For Kevin Willer, chief executive of the Chicago Entrepreneurial Center, last week’s $700 million initial public offering for Groupon Inc. could be the start of something big.
“It’s a really big, big thing for Chicago, a watershed,” Willer said. “Until now, we haven’t had a massive tent-pole, something that can create a lot of wealth for investors in Chicago, who in turn can create more wealth.”
Take a look at the Groupon tent pole, though, and it’s unclear whether the company will be strong enough to support itself, much less bear the weight of a Chicago tech community always looking for that breakthrough success.
There are ample reasons for skepticism about Groupon, many of which got a good airing in the run-up to the IPO. That, after all, is how stock offerings work: Get all the caveats out of the way, and if there are still enough emptors out there, well, that’s how markets work.
Groupon’s $700 million stock sale came out at $20 a share, jumped to $25 and has hovered there since. This means there are plenty of investors who believe Groupon’s easy-to-copy business model can stand up to competitors like Google Offers or the Amazon-backed Living Social, not to mention the hundreds of locally oriented upstarts. They apparently were able to close their ears to the chatter from founders Andrew Mason and Eric Lefkofsky, whose positive outlooks in recent weeks ran afoul of Securities and Exchange Commission rules against hyping stocks.
These stalwart investors even can abide Groupon’s adventuresome accounting gimmicks. As it stands now, they’ll have to do without one fanciful Groupon measure that didn’t pass muster–adjusted consolidated segment operating income–which magically made the company’s massive marketing expenses disappear. But that’s OK, because Groupon last month provided investors with at least two new dazzlers: “Cumulative customers” counts every person who has ever bought a Groupon, and “cumulative repeat customers” tallies all those who ever have bought more than one.
Finally, an innovative company has cooked up a metric guaranteed to go up and up, and up. The cumulative-customer data doesn’t mean much, but it sure looks fine on a quarterly graph.
Weeks and months from now, most of these pre-IPO tempests will be behind Groupon. And if the company does a good job of marshaling the money it raised, then investors who ignored the naysayers may be glad they did. Chicago will have an Internet darling it can keep calling its own. Were that to happen, everyone would win.
It’s unfortunate, though, that in preparing Groupon for its IPO, founders Mason, Lefkosky and Brad Keywell made some of the decisions that did not serve the company well.
To be successful, Groupon will have to grow quickly, and in a drive for scale, every penny counts. Yet Groupon’s founders took googols of pennies out of the kitty even as the company desperately needed the money to rev up its growth. In two rounds of transactions—one in April 2010 and another that began in December that year—the founders and other insiders took $940 million out of the company they founded by selling stock back to it. Through these two sales, Groupon’s founders got back 84 percent of their investment—well before last week’s IPO.
Sam Hamadeh, chief executive of PrivCo, an investment firm that follows privately held companies, said he has never seen anything like it. Hamadeh combed through some 3,000 companies that have gone public since 2000 and found nothing close to the amount Groupon’s insiders received. Google’s founders, Larry Page and Sergey Brin, took no money before their IPO, he said. More recently, the founders of LinkedIn, the Internet darling that went public earlier this year, got back only about 5 percent of their investment before that company’s IPO.
People with an interest in Chicago’s tech community say the $940 million in payouts to Groupon’s founders will be a boon to Chicago’s nascent start-up scene. And Lefkosky and Keywell have proved the point by funding other ventures. But that doesn’t do Groupon any good, especially when most of the $700 million the company just raised already is spoken for.
Upwards of $50 million went to investment bankers, but that’s nothing compared to other bills coming due. As of the end of June, Groupon owed $392 million to merchants who ran Groupon deals—payments likely due within the next 30 to 90 days. The figure is more than double what it was at the end of last year.
Groupon spent $432 million on marketing in the first six months of this year, en route to a $254 million loss for the first six months. The company–which could not comment because an SEC-mandated quiet period is still in effect–reports it has a positive cash flow, and said in a filing that proceeds from the offering should last it at least 12 months. But facing demands from merchants and needing cash to grow the business, it’s no wonder Groupon is expected to conduct a second stock offering sometime early next year.
Regardless of how Groupon’s near-term future ultimately turns out, Willer of the Entrepreneurial Center thinks the company’s fast start—highlighted by the largest IPO since Google went public in 2004–will be good for Chicago. But there will be more work to do for Chicago’s tech boosters.
“If you’re going to create something in the long term, you shouldn’t just be talking about Groupon all the time,” Willer said.
On that last point, Willer should give himself and the Chicago tech community a break. With drama likely to surround Groupon as far as the eye can see, sometimes it’s hard to imagine talking about anything else.
by DAVID GREISING | Nov 9, 2011
For Kevin Willer, chief executive of the Chicago Entrepreneurial Center, last week’s $700 million initial public offering for Groupon Inc. could be the start of something big.
