Thursday, 24 November 2011

Is Groupon Going To The Biggest Tech Stock Failure?

Groupon shares have now fallen back to pre-IPO level where they spectacularly raised $805m just 3 weeks ago. Investors are getting worried as news that Groupon's Chinese Joint Venture has already hit a rocky road.

Yesterday I blogged on Groupon looking at a potentially flawed business model that is a child of the times. I mean this not only in that we are in a recession and so discount offers are very popular in harder times amongst consumers but also it is a time when it is perfectly acceptable for a business to start up and raise huge sums of money on the back of a business that loses ever more money in its model every time it makes a sale. The actual cost of acquisition of each customer is increasing for Groupon not leveraging the scale of the operations as you would expect of any business - so the question is: when will it ever make a profit?.

I highlighted some reasons why Groupon specifically is flawed in the face of investors who willingly chipped in nearly $1bn for a small stake in the company:
  1. It's a business borne out of hard times that may lose it's shine when the recession ends
  2. It is reliant on the habits of 'Discount Junkies', i.e. customers who are serial discount offer buyers and are not likely to show brand loyalty
  3. The business model for many of the retailers participating is flawed and once they have overcome the fad value they will realise they have to be more targeted with their offers and more frugal 
  4. It's really a 'me-too' proposition that's not only easy to clone but it is potentially at risk by big gun players like Google and Amazon.
I doubt if my article triggered the share slide as there have been high profile news stories of bakers losing thousands on offers that were 'too successful' and in the US there have been cases where the ethics of offering cosmetic survey under an intense, short period deals is pressuring people into surgery they either don't need or haven't sufficiently considered.

It all points to a potential short term story for Groupon and a possible bad news story for investors. To put the case for a fall in even more practical terms there are now rumours that executive and staff lock-ins on stock options are less than 6 months and there may be considerable 'internal' share sales to follow - a sort of sign that rats are leaving  the sinking ship as these people realise the game is up.

This has serious repercussions for other Tech stocks that wish to IPO as investors may well be very concerned at the sight of Groupon's potential implosion. The fact is that I blogged on this potential some months ago and to me it was perhaps too obvious that this company would fail or at least be not so world changing. I get no satisfaction about being right but there has to be serious questions asked about the 'get rich quick' mentality that has pervaded in venture capital and tech investors who have talked the Groupon story up.

Scrutiny may now change to others with 'Potential potential' business models as I describe them like Twitter. You have to ask yourself that if a service is not valuable enough to be charged for at the start, how can it possibly charge later? If Twitter is just modelling itself to be sold then all someone is buying is a glorified and very expensive database.

The Emperor's Clothes springs to mind. 

Will the Industry Benefit from Groupon's Failure?

There is a school of thought that the industry needs a big failure to snap investors out of this daft flawed business model mentality of jam tomorrow. Hopefully, the good that will come of it will be that need start ups have a cogent plan for making money early rather than the too hopeful tack of accumulating vast losses on the wisp of a hope that some day they might hit the seem of gold.

Oh dear, are we living through the second Californian Gold Rush? Lot of people got rich then and many more didn't.
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