This week, Groupon’s stock dipped to $3.78 a share, less than 1/5th of its IPO price of $20 (and less than 1/7th its IPO-day peak of $30). Most entrepreneurs are desperate just to find a product with an eager base of prospective buyers. Groupon, it seems, found that product years ago, and its founder, Andrew Mason, and other stakeholders were so utterly confident of the strength and breadth of its appeal that, rather than growing organically, re-investing the ample revenue they were generating into development and expansion, they took on round after round of venture funding to expand faster than that course would have allowed. Now, many merchants are questioning whether Groupon delivers enough value to justify its cost, and many experts are predicting imminent bankruptcy for the company 1. With this the present condition, I want to consider what Groupon’s trajectory could have been if the company had taken a different tack with respect to development and expansion.
Discovering a Market
In late 2008, Andrew Mason was running a company called ThePoint.com out of a Chicago office building. ThePoint is, astonishingly, still live (you can check it out here) and the website still lists Mason as CEO, but it looks as if the newest postings are several years old and I suspect nobody is using the product. ThePoint was a sort of Kickstarter for social causes. People could create pages outlining causes, along with a number of people and/or a financial commitment (a “tipping point” — the site’s namesake) that would be required to move forward with it. On a whim, the company decided to try and apply the same concept of a commitment-threshold to more ordinary commerce, and offered a 2-for-1 pizza coupon for a bar downstairs from the office on a slapped-together WordPress site. Like ThePoint’s campaigns, the coupon would only be disbursed if some set number of people agreed to pre-purchase it. The campaign was a moderate enough success (20 commitments) that Mason decided to turn the group-buying coupon concept site into a bona fide product and marketed it, with strong uptake, to local Chicago merchants.
Putting the Company on Steroids
Groupon took a $4.8m series A round of financing in 2008, and $30m series B in 2009. By the point of its IPO in late 2011, Groupon had raised more than $1.1b, an astonishing amount of funding for a web startup. Mason used this money to expand the company to 10,000 employees and more than 100 local markets.
A Dubious Business Model
Groupon’s typical arrangement with merchants is a 50% cut of coupons sold plus a 2.5% fee for credit card processing. Anecdotally, merchants who negotiate hard can bring Groupon’s cut down to 40%. What this means is that for most merchants to just break even on their deal, they must have a margin of at least 75% on the product that they are offering. Groupon justifies this math in part by telling merchants that a high percentage of people who purchase and redeem their coupons return to do more business. Personal accounts contesting this claim, though, have become a sort of subgenre of tech journalism 2. Groupon needs its margin to support its massive size. One must wonder if things could have been different.
What Could Have Been
What if Groupon didn’t have sufficient access or initiative to raise round after round of venture funding? What if Groupon had bootstrapped itself entirely from 2-for-1 pizza coupons to a bona fide product with a huge customer base? Would this even have been possible?
The most troubling part about Groupon’s course to its present, precarious condition to me as an entrepreneur is that Mason undeniably found product-market fit with the site. He’d built a product that people were stumbling over themselves to buy. Where things went off tracks was in remaining sensitive and responsive to the interests of merchants, and this shortcoming seems to be a consequence of Groupon’s overpowering need to bring in cash to support a ballooning head-count and to satisfy pressure from stakeholders who needed to see it become a multi-billion dollar company to make good on the hundreds of millions of dollars they’d pumped in.
One wonders if Groupon could have burdened itself with fewer external obligations and served the interests of its customers better. Selling 1000 coupons a day, as the site managed to do regularly in its early days, at $30-per in just a single local market would have meant a steady $15,000/day, which would have been more than enough to support a small staff and grow organically. More significant, though, if the company had remained clear of investor obligation and pressure, it could have conceivably reduced its fees and increased merchant value. If the company took just a 25% cut on offers in the above circumstance, it could have been bringing in $7,500 per-market, per-day (and $30 is a relatively cheap Groupon, so plausibly much greater revenue for more expensive offers). Expanding to more markets could have linearly increased this generous revenue, and it’s perfectly conceivable that the company could have bootstrapped its way to $50m or more in annual revenue in a reasonably short time, with no external obligations or pressure, a more sustainable structure, and a product of greater value to small businesses. Instead, it seems Groupon has made an otherwise sustainable business unsustainable, and turned a product that could have been a boon to small businesses into a raw deal.