Groupon files for IPO

Daily deals site Groupon has filed for an initial public offering, hoping to capitalise on the biggest investor stampede into web start-ups since the dotcom bubble burst a decade ago.

The company filed yesterday to raise up to $750 million in its IPO, an offering that has been speculated about for months and that will be watched as a barometer of whether Internet valuations have become too rich.

In April, a source told Reuters that Groupon could raise as much as $1 billion in an IPO that could value it at $15 billion to $20 billion.

Yesterday's filing did not specify the number of shares to be sold in the IPO, the price range, or the exchange, though it did say the shares would trade under the symbol "GRPN." It also said the $750 million figure is preliminary and may change.

Other Web companies including LinkedIn Corp and China's Renren Inc have had strong IPO premieres, and anticipation is building toward a fever pitch for potential offerings by Facebook and Twitter. Pandora, a Web radio company, raised its IPO size to up to $141.6 million yesterday - 40 per cent more than estimates.

Some doubt whether the buzz surrounding the new Web generation is justified, warning that the hype is reminiscent of the atmosphere prior to the dotcom bust in 2001.

Groupon has also been called into question by critics who say its business - essentially a coupon service - can be easily replicated both by startups and existing web powerhouses. Google has already begun such a service.

At the All Things Digital conference Wednesday, Groupon chief executive Andrew Mason himself admitted he feared possible competition from businesses that "have some twist on the model we haven't thought of yet".

"I think investors will go for this one," said Ryan Jacob, chairman and chief investment officer of Jacob Funds, which includes the Jacob Internet Fund. "Whether or not it's worth the valuation it comes at is still an open question."

Groupon in the filing warned that it has incurred losses ever since its birth 2.5 years ago, that its technology may not be up to the task of handling demand, that expenses are bound to rise, and that the market may not continue to grow.

"As with any business in a 30-month-old industry, the path to success will have twists and turns, moments of brilliance and other moments of sheer stupidity," Mason, 30, said in a letter to potential stockholders that was attached to the filing.

Groupon backer Marc Andreessen, the Netscape co-founder who took part in a recent round of funding, waved off fears of an emerging tech bubble, citing historically low PE ratios.

Founded in November 2008 by Mason, a Northwestern University music major, Groupon offers discounts on everything from restaurant dining to sky-diving excursions. The "group" part of the name refers to the fact that many deals are activated only when a certain number of people sign up.

Groupon, which has 83.1 million subscribers and deals with nearly 57,000 local merchants in 43 countries, is backed by some of the top venture capital firms in Silicon Valley, including Andreessen Horowitz, Battery Ventures, Greylock Partners and Kleiner Perkins Caufield & Byers. T Rowe Price Group and Fidelity Investments also own a stake, among others.

At one point, Groupon caught the eye of Google, which approached the company with a $6 billion takeover offer in December but was rebuffed, a source told Reuters at the time. Today, Google, Facebook, LivingSocial and a clutch of other web companies are offering their own coupon programs. Moreover, Groupon noted in its filing it depends on existing partners and potential rivals like Google and Facebook to lure business.

"Groupon's had a lot of success in its early stages, but the model of group buying has limited barriers to entry and it's being replicated," said BCG Partners' Colin Gillis.

Groupon for now holds a clear lead over rivals such as LivingSocial, part-owned by online giant Amazon.com. LivingSocial has about 26 million subscribers.

Filing an IPO while ahead, along with demand for consumer tech companies, should help Groupon raise money.

"The IPO window has been closed so long there's a backlog of demand," said Ethan Kurzweil, a vice president at Bessemer Venture Partners, which backed LinkedIn.

But whether Groupon can turn its popularity into profit is another matter. The company takes a cut from merchants that provide the coupons: in the first three months of the year its revenue totaled $644.7 million. But it incurred a net loss in the period of $146.48 million as it spent heavily to expand, both by acquiring customers and by signing up merchants.

"The growth is astronomical and clearly a lot of the money they're making is being plowed right back in the company," said Jacobs. "The biggest concern is going to be: is this kind of growth sustainable with a lot of new entrants in the market?"

While Groupon enjoys the spotlight trained on social media companies such as Zynga, it needs resources others don't - a huge sales staff to enlist merchants and handle customer service.

Groupon disclosed in its filing that its staffing ballooned to more than 7,000 employees at the end of March from 37 in June 2009.

Morgan Stanley, Goldman Sachs and Credit Suisse will act as underwriters.

Reuters