($930M) is now in the pockets of CEO Andrew Mason, a few senior employees and few early backers.
• Groupon’s quarterly burn rate is about $100M and rising rapidly to support it rapid growth. To put that in perspective that’s going from zero employees to over 7,000 in a couple of years.
• And a few other tidbits, margins seem to be declining, there’s a bit of accounting “optics” going on between its GAAP and non-GAAP numbers, the model is susceptible to customer fatigue and the playing field is getting crowded with new competitors.

But, with all of that said there are two things that might just trump all of the other factors: 1. Sometimes being the first mover and / or capturing a massive customer base in Internet business wars can be the trump card, just look at Google, Skype, Twitter, Facebook , Amazon, YouTube, etc. and 2. Groupon has done what Google and many others have not been able to figure out – translate online to offline effectively. This last advantage can’t be taken lightly in the “local wars”. Are the flaws fatal, guess we’ll have to wait and see…