Groupon is not a Bubble Make

Last Friday, I noticed a tweet from my friend Aziz Gilani (@texasvc) at DFJ Mercury:

“When asked questions by the audience, john doerr just filed groupon under ‘bubble’. The crowd roared! @rbpc2011″

Normally, the half-life of tweets are about 5 minutes for me (if that), but this one stuck in my head all weekend because it is wrong on a few levels.

First, I don’t think Groupon is a bubble, or indicative of a bubble. While I don’t have a ton of inside knowledge, from what I do know they are creating substantial profits at the company. I guess you could file Groupon next to Facebook, Twitter or Zynga if you are that cynical, but in each of these cases, there are real businesses here. What are reasonable valuations for these entities? No clue, I’m an early-stage investor, but profit is profit. And I don’t think any of these markets are fads.

Whether or not any of these companies are long-term successes, I don’t know (my guess is they will be), but these don’t look like bubble companies that I’ve seen in the past.

I think the term bubble referred to the Dot Com blowup a decade ago. Many of these bubble companies had no viable business models and were acquired or taken public due to hype. Many of these companies had negative margins for every good they sold. I’m sorry, but volume doesn’t help you here. (Note to self: shipping kitty litter is expensive).

And why be a hater Mr. Doerr or audience? In the case of Mr. Doerr, he is one of the most prolific investors of our time, so I’m not sure why he has to be negative. As momma used to say….

As for the audience, I’m not sure if this reaction was spurred by jealousy, or some desire to see the VC ecosystem do poorly, but all of us in the startup community should be rooting for our industry, whether or not we invested in these companies or not.

I wasn’t at the event, so perhaps I’m taking too much issue from a third-hand report in 140 characters or less, but this just hit me the wrong way.

  • John opened at Rice by asking the audience to throw questions at him, which he filed under different headers on a projector. One of the first questions someone asked was if we were in a bubble. Later, when someone asked him about Groupon, he filed it with it under the ‘bubble’ question. FWIW, by the time he got to bubble/Groupon question, he gave a pretty level-headed analysis of the company. He asked the audience not to tweet the details of his answer when he gave it, so I never followed up on the original tweet. Rest assured though, John seems pretty happy with his investment in Groupon. I would be!nnWe need to get you down to Rice next year! Hope to see you on April 12, 2012!

    • Anonymous

      I would like to come visit, yes. Thanks for the comment

  • If Groupon really IPO’s at a $25 billion valuation, I’d say that’s pretty far from intrinsic value. $800million in revenue last year puts that revenue multiple at 31x which is a ton for a business without much of an economic moat. But they have an awesome business and are running a great operation, so agree that this is a far cry from last bubble.

    • Anonymous

      I have no idea what “intrinsic value” is but I am sure that we don’t knowrnthe real numbers or growth curves, so while cautious, I don’t know if I havernan opinion here.

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  • Emmet

    I would be curious to know your take on Groupon now that more information is out regarding their numbers.u00a0 Do you still think they are creating substantial profits?u00a0 I don’t think we should be taking “Adjusted CSOI” very seriously.u00a0 Anytime a company invents a metric for us to judge them by I’d be wary.u00a0 Also, a company where the owners have taken SOOO much money off the table is cause for concern.u00a0 So, what do you think about Groupon now?u00a0 Do you still maintain your opinion that they are a legit business?u00a0 Can they last without a serious pivot?u00a0 Cheers,nnEmmet

    • Anonymous

      I, too, was surprised with their made up accounting terms. I still hold outrnsome skepticism regarding the accounting (in general) as one never reallyrnknows how deferred revenue really works these day with crazy revenuernrecognition rules, but your point is well taken. I don’t know what theirrn”pivot” would be as they’ve already made their bed, so to speak

  • While I do not operate with a massive data set, I do believe GroupOn operates in a unique environment: 1) Many small businesses are desperate for customers in this economic environment and a large percentage of them will try anything to drive revenue, 2) GroupOn has grown so fast and received so much major media coverage that most small business owners perceive the concept as a runaway success, 3) a fair percentage of small business owners are willing to try this concept once, maybe twice, until they realize that the customer retention is not there. How long will this environment support this model? That I do not know.

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