Groupon IPO - Is it a high risk in Social media?

Groupon a website that offers daily discount on local merchants has filed for an Initial Public offering. In Dec. 2010, Google offered 6B to acquire Groupon was rejected by them. They raised a fund ($950 M) in January 2011 and most of the money was paid to the employee and the initial investors ($810M). At the end, around $135 M was used to run the company.

They are investing more on the marketing, Sales and Administrative expenses. Their net LOSS for the year 2010 was $390M. Their marketing and selling spending was more than that of their Cost of Revenue. The letter from ANDREW D. MASON CEO of Groupon Inc. says

We don't measure ourselves in conventional ways.

There are three main financial metrics that we track closely. First, we track gross profit, which we believe is the best proxy for the value we're creating. Second, we measure free cash flow—there is no better metric for long-term financial stability. Finally, we use a third metric to measure our financial performance—Adjusted Consolidated Segment Operating Income, or Adjusted CSOI. This metric is our consolidated segment operating income before our new subscriber acquisition costs and certain non-cash charges; we think of it as our operating profitability before marketing costs incurred for long-term growth.

If you compare the first IPO filings of the two companies, Groupon and Google, there was a profit for Google $143M when they went for IPO where as Groupon has a loss (389M) in 2010 and 102 M in Q1 2011.

Also when you compare the business model of other successful Social Media companies like Facebook and LinkedIn, where their marketing spending and sales spending is less to bring in customers where as Groupon is investing more on that area.

In addition, there is a continuous drop in the US economic growth for the past six weeks, and policy makers started controlling the headline inflation instead of the core inflation.

The Weekly Leading Index (WLI) Growth indicator of the Economic Cycle Research Institute (ECRI) declined to 4.9 from last week's 5.0. This is the sixth consecutive week of decline from the 11-month interim high of 7.8 for the week ending on April 15.

Wall Street Journal says 3 reasons to worry

1. Crazy Spending
2. Early investors taken out around $1B
3. Wrong timing.

Jason Fried of 37 Signals was a board member of Groupon and now an advisory to the company says "spending less than you earn is the only way to have a healthy relationship with money."

This is going to be a big risk, which Andrew says as "We aggressively invest in growth" & "We are unusual and we like it that way".

Saravanan