Up a Third: Groupon Rings Nasdaq

On Friday, Groupon went public, and the market gave the daily-deals company a reception that felt like a coronation. The shares priced at twenty dollars, above the already raised range, and the company raised about seven hundred million dollars on a valuation near twelve and a half billion. The first trade came in near twenty-eight dollars, and the stock closed its first day at twenty-six eleven, up about thirty percent. It was the biggest technology initial public offering since Google's debut in 2004, and the whole industry watched. This is the November 2011 story, and the story is the lesson: ...

Up a Third is the subject of this article: the day the daily-deals gold rush reached the stock market, and the questions that the celebration could not answer. The debut is the anchor, the model is the debate, and the lesson is about the distance between a company's story and its numbers.

1. The Ringing Bell

The Nasdaq opening was a spectacle, because Groupon had become the most talked-about company of the year. The shares priced at twenty dollars on Thursday evening, above the range the company had raised, a sign of demand that exceeded even the optimistic forecasts. The first trade on Friday morning came near twenty-eight dollars, a pop of roughly forty percent from the offering price, and the celebration was loud. The stock faded a little from that peak during the day, but the close at twenty-six eleven still counted as a triumph. The bankers called it a success. The market was calling it something else.

The numbers were the point. The offering was the biggest technology initial public offering since Google's in 2004, and the comparison was repeated in every headline. Google had gone public at a moment when the internet was still proving itself; Groupon went public at a moment when the internet was the economy. The daily-deals company was unprofitable, barely a few years old, and now worth more than established retailers. The bankers explained the math with growth curves and market sizes. The skeptics explained the math with marketing budgets and coupon fatigue. The bell rang, and both arguments were now public.

2. The Company

Groupon was the creation of Andrew Mason, a Chicago entrepreneur who had built the company out of the failure of an earlier idea called The Point. The Point was a platform for collective action, a place where people could organize around causes, and it did not work. The company launched in 2008, and the model was simple. A local business offers a steep discount, Groupon takes a cut, and the subscribers get a coupon for a restaurant, a spa, or a painting class. The merchant gets customers it would never have reached, and the company gets a slice of every sale.

The simplicity was the genius, and the genius was the problem. The model was easy to copy, and copying was already happening. But the early Groupon had something the clones lacked: the mailing list, the voice, and the pace. The deals were written with a wit that became a brand, and the daily rhythm trained millions of people to check their inboxes. By 2011 the company operated in hundreds of cities around the world, signed up tens of thousands of merchants, and was described in the press as the fastest-growing company in internet history. The growth was real. The question was what it cost.

3. The Rocket

The growth numbers were staggering, and the company put them at the center of its pitch. Revenue was on pace for about one and a half billion dollars for 2011, a figure that had seemed impossible for a four-year-old company, and the growth curve pointed straight up. The company added cities the way other companies added employees, and it entered country after country with the same playbook: hire a local team, sign up merchants, flood the inboxes. The daily deals became a habit, and the habit became a business. The merchants came back, because the crowds came back, and the crowds came back because the discounts were real.

The costs were the other side of the rocket. Groupon spent heavily on marketing to buy the subscribers that made the deals attractive, and the spending grew with the revenue. The company was losing money on every quarter, and the losses were growing too. The classic startup story had been inverted: the product was profitable at the margin, but the acquisition of customers ate the profits, and then some. The skeptics argued that the spending was a treadmill, that the moment the marketing slowed, the growth would slow with it. The IPO would give the company the cash to keep running.

4. The Google Offer

In late 2010, Google had offered roughly six billion dollars to buy Groupon, and the founders had said no. The offer was the largest ever made for a consumer internet company that had not yet gone public, and the refusal was the boldest bet in the industry. Mason and his investors believed the company was worth more, and they chose to build it instead of selling it. The decision became the founding myth of the daily-deals business: the company that turned down six billion dollars to keep growing. The myth was repeated in the IPO roadshow, and it worked on the investors.

