As Groupon files US$750m IPO, questions emerge over deficit

3 Jun 2011

Three-year-old social commerce leader Groupon is aiming to raise US$750m in an IPO. However, questions have emerged over how a company everyone believed was turning over US$1bn actually lost US$413m.

Groupon yesterday filed an S-1 with the Securities and Exchanges Commission for an IPO that will be underwritten by Morgan Stanley.

According to the S-1, Groupon had revenues in 2010 of US$713m and first-quarter 2011 revenues reached US$645m.

However, last year, Groupon racked up losses of US$413m.

The company, which started-up in Chicago, has more than 7,000 employees worldwide and last year spent US$241.5m on online-marketing initiatives.

That rate of spend on marketing seems to be accelerating, as the company spent US$179m on marketing so far this year.

Operating costs reached US$86m last year and so far this year appear to be slowing at US$17m.

The company grew at a rate of 2,241pc last year.

Groupon aggressively invests in growth

In a letter to investors, CEO and co-founder Andrew Mason explained why the company is aggressively investing 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,” Mason said.

John Kennedy is a journalist who served as editor of Silicon Republic for 17 years