Hello everybody, Tom Ellsworth here, and welcome to case studies with the Biz Doc.
This week we're going to be talking about Groupon and digital coupons.
You know, when you look at technology, there's been so many ways that technology has made
life better for us.
And it's infiltrated and changed a bunch of legacy industries.
And those old paper coupons, they're still around, but coupons is one area where you
may have an app on your phone from Target, from Wal-Mart, you get your coupons that way,
but there still are places you can clip your coupons, but that used to be the only way
to do it.
And going back several years, remember you used to buy your Thursday paper because that
was when all the grocery coupons were in there.
I remember my mom did that, and people I knew that.
Heck, in college, I did that.
Oh, the Thursday's paper's here.
Let's cut the coupons out.
Then you'd go get stuff at the store.
Basic stuff.
Then there were also, remember Entertainment books?
Entertainment books were full of coupons.
You'd have people from the high school, like the high school football team or the cheerleaders
trying to sell you a coupon book for 15 bucks.
You'd tear the pages out for restaurants or groceries, whatever it was.
And finally, that gave way to digital coupons, because hey, everybody's got email.
And we can track and learn the kind of things you like and determine what coupons we send
you and when we send it.
And that was, the story of Groupon, a pioneer in the digital coupon era.
So the two points we're going to learn today is one, about business model.
You've got to know what you're doing, because replicating a flawed business model just means
if you're wrong, you lose money faster.
And if that's investor money, that's even worse.
The second point is, greed can be bad, especially when it's married to hubris.
Oh, hubris.
If any of you saw the Nokia case study, there's that word again.
Alright, so let's dive in.
And let's go to the beginning of the story of Groupon.
Groupon was founded by a guy named Andrew Mason.
And the company he founded turned into Groupon, but that's not what he started with.
He dropped out of school, because he had an interesting idea to fund a business for online
collective actions and collective fundraising.
And it was called the Point.
And he had a friend of his who was an investor who put between four and five million dollars
into this thing called The Point.
And they took a shot at it.
It failed.
And then, he took the money that was left over, and he founded Groupon.
And Groupon, as you might imagine, is a merge of the words, "group" and "coupon" or coupon
for groups.
And their first deal that they did, the daily deal where they would email it out to people,
believe it or not, was half-priced offers for pizzas that were delivered from the pizza
guy that operated on the first floor of their building in Chicago.
Well, that led to others and before you knew it, this thing was taking off.
And in no time whatsoever, digital coupons were in everybody's email box.
And it was a viral start, because people would share with their friends, "Hey, check this
out.
Go to Groupon and give them your email address and tell them what you like, and tell them
what city you're in."
And all of a sudden people started getting coupons.
Well, from the start, in Chicago, which is where it started, they expanded to other cities
and the traction was amazing.
And they were soon touting these stats that millions and millions of consumers emails
and that they had purchase history and they had all this stuff on their servers.
You know, that was eerily similar, you know, what we call vanity stats, bragging about
statistics that may or may not mean there's a business model there.
So there's an important lesson.
It's like people that say, "Oh, I have half a million Twitter followers."
You do?
When you send out a tweet, how many people respond?
And you'll find out that sometimes you may have a half a million total Twitter followers
going back since the dawn of your Twitter account, but they're not really active.
They're not really paying attention.
Well, it's the same case for Groupon.
Groupon's only going to work if people are active and paying attention and they do something
with the coupon.
Because the way it worked is Groupon made a deal with a merchant like a pizza place,
and if you used the coupon, Groupon got a piece of the action as the person that did
the email system and everything, and sent you the coupon that you used to buy the pizza.
And that's how they made their money.
That's how they got a cut.
The traction was crazy.
It was off the hook.
And, you know, they were just burning through money and blowing through new city after new
city, and just expanding.
A lot of money came into it, too, which was pretty amazing.
Check this out.
In December of 2009, you know, after 2008, they got off that crazy start.
Suddenly they raised $30 million in December of 2009.
It was called Series B, b, which is the second letter of the alphabet.
And people that are not familiar with venture capital financing, that was the second investment
they got.
Then, in April of 2010, remember, December of '09, $30 million, April of 2010, $135 million,
in April.
Then in December of 2010, Google says, you know what, that is a big pile of consumer
information.
I dig consumer information because I can do all kinds of things with it.
You know, Google, they're like the big, giant information mammoth.
And they knew what they were going to do.
They also thought there might be some money in those coupons, and they're like, hey, we
got a lot of data over here, maybe we can put all this together.
So they go to offer Groupon, before their second birthday, $6 billion, they offer for
Groupon before their second birthday.
Right?
$6 billion.
Let me ask you a question.
