We could not let the working week draw to a close without mentioning the IPO on the New York Stock Exchange of Groupon. The company raised $700 million after increasing the size of its initial public offering, becoming the largest IPO by a U.S. Internet company since Google Inc raised $1.7 billion in 2004.
The global leader in “daily deals” is now valued at almost $13 billion after saying it increased the offering by 5 million shares to 35 million in total and pricing them at $20 each, above an initial range of $16 to $18. Is this good business, or simply a return of the crazy valuations that heralded the spectacular crashing to earth of the majority of 1st generation Internet companies.
What does Groupon actually do for its customers?
There are mixed reports on the validity of the daily deals model. While the company undoubtedly offers small businesses coverage to a huge customer database, that they would never be able to build themselves, many companies have struggled to break even when take-up has been high. They are forced to price the service often at a loss.
However, for those businesses simply “looking to get people in the door”, then this offers an unrivalled opportunity.
The threat of competition:
But can Groupon really sustain such a high valuation? The shares have traded robustly in the first week, but the threat of more competition hangs heavily over its business model. Many of the major online retailers are creating their own flash-sale sites to sell off stock, and many retailers are now offering time or volume-limited sales either on their own sites, or via social networks such as Twitter and Facebook.
This trend is likely to continue, making the proposition of third-party daily deal sites less exclusive and making it harder for them to source compelling deals. If, as some investment specialists predict, backers simply “flip” their investment – sell straight away and profit on the initial buzz – it could start a downward spiral and something akin to the burst dotcom bubble all over again.
The next few months will tell if the spectre of overvalued internet companies is coming back to haunt us. In the meantime, $13bn company in 3 years from its inception..not bad for 3 years work!