Groupon, a provider of discount coupons to people that also runs a foundation giving college scholarships to babies born to people using its products on their first dates*, plans to raise $750m in its flotation giving the corporate venturing backers an estimated 200 times paper return on their investment.
Groupon, which turned down a reported $6bn takeover offer from Google in December and is now worth an estimated triple that valuation, said it had $644.7m in revenue in the first three months of the year, up from $3.3m in the second quarter of 2009, as its users increased to 83.1 million at the end of March compared to 152,203 in June two years ago. Gross profits were $270m in the first quarter of the year while free cashflow after marketing expenses were $7m.
The company spent $18m in online marketing to acquire North American subscribers in the second quarter of last year and in the following 12 months earned $61.7m in gross profit from this group of subscribers, while also making 13 acquisitions to help expand into 43 countries.
One of these acquisitions using Groupon’s shares as currency was in May last year for CityDeal, a Germany-based peer that first raised €4m ($5.6m) in January last year and which raised a further €5m in March 2010. CityDeal owns 10.3% of Groupon, according to its regulatory filing, which is worth $2bn at a Wall Street Journal-reported valuation of $20bn for the whole of Groupon.
CityDeal’s backers had included eVenture Capital Partners, which has Germany-based retailer Otto Group as its cornerstone investors, Holtzbrinck Ventures, the former corporate venturing unit of local media company Georg von Holtzbrinck Publishing Group that became independent in January, Sweden-based conglomerate Investment AB Kinnevik and Rocket Internet, the family investment vehicle for the Samwer brothers (Alexander, Marc and Oliver) that also operate European Founders.
The Samwer brothers had previously set up and sold online auction company Alando to eBay and wireless media distributor Jamba to VeriSign and are also investors in Facebook, HomeAway and LinkedIn among others.
Investment banks Morgan Stanley, Goldman Sachs and Credit Suisse are underwriting Groupon’s IPO.
As well as South Africa-based media group Naspers, Goldman Sachs is a corporate venturing investor behind Digital Sky Technologies, a Russia-based internet investment vehicle, that backed Groupon’s $950m private placement in January.
Below is a letter by Andrew Mason, chief executive of Groupon, about the flotation and its .
June 1, 2011
Dear Potential Stockholders,
On the day of this writing, Groupon’s over 7,000 employees offered more than 1,000 daily deals to 83 million subscribers across 43 countries and have sold to date over 70 million Groupons. Reaching this scale in about 30 months required a great deal of operating flexibility, dating back to Groupon’s founding.
Before Groupon, there was The Point-a website launched in November 2007 after my former employer and one of my co-founders, Eric Lefkofsky, asked me to leave graduate school so we could start a business. The Point is a social action platform that lets anyone organize a campaign asking others to give money or take action as a group, but only once a "tipping point" of people agree to participate.
I started The Point to empower the little guy and solve the world’s unsolvable problems. A year later, I started Groupon to get Eric to stop bugging me to find a business model. Groupon, which started as a side project in November 2008, applied The Point’s technology to group buying. By January 2009, its popularity soaring, we had fully shifted our attention to Groupon.
I’m writing this letter to provide some insight into how we run Groupon. While we’re looking forward to being a public company, we intend to continue operating according to the long-term focused principles that have gotten us to this point. These include:
We aggressively invest in growth.
We spend a lot of money acquiring new subscribers because we can measure the return and believe in the long-term value of the marketplace we’re creating. In the past, we’ve made investments in growth that turned a healthy forecasted quarterly profit into a sizable loss. When we see opportunities to invest in long-term growth, expect that we will pursue them regardless of certain short-term consequences.
We are always reinventing ourselves.
In our early days, each Groupon market featured only one deal per day. The model was built around our limitations: We had a tiny community of customers and merchants.
As we grew, we ran into the opposite problem. Overwhelming demand from merchants, with nine-month waiting lists in some markets, left merchant demand unfilled and contributed to hundreds of Groupon clones springing up around the world. And our customer base grew so large that many of our merchants had an entirely new problem: Struggling with too many customers instead of too few.
To adapt, we increased our investment in technology and released deal targeting, enabling us to feature different deals for different subscribers in the same market based on their personal preferences. In addition to providing a more relevant customer experience, this helped us to manage the flow of customers and opened the Groupon marketplace to more merchants, in turn diminishing a reason for clones to exist.
Today, we are pursuing models of reinvention that would not be possible without the critical mass of customers and merchants we have achieved. Groupon NOW, for example, allows customers to pull deals on demand for immediate redemption, and helps keep merchants bustling throughout the day.
Expect us to make ambitious bets on our future that distract us from our current business. Some bets we’ll get right, and others we’ll get wrong, but we think it’s the only way to continuously build disruptive products.
We are unusual and we like it that way.
We want the time people spend with Groupon to be memorable. Life is too short to be a boring company. Whether it’s with a deal for something unusual, such as fire dancing classes, or a marketing campaign such as Grouspawn* [a foundation created to award college scholarships to babies whose parents used a Groupon on their first date], we seek to create experiences for our customers that make today different enough from yesterday to justify getting out of bed. While weighted toward the measurable, our decision-making process also considers what we feel in our gut to be great for our customers and merchants, even if it can’t be quantified over a short time horizon.
Our customers and merchants are all we care about.
After selling out on our original mission of saving the world to start hawking coupons, in order to live with ourselves, we vowed to make Groupon a service that people love using. We set out to upturn the stigmas created by traditional discounting services, trusting that nothing would be as crucial to our long-term success as happy customers and merchants. We put our phone number on our printed Groupons and built a huge customer service operation, manned in part with members of Chicago’s improv community. We developed a sophisticated, multi-stage process to pick deals from high quality merchants with vigorously fact-checked editorial content. We built a dedicated merchant services team that works with our merchant partners to ensure satisfaction. And we have a completely open return policy, giving customers a refund if they ever feel like Groupon let them down. We do these things to make our customers and merchants happy, knowing that market success would be a side effect.
We believe that when once-great companies fall, they don’t lose to competitors, they lose to themselves-and that happens when they stop focusing on making people happy. As such, we do not intend to be reactive to competitors. We will watch them, but we won’t distract ourselves with decisions that aren’t designed primarily to make our customers and merchants happy.
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’re thinking about investing, hopefully it’s because, like me, you believe that Groupon is better positioned than any company in history to reshape local commerce. The speed of our growth reflects the enormous opportunity before us to create a more efficient local marketplace. As with any business in a 30-month-old industry, the path to success will have twists and turns, moments of brilliance and other moments of sheer stupidity. Knowing that this will at times be a bumpy ride, we thank you for considering joining us.