The rejection said something about the moment. The technology market in 2010 and 2011 was awash in cash, and the big platforms were buying growth wherever they found it. Google wanted the local advertising business that Groupon had invented, and it was willing to pay a price that would have made the founders rich overnight. They bet on themselves instead, and the bet looked brilliant on Friday morning. The company was now worth more than twice the offer it had refused, at least on paper. The market was paying for that confidence, and the market would eventually ask for the profits.

5. The Gold Rush

Groupon had not invented the discount, but it had invented the format, and the format had spawned an industry. LivingSocial, backed by Amazon, was the largest rival, and it was growing in the same cities with the same playbook. Hundreds of clones appeared around the world, many of them indistinguishable from the original, and the daily deals became a category overnight. The merchants who had once been courted by one company were now courted by a dozen, and the cost of acquiring a merchant rose as the clones competed for the same restaurant owners. The category was young, and the competition was already brutal.

The gold rush had the shape of every gold rush: early claims were rich, and the late arrivals fought for the scraps. The big money flowed to the leaders, and the leaders spent it on scale, and the scale made the barriers to entry higher for everyone else. The daily deals were a local business dressed as a global one, and the local economics were unforgiving. Each city had to be profitable on its own, and each city was a separate war. The IPO proved that the capital markets believed in the category. The cities would prove whether the category believed in itself.

6. The Money Question

The debate around the offering was not about growth. Everyone agreed the growth was real. The debate was about the quality of the earnings, and the company's own numbers made the debate unavoidable. Groupon used a measure called adjusted consolidated segment operating income, ACSOI, which excluded the marketing costs that were the company's biggest expense. The acronym became the symbol of the offering, and the Securities and Exchange Commission had questioned the metric during the filing process. The company defended the measure as a way to show the underlying economics. The critics called it an attempt to make losses look like profits.

The merchant complaints added to the doubt. The steep discounts that made the deals irresistible also made them expensive for the merchants, and the stories of restaurants overwhelmed by crowds of coupon holders were everywhere. The model worked best for first-time customers, and the repeat business was the question that no one could answer. The company was spending to acquire subscribers, spending to acquire merchants, and arguing that both would eventually pay off. The math was possible, and the math was also unproven. The market priced the stock for the possible. The quarter would price it for the proven.

7. The Wave

The offering was the second big test of the social internet wave, and the first test had been spectacular. LinkedIn had gone public in May and closed its first day up more than one hundred percent, a pop that made the word froth part of the daily vocabulary. The wave carried everything, and the wave was now carrying Groupon. The social companies had the users, the growth, and the attention, and the stock market was paying a premium for all three. The pattern was the same in every pitch: the revenue curve, the engagement numbers, the network effects, the future.

The froth worried the veterans, and the veterans were not shy. The internet bubble of the late nineties had ended badly, and the lessons were still fresh: revenue without profits, valuation without discipline, and the market's willingness to believe in the next big thing. The social wave had a different shape, the defenders said, because the revenue was real and the users were paying. The skeptics said the shape was the same, just bigger and faster. The IPO of Groupon was the wave at its loudest, and the loudest point of a wave is also the point where the water runs shallow. The lesson was coming.

8. The Lesson

The lesson of the IPO week is that a debut is a moment, not a verdict. Groupon raised the money it wanted, the founders and the early investors took their profits, and the company got the capital to keep chasing the growth. None of that was a mirage. The mirage was the belief that the first day's close answered the questions the offering had raised. The company still had to prove that the merchants came back, that the subscribers paid for themselves, and that the marketing treadmill could slow without the growth stopping. The stock market had priced a story. The quarters ahead would price the reality.

Groupon's story was the fastest growth in internet history, the rejected six billion dollar offer, and the daily ritual of the deal. The story was true, and the story was also incomplete. The numbers that were not in the story, the losses, the complaints, the metric that hid the marketing spend, were the numbers that would write the next chapter. The market that celebrated the debut was the same market that would punish the first miss. Up a Third is the November 2011 story, and the story is the lesson: the bell rings once, and the ledger keeps score forever.

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