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June 11, 2012

New bet with Felix Salmon of Reuters

Filed under: Uncategorized — Rakesh Agrawal @ 8:10 pm

I have a new bet with Felix Salmon of Reuters tied to an exit for Square.

I win the bet if:

  • Square is acquired on or before December 31, 2012 by anyone other than PayPal.

Felix wins the bet if:

  • Square is not acquired on or before December 31, 2012.
  • Square is acquired by PayPal.

Stakes: Dinner next time we are in the same city at a place of the winner’s choosing.

“Acquired” means that an agreement has been announced by. The transaction need not have closed.

The outcome of this bet does not cancel out our previous bet related to Groupon and Priceline. (One that I’m currently winning.)

Any disputes will be settled by Naveen Selvadurai.

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June 8, 2012

Would Rocky Agrawal ever work for Groupon?

Filed under: daily deals, groupon — Rakesh Agrawal @ 1:00 pm

This post is an excerpt from a forthcoming book on Groupon.

It’s a question I’m asked quite often by friends, family, journalists and once by a Groupon employee.

Apparently, it’s plausible that I would. When I posted on April Fool’s Day that I was joining Groupon (a day after a scathing analysis of Groupon’s earnings restatement), quite a few people believed it. I had several reporters contact me to ask me for interviews on my new job.

What made it believable is that most of the post was actually true. Aside from the part about, um, actually joining Groupon:

  • I’ve spent my entire career in product management and business development. It’s my true passion.
  • I’ve also spent much of my career on local products.

My initial and ongoing motivation for writing about Groupon and LivingSocial (and increasingly, Yelp), is to help small businesses make better decisions. By analyzing these business models, I hoped that SMBs who do even the most basic due diligence could find resources that would help them make a better informed decision on how to spend their hard-earned dollars.

I was chatting with a VC the other day about how wave after wave of local sites have raped small businesses, promising internet magic but delivering dubious value.

As I’ve said repeatedly, Groupon is not always a terrible thing for merchants. There are some cases when it makes sense. (Yelp, on the other hand, is always a bad buy.) Some of Groupon’s newer products actually make sense for small businesses.

One thing that I’ve heard from several sources is that Andrew Mason actually cares about small businesses. When he hears that a deal has gone bad or that a business lost a lot of money on a Groupon, he pulls out the checkbook and tries to make it right. Not in the “please don’t sue us and run to the press” way, but because he genuinely wants to make it right. Even Jessie Burke of Posie’s Cafe told me this. (To date, the company has not allowed me to speak with Andrew Mason, so I can’t offer a personal assessment.)

Over the last year, I’ve been approached by a number of companies that are looking to tackle the local space, from startups to the giant internet companies, about joining their teams to help small businesses. If I thought a company had a credible plan for helping small businesses really use the power and efficiency of the Internet, I would consider joining them.

Even if that company were Groupon. I look toward the future, not the past.

But I would have to believe that Groupon genuinely wanted my input and I would have a role where I could drive products in a way that would work for small businesses. If it was just about silencing a vocal critic, that wouldn’t be interesting.

Joining Groupon would obviously carry a lot of brand risk for me. Based on my April Fool’s Day joke, I know how a lot of people would feel about it. Many were puzzled, some called me a traitor and many offered their congratulations.

My friend Dave wrote on my Facebook wall:

Congratulations but I have to say I’m a bit disappointed. Here’s why, businesses that build their empires based on questionable/unethical business practices that ruin other businesses (especially small and local) should not be rewarded later for changing their practices after they’ve been exposed. I’d rather they go belly up but short of that, I hope you can help them stop ruining SMBs.

My friend Walt wrote:

Wow! Rocky life is full of surprises – this is a big one! The are very fortunate to have you!

And J.T. wrote:

I recall a lot of us thinking that their best move would be to hire you when last we met.