If somebody offers you $6 billion for anything, before your second birthday, you should say
yes.
Right?
You may remember there's an old classic movie Ghostbusters.
Not the new one that came out, but the original Ghostbusters.
There's this scene where they're up on the roof of this building and this demon from
the other world asks them, are you a god?
And the guy says, "No" and then he blows fire on them, they're almost blown off the side
of the building, and they almost die.
And then one guy says to his friend, the next time someone asks you if you're a god, you
say yes!
Well, the next time Google asks you if you want $6 billion, you say yes!
So Groupon's board turns down the $6 billion from Google.
Turns down $6 billion.
When I hear someone turns down $6 billion, I need a drink.
So they come back and they said, you know what we need to do?
We need to go public.
So they made plans to go public, and they announced that they were going to go public
on the U.S. Nasdaq stock market for a deal size of half a billion dollars that would
make the company valued about $11.2 billion.
So I suppose, okay, if you thought you could go public and the company be worth $11 billion,
maybe you don't sell to Google for $6 billion.
But still, as they will find out, it would have been far smarter to do that.
And we'll get to the reasons why.
So there were all kinds of questions; I mentioned those financials.
There were questions swirling around about their financials.
And about how they calculated these individual Groupon deals and what that meant.
They also were having trouble keeping some senior executives, which is very important
when you're going to go public on the stock market, because the stock market wants to
see a good CEO and a bunch of stable people running the company.
And if you can't hold on to your COOs, they keep leaving the company, they went through
I think two COOs the year they were trying to go public, that's kind of a red flag to
people, saying, "Whoa, what's going on?
This doesn't look like stability to me."
But nonetheless, they went forward.
Well some keen-eyed financial people started asking questions about the documents that
they had put out, with regard to going public.
And one of them, they actually came back and said, "We made a mistake.
We told you that we did $714 million in 2010 sales.
We actually only did $312 million."
How do you make a $400 million mistake?
Well, that sort of thing can end you up in court or in end you up in prison for securities
fraud.
But nonetheless, in response to the furor despite all these stories, there was still
a lot of people that wanted Groupon to go public, and a lot of people were going to
make money on that.
And so, they took the CEO, this young, hipster kid, Andrew Mason, they cleaned him up, made
him shave, and they put him in a suit and tie, doing what is now a very famous video
of talking about the IPO and going on the stock market for Groupon.
And so for the first time in his life, he's doing like a big adult presentation.
I don't know if it was the first time in his life, but everyone that saw it said, "Well
that's kind of weird.
That doesn't seem like the CEO I know."
But they were trying to clean up the image, clean up the mistake about misstating the
income and all of that.
And despite all of these negative things that were against it, on December 4, 2011, they
went public, and they didn't raise the $500 million they raised $700 million.
That's how much furor in the marketplace and the fury of the marketplace.
And I don't mean anger fury.
There was like a storm of investors that wanted in on this deal, despite all the things that
they had read.
So, the first day they go out, they're actually worth $12.7 billion, their very first day.
However, there's a problem.
Once you're public on the stock market, you have to go out and make quarterly earnings
reports.
And you're transparent.
And you, by law, have to make these reports and disclose certain things.
When they started doing that, guess what people started finding out?
They started finding out that sometimes consumers only bought one or two Groupons and then got
tired of Groupon being in their email, and thought it was spam, treated it as spam, and
unsubscribed.
Then there was retention of merchants.
Some of the merchants said, hey, Groupon's really picky about the deal it will do.
It won't do a two-for-one free pizza.
It will only do a deal on a large free pizza.
I'm kind of frustrated by this.
So some of the merchants, they had trouble retaining the merchants because they said,
you know, I'm done with this.
And also, you're just sending emails to a lot of customers that are already known, so
I love to do nice things for my customers, but now I'm just giving everybody that walks
in the door a deal.
And I want to step back from that a little bit.
So the merchants had issues with it.
Well, guess what?
Merchants have issues, customers have issues, Groupon is in the middle, just building the
market.
Emailing the customer to use his coupon, as Groupon, to go to the merchant.
And if you've got problems on both sides, and you're having issues with your financials
and people think that the way you're counting is a little weird, guess what happens to your
stock price?
In one year, since they went public, the stock lost 85% of its value.
85% in one year, from November of '11 to the end of 2012, lost 85% of its value and it
was only worth a little more than $2 billion.
Hear that again.
At the end of one year on the stock market, it was worth $2 billion.
Right?
There's a word for it.
A special technical word, when your stock drops 85% in one year, from your IPO.
And that word is DAMN!
Somebody's going to get fired.
Well, guess what?
