A lot has been said about Groupon in the last 18 months. While I have my own thoughts, it just so happens that this weekend I read two great articles that do a better job of explaining Groupon than I ever could. To be clear, I am not going to bash Groupon, what I do think is important is exploring the underlying question of what Groupon is worth in terms of enterprise value.
The two articles I am talking about can be found here:
Groupon is not a tech company. Why was it valued like one?
Musings on Markets: Groupon Gloom: Deal of the day or Death Spiral?
Both articles focus on this subject of valuation. The Damodaran valuation is an in-depth valuation exercise with clearly explained rationale and hard numbers (spoiler alert - Damodaran has done the valuation part for you if you want to know what the company is worth). The GIGAOM piece focuses on one simple, but incredibly important question which is what type of business Groupon is in. This is the part that gets interesting.
I don't want to rehash the articles (you should definitely read them) but it really is crazy that people think Groupon is a tech company. That is nonsense and always has been. Groupon acquires customers and collects payments via the internet and that is about it. Sure they have "algorithms" and "targeting", but the underlying reality is that without thousands of sales people cold calling every day, there would be no business. Groupon is a call center company.
There is no scale effect to their economics in the way there is with a true tech company so people should stop assuming rapid expansion of margins that economies of scale should create. Groupons grows by hiring more people to dial for listings. They may eventually find a way to sell more stuff to the small businesses they target, or pivot away and become a tech company, but they aren't today and their valuation should reflect that.