Stephen Foley: Groupon float looks like another offer at a price that's too good to accept


US Outlook: It is indecent, the haste with which Groupon is coming to the public markets.

It is distasteful, the way its founding investors have already feasted upon the company. And it is absurd, the accounts it wants us all to examine. If this is the start of a new dot.com bubble, then God help us at the peak.

Groupon is 30 months old. It invented a brilliant new way for local merchants to advertise themselves by offering deeply discounted deals to its fast-growing number of email subscribers.

On the basis of 83.1 million people around the world having signed up to try it out, and 57,000 merchants so far this year seeing what it can do for their businesses, Groupon has built a worldwide staff of more than 7,000 and is seeking to sell a $750m slice of the company to public market investors.

It declares itself "better positioned than any company in history to reshape local commerce", and it had better live up to its hype. The crash, in terms of lost investment and lost jobs, will be horrible if it turns out that subscribers stop opening their Groupon emails, or merchants don't come back a second time, or the myriad rival services springing up drive down potential profits across this new industry.

Whichever way it turns out, the important thing to note about this flotation is that the founders and early investors have already got rich beyond their wildest dreams. Groupon has raised a total of $1.1bn in its short life, and used $942m of the proceeds to return cash to founding investors, led by the Chicago professor Eric Lefkofsky, who has made almost $400m, and to directors, including the 30-year-old founder Andrew Mason, who has cashed out $28m.

On top of this, Groupon has also paid dividends to the same early investors, to the tune of 18.3 per cent of revenues in 2009. This is highly unusual for a loss-making start-up. Groupon has hundreds of millions of dollars pouring through its doors, and its early investors have shown a determination to grab large portions of those, irrespective of whether these revenues can certainly and sustainably be turned into profits.

The other notable and unnerving thing about Groupon's flotation prospectus, filed with regulators in the US late on Thursday, is that the company insists on highlighting a ridiculous accounting line it calls adjusted consolidated segment operating income, which strips out practically all the costs of acquiring new subscribers, including acquisition costs and the expense of buying online ads. Investors must not ignore these vital and ongoing expenses, particularly since they will only go up as competition increases and Groupon has to fight for customers against the likes of Facebook, Google, local newspapers, specialist e-commerce sites like Travelzoo and Gilt, plus a burgeoning number of copycats.

The scale that Groupon has achieved in its short life is awesome, but we shouldn't confuse that scale for proof that the company's business model will still look viable in another 30 months.

Its prospectus, with its revelations and its exasperating accounting, has proven a dispiriting read. Surely public market investors – private individuals and the fund managers looking after our pensions – will balk at signing up to a $15bn or $25bn valuation for Groupon? Perhaps this one outrageous document will be enough to pop our new dot.com bubble before it really inflates. It seems too much to hope.

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