In March of the following year, one year and four months after they went public, the board
fired Andrew Mason, the kid who had built Groupon, the kid who had been a little sketchy
with his finances, the kid that couldn't hold the senior executives, the kid that had retention
problems with merchants, the kid that had.
. . yeah.
There was a list of reasons.
And it probably wasn't a long meeting.
It was basically, Andrew, we're done here, see you later.
And that was that.
So, after he was fired, the stock went up a little bit, and they had a new management
team, and Groupon is still out there right now, trying to make a go of it.
And actually, they're doing okay, and they're profitable, but it's a whole different business,
and it's worth barely $2 billion now, and a lot of people think back to that day when
Groupon had a knock at the door and it was Google, offering them $6 billion.
They look back to that day and say, "Why didn't we take it?"
$6 billion when we were barely two years old, ugh, what were we smoking?
You know, maybe that was the problem.
Maybe you were smoking.
Who knows?
But there's something we want to talk about.
And that is that the business model.
See, Groupon is probably a bad example, or an example of a bad player in the digital
coupon market.
But the digital coupon market didn't turn out the way everybody thought it would, because
people didn't really assess the business model of digital coupons.
For instance, a business model is, you get my mom to use coupons over and over again,
and she's a regular customer using coupons.
And there's vendors and stores and things that are regular vendors.
And it creates a recurring economy.
Well, a lot of this was people would try and die.
Or a merchant would try and die.
I hope that makes sense.
You see what I'm saying, try and die, come and go.
Well, now you're just constantly trying to find new customers, working yourself to the
bone.
It's a very interesting thing.
Back in 2010, when Groupon was all the buzz was coming up, there was a little company
in Seattle called LivingSocial.
They were also doing daily deals.
Well, LivingSocial, Amazon invested $175 million in LivingSocial in 2010.
And then, in the third quarter of 2012, when all the fun was happening with Groupon, Amazon
wrote off $169 million of that investment.
So big companies sometimes buy companies and write it off.
I think you may have remembered in the Nokia case study how Microsoft wrote off billions
of dollars from its purchase of Nokia.
Well, here's another example, except Amazon's a little smarter.
Number one, they spent less going in, and number two, when it was time to give up, they
gave up.
And when the king of online sales, Amazon, can't get jacked up about it, and starts writing
it off and backing off, you know there's maybe more of a problem than a company's involvement.
Maybe it's just the digital couponing was never going to be the big crazy thing of the
future that everybody thought.
So guess what?
It was the business model.
And it was studying the business model and being honest about what would get merchants
to stay in the game, what would get consumers to stay in the game, and the very end of the
story is a shocking one.
In October of 2015, Amazon exited daily deals completely, and said that the Amazon local
daily deal and LivingSocial, they were done with it, and they laid off some staff and
said, hey, this is not a space that's working out, and there's nothing here.
Then, this year, Groupon's new management bought what was left of LivingSocial.
I never saw a price announced.
Maybe I missed it somewhere, but to me it was more like kind of Groupon buying a dying
dog.
They bought LivingSocial from down the street, and so now the two players in digital coupons
are under one roof.
Groupon is profitable, but worth maybe 1/3 of what it was when Google came to the door,
and maybe 1/6 of what it was when it went public.
So there's something to think about in this case study and that is business model.
And you can see a lot of companies got jacked up about digital coupons and a lot of money
was invested, and a lot of people went crazy, and then a lot of money was lost, and then
there was also the CEO that had his own issues, and misstating financial reports and things
like that.
That was a lot of things, and if you want to read all about the Groupon story, go over
to Business Insider one day and pull their little eBook on Groupon.
It's free, and you can read the whole long story and all the gossip.
But beyond the gossip, this is a lesson in business model, and that you should spend
a lot of time on business model, and make sure that an early yes you may see in the
market, whether it's vanity stats or it's a real honest-to-good market, and there's
a real business model to be had.
And, I'll recommend a book.
One of my favorite books is this one, Business Model Generation.
And it was written by Alexander Osterwalder.
I always look at his name; I'm always scared I'm going to mispronounce it.
But you can find this and go give it a read, because this is inexpensive insurance, and
it's one of the things that could help you make a great business model.
It's probably good practice as an entrepreneur to read books like this and be up to speed
on what great business models are all about.
Because what you don't want to be, is a bad business model that's nothing more than buzz
on day one, that turns into a train wreck later on.
Because whether you're Groupon or Amazon, you could find yourself in a space that just
doesn't take off.
And so, that's the story of Groupon, that's it for today.
And, of course, as we say every week, please subscribe to Valuetainment, and this is where
you're going to find the best content on the Internet for entrepreneurs.
And until next time, I'm Tom Ellsworth, and I hope that I left you, better than I found
you.