“It’s a really big, big thing for Chicago, a watershed,” Willer said. “Until now, we haven’t had a massive tent-pole, something that can create a lot of wealth for investors in Chicago, who in turn can create more wealth.”
Take a look at the Groupon tent pole, though, and it’s unclear whether the company will be strong enough to support itself, much less bear the weight of a Chicago tech community always looking for that breakthrough success.
There are ample reasons for skepticism about Groupon, many of which got a good airing in the run-up to the IPO. That, after all, is how stock offerings work: Get all the caveats out of the way, and if there are still enough emptors out there, well, that’s how markets work.
Groupon’s $700 million stock sale came out at $20 a share, jumped to $25 and has hovered there since. This means there are plenty of investors who believe Groupon’s easy-to-copy business model can stand up to competitors like Google Offers or the Amazon-backed Living Social, not to mention the hundreds of locally oriented upstarts. They apparently were able to close their ears to the chatter from founders Andrew Mason and Eric Lefkofsky, whose positive outlooks in recent weeks ran afoul of Securities and Exchange Commission rules against hyping stocks.
These stalwart investors even can abide Groupon’s adventuresome accounting gimmicks. As it stands now, they’ll have to do without one fanciful Groupon measure that didn’t pass muster–adjusted consolidated segment operating income–which magically made the company’s massive marketing expenses disappear. But that’s OK, because Groupon last month provided investors with at least two new dazzlers: “Cumulative customers” counts every person who has ever bought a Groupon, and “cumulative repeat customers” tallies all those who ever have bought more than one.
Finally, an innovative company has cooked up a metric guaranteed to go up and up, and up. The cumulative-customer data doesn’t mean much, but it sure looks fine on a quarterly graph.
Weeks and months from now, most of these pre-IPO tempests will be behind Groupon. And if the company does a good job of marshaling the money it raised, then investors who ignored the naysayers may be glad they did. Chicago will have an Internet darling it can keep calling its own. Were that to happen, everyone would win.
It’s unfortunate, though, that in preparing Groupon for its IPO, founders Mason, Lefkosky and Brad Keywell made some of the decisions that did not serve the company well.
To be successful, Groupon will have to grow quickly, and in a drive for scale, every penny counts. Yet Groupon’s founders took googols of pennies out of the kitty even as the company desperately needed the money to rev up its growth. In two rounds of transactions—one in April 2010 and another that began in December that year—the founders and other insiders took $940 million out of the company they founded by selling stock back to it. Through these two sales, Groupon’s founders got back 84 percent of their investment—well before last week’s IPO.
Sam Hamadeh, chief executive of PrivCo, an investment firm that follows privately held companies, said he has never seen anything like it. Hamadeh combed through some 3,000 companies that have gone public since 2000 and found nothing close to the amount Groupon’s insiders received. Google’s founders, Larry Page and Sergey Brin, took no money before their IPO, he said. More recently, the founders of LinkedIn, the Internet darling that went public earlier this year, got back only about 5 percent of their investment before that company’s IPO.
People with an interest in Chicago’s tech community say the $940 million in payouts to Groupon’s founders will be a boon to Chicago’s nascent start-up scene. And Lefkosky and Keywell have proved the point by funding other ventures. But that doesn’t do Groupon any good, especially when most of the $700 million the company just raised already is spoken for.
Upwards of $50 million went to investment bankers, but that’s nothing compared to other bills coming due. As of the end of June, Groupon owed $392 million to merchants who ran Groupon deals—payments likely due within the next 30 to 90 days. The figure is more than double what it was at the end of last year.
Groupon spent $432 million on marketing in the first six months of this year, en route to a $254 million loss for the first six months. The company–which could not comment because an SEC-mandated quiet period is still in effect–reports it has a positive cash flow, and said in a filing that proceeds from the offering should last it at least 12 months. But facing demands from merchants and needing cash to grow the business, it’s no wonder Groupon is expected to conduct a second stock offering sometime early next year.
Regardless of how Groupon’s near-term future ultimately turns out, Willer of the Entrepreneurial Center thinks the company’s fast start—highlighted by the largest IPO since Google went public in 2004–will be good for Chicago. But there will be more work to do for Chicago’s tech boosters.
“If you’re going to create something in the long term, you shouldn’t just be talking about Groupon all the time,” Willer said.
On that last point, Willer should give himself and the Chicago tech community a break. With drama likely to surround Groupon as far as the eye can see, sometimes it’s hard to imagine talking about anything else.