Groupon: The Price of Hubris

When three-year-old Groupon filed to go public in June, market commentators dialed the outrage meter up to 10.

Flashpoints: an aggressive business model, creative accounting, and a history of cashing-out early investors--to the tune of $1 billion. Further irritants: public puffery from the Chairman and the CEO during the so-called quiet period and August and September resignations of two senior team members--PR Chief Brad Williams and COO Margo Georgiadis--only months after they joined the Company.

In late September, Groupon re-filed its registration statement. Thanks to SEC oversight, the numbers had been scrubbed. Management and early investors scrapped their plans to sell shares. Today, despite the bumps, the Company hits the road to meet with potential new investors. If all goes as planned, on November 3rd Groupon will be publicly traded, having sold 30 million shares in a $500 million transaction.

Although the IPO is moving forward, Groupon has paid a price for the shenanigans it pulled on the way to the start line of its roadshow. In addition to insiders withdrawing their shares from the deal, the Company is likely to raise $250 million less than it had originally hoped.

More notably, it had been anticipating a market capitalization of $25 to $30 billion, post-pricing. Expected market capitalization is now less than half that--$10 to $12 billion. In fairness, some of the drop comes from the deterioration of the IPO market since Groupon filed. But market conditions alone are not responsible. The hubris of the Company's founders, investors, bankers, accountants and attorneys has cost them all.

Earlier this month venture capitalist Fred Wilson (whose top-notch blog, AVC, I wrote about back in February) published a brief note entitled Building a Company vs. Building a Business--where Company is defined as culture and values and Business is product, revenues and profit. In it he wrote:

No matter how or when you do it, building a company is a required step to sustainability. Positive cash flow is not enough to keep the company independent and solvent. You need a culture, systems, and processes to keep everyone happy and functioning well.

And in its just-released November issue, Harvard Business Review has published an interview with Infosys founder N. R. Narayana Murthy in which he discusses the crucial role that clearly defined values played for him and his co-founders, as they deliberately set out to build Infosys into not only a global organization, but also India's most respected company.

The scale of Groupon's accomplishments is undeniable: from zero to over $1.5 billion in annual revenues in 45 countries in less than three years. The Company creates real sales, savings and income for its merchant partners, customers and more than 10,000 employees around the world. But the hubris that cost the Company in its run up to its IPO is a briskly waving red flag: Groupon is built on a shaky foundation at best. Values, to date, are an afterthought.

Few company founders are as rigorously attentive to the question of values from the get-go as Murthy and his Infosys cohorts were. And yet, as Wilson points out, all need to be, eventually, in order for a company to survive.

Groupon needs to focus, stat. The Company's senior management team has been together for less than 10 months. They are facing powerful new competitors (including online peers and credit card companies) and, shortly, will be under the pressure of relentless quarterly earnings expectations. Values are the glue that will hold the Company together, as the easy opportunities that drove its early growth dry up and public shareholders want answers.

In August 2010, Forbes profiled Groupon in an article entitled Meet the Fastest Growing Company Ever. Company co-founder and CEO Andrew Mason spoke with Charlie Rose in December 2010. Watch here. In August, Vanity Fair ran a profile of Mason. Read here. He is No. 27 on the magazine's 2011 New Establishment list.

You can view Groupon's roadshow, including a video of senior management walking through the presentation, here. The Company's latest registration statement, filed on Friday, is here. Lead underwriters on the IPO are Morgan Stanley, Goldman Sachs and Credit Suisse. The Company's accountants are Ernst & Young.

Photo: Charles Rex Arbogast, AP via San Francisco Chronicle