June 1, 2012

Groupon investors race for the exits as lockup ends

Filed under: daily deals, groupon — Rakesh Agrawal @ 2:12 pm

Groupon shares dropped to a new all-time low today as its lockup ended, releasing a torrent of new shares on to the market. Thirty minutes into the trading session, Groupon had already traded 75% of its average daily trading volume. This was Groupon’s third highest volume trading day. (Disclosure: I have various puts against Groupon.)

Groupon filed to go public a year ago tomorrow. Back then the New York Times estimated a $30 billion valuation for the company; today’s closing value was $6.3 billion. That’s about 80% off. It’s just barely higher than the $6 billion that Google reportedly offered for the company last year.

Public market investors have lost a Groupton on the stock, which is down 52% from its offering price and 63% from its first-day close.

Early insiders are still fine, of course. Groupon co-founder Eric Lefkofsky and his affiliated entities took nearly $400 million off the table well before the IPO. Even those who got in the last round of financing, such as Fidelity, T. Rowe Price and Andreesen Horowitz are up, at least for now. Those shares were purchased for approximately $7.90, split adjusted. At today’s close, that’s a 23% return.

For locked up shareholders, the timing of the lockup’s end couldn’t have been worse. It came shortly after Facebook’s IPO and on a day with bad macroeconomic news.

What’s ahead for Groupon

I have been following the company closely since the S-1 was filed; I’ve predicted that without substantial changes to its core business model, Groupon stock is going to zero.

The company is trying hard to diversify beyond its core daily deals business with forays into loyalty, travel, liquidation of unwanted merchandise, instant deals and, most recently, payments.

Groupon Now, once touted at what Groupon would have been from the beginning, has been an unmitigated failure. Although the company likes to say that Groupon Now sold 1.5 million Groupon vouchers, that’s roughly 1% of Groupons sold last year and likely a smaller portion of revenue. “In just one year Groupon Now! has hit a milestone that took the original Groupon deal platform 15 months to accomplish,” Dan Roarty, VP of Groupon Now! said in a press release. But once you reach a certain notability and are a multibillion dollar company, your success has to come much, much faster.  Tom Cruise took 18 years to make his first movie. If it took him another 16 years to make the second one, that would be a failure.

To be fair, Groupon’s other businesses don’t have the structural problems that Groupon’s daily deals product has. They aren’t toxic for merchants. But they also aren’t gigantic profitable businesses. Here is my quick handicapping of the new product lines:

  • Getaways – Highly competitive business, with margins in the 20-30% range (vs. 40-60% in the daily deals business). The quality of Groupon’s offerings have been lackluster. I had my own terrible experience with Groupon Getaways.
  • Goods – Margin competitive business. Groupon doesn’t have the logistics capabilities of Amazon or the ad distribution power of Google.
  • Now! – Low volume, forces a change in consumer and merchant behavior. LivingSocial abandoned its product in the space.
  • Rewards – Trying to change consumer and merchant behavior too much. Structural flaws in the product.
  • Payments – This is a potential opportunity for Groupon, but is incredibly competitive. Not only is Groupon comepting with Square, PayPal and Verifone, there are hundreds of independent sales organizations that target this space. Groupon would have to tremendous volume to succeed in this space at the prices they’ve put forth.

With the exception of Goods, I don’t see any of these businesses being material to Groupon’s revenues in the next 12 to 18 months.

At a town hall meeting with employees, Groupon’s Andrew Mason reportedly said, “We’re still this toddler in a grown man’s body in many ways.”

And like a toddler, Groupon is sticking its hands everywhere; it has no idea what it wants to be when it grows up. Here’s a partial list of the companies and brands that Groupon is trying to compete with: LivingSocial, Amazon, Google, Expedia, Priceline, Hotwire, PayPal, Square, Verifone, American Express, Visa, MasterCard, Fab, Woot, Facebook, OpenTable, Mindbody Online, Envision Salon, First Data, Costco, every newspaper, every Yellow Pages.

Groupon’s investors were counting on the kind of stratospheric growth that the company was experiencing before its IPO to propel its stock price. So far, the trajectory has all been downward.

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