Recently, there has been a slew of new technology-based company’s initial public offerings (IPO), including LinkedIn, Pandora and Zillow, among others. Like most IPOs at launch, they were all met with a degree of skepticism and some level of optimism.
Some, including LinkedIn’s IPO, met with huge initial success, seeing a huge boom in their stock price following their IPO. Companies like Pandora, on the other hand, haven’t been met with the same success that other IPOs have, seeing their stock prices already down significantly from their initial public offering level.
And as some of you may know, the ubiquitous group deal service Groupon just recently filed for and was granted their IPO. After initially closing up significantly higher than their IPO price in its first few days on the stock market, their stock price has since fallen down to their original IPO levels.
Still, although stock price isn’t necessarily indicative of future success (although it is supposed to reflect it), its fluctuating stock price aren’t the only aspects which point to potential failure.
Sketchy Accounting Practices
For one, Groupon has been heavily scrutinized for its often questionable and certainly sketching accounting habits. Certainly, it’s normal for all of their company’s accounting practices pre-IPO to be scrutinized in some way, but that Groupon has drawn so much attention throughout their IPO process, and even afterwards, particularly regarding their accounting practices, is something to criticize. After all, in 2010 when Groupon reported revenues of over $760 million, they later revised those numbers to admit that they had only earned just $320 million on the year.
The Founders Are Already Losing Interest
Then there’s the issue of the founders and what, precisely, they have been doing with the funding they have been receiving. Following a recent round of just over $1 billion in funding for the company, its directors, officers and stockholders took nearly all of that funding off of the table, leaving just $151 million left for the company. Certainly, a huge amount of money to stimulate growth, but a pittance of what they had received in funding. Sketchy? Absolutely. Yes, it’s normal for company founders and managers to take some of their money off the table in order to pay for personal expenses and such, but almost all of the money they had received from funding? Are the founders and managers concerned that their company’s plan won’t be viable in the long run?
Customer Acquisition Costs for Businesses
Finally, there’s the issue of costs, and whether or not Groupon’s business model is truly sustainable. In some scenarios, customer retention rates and the actual cost of doing the Groupon can be relatively inexpensive, and thus highly profitable for business. But in other scenarios, particularly in businesses dealing with less expensive goods in which having a few hundred customers nets only as much as a few customers to higher-yield businesses, it may take a long time, and many upon many return visits from those customers in order to recoup the cost of the Groupon.
Part of the problem is that Groupon already takes half of the final sale price of whatever the business is selling. So, for example, if your business sells a meal for two for $40, Groupon already takes a $20 cut. If that is 60% off of the normal price, the total cost for you is $80 for each Groupon sold.
And that simply hasn’t proven to be a very sustainable business model. Beyond that, Groupon has yet to prove that, as a company, it can actually make a profit. That, in combination with increased competition from other services, including Living Social, only seems to further suggest that Groupon is a sinking ship inhabited by extremely greedy ship captains.
But Groupon will fail not because the company is too big or because growth is too rapid, but because between their antiquated business models and questionable ownership and accounting methods, they don’t necessarily seem to have what it takes to maintain themselves as a huge corporation.
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