10/27/2011 01:28 pm ET Updated Dec 27, 2011

Groupon, Did You Just 'Groupon' Yourself?

Groupon just offered a discount on ... its own stock. Its valuation, once soaring into the stratosphere at $20 billion -- even higher -- is now going cheap. The IPO may be well in the $11 billion range. That's half off, guys -- get it while you can! This daily deal ain't gonna last too long!

For its early private investors, it's a great investment. Accel Partners and New Enterprise Associates invested at a $250 million valuation. A return of 40 times in a little over two years is not too shabby at all. Its later investors, Battery Ventures and Digital Sky Technologies, who invested anywhere from $1.4 billion to $4.7 billion valuations could end up with 2 to 6 times the returns in about two years. No complaints there!

Let's look at this daily deal closely. The company's S1 filings start with a letter from the founder, Andrew Mason, who tries hard to take a Google/Warren Buffet-like approach to public offering communications. "Life is too short to be a boring company," he says. As we delve deeper in the 256-page S1 filing, we find some interesting data points:

  1. "We don't measure ourselves in conventional ways." OK, agreed, but when you start talking about subscribers as opposed to customers, you remind me of those dot-com clicks. A subscriber is an average Joe, like me, who gets a deal email every day. Subscribers grew from 152,203 to 142.9 million in about two years. A great start, but subscribers are kinda like eyeballs or like the drive-by's, the window shoppers. The question is how many of these become customers. The percent of subscribers who purchased a Groupon are in the 20 percent range -- a lot of people signing up, but these are tire-kickers indeed. So please, save us the "subscriber" data points and focus on customers.
  2. "Fantastic financial growth." Dude, but what's up with those customers? A recent Wall Street Journal article describes Andrew Mason, Groupon's CEO, in a roadshow video, where the 30-year-old talks about the company being like a Cyborg with "fantastic financial growth." While Groupon's revenues increased to $1.1 billion in about 2 years, the way it calculates its customers is cumulative -- as in every customer that ever bought a Groupon since Jan. 1, 2009. And cumulative Groupons sold per customer are 4.2. My math is not very good, but does that means each customer buys a Groupon once every nine months? Maybe, if we get the Nordstrom deal again, these ratios would be better.
  3. "Our customers and merchants are all we care about." Really? Management has cashed out a substantial amount via redemption of shares prior to this offering, as have some early investors. I wonder what motivation anyone may have to continue to build the business. Let's look at the merchants, who are the true drivers of this business. About 60 percent of the business comes from restaurants, retail, and health and beauty. Merchants split as much as half of their revenue with Groupon. But what is the ROI for the merchants? How many new Groupon customers eventually came back to these merchants for the full price offering? But wait, that is not an unusual metric -- its plain ole boring ROI, so who cares? I also think Groupon enjoys the float at the expense of the small guy, but, again, why worry? (Float = collect the money upfront but pay the merchants after the Groupon has been redeemed, an amount that has grown to 465 million in two years).

So in a nutshell, you have fickle customers, who buy a Groupon once every six to nine months, and no way to track if merchants had a meaningful ROI. We can just move on to the next merchant, or the next town or the next country. Merchants in other parts of the world are eager to hear from this 3-year-old company. More than half of its 2011 revenues are from international operations.

What matters in any business in the long run is the substantial value it can create for its customers. Apple's customers rave about the company and beat a path to its door, again and again? Oh well, guess that sounds a bit old-fashioned to a 3-year-old!

The stock offering at $17 may be a steal and promises a nice bump. Alan Patricof, managing director of venture firm Greycroft Partners, recently remarked here that the Groupon roadshow may be a circus. And creating a $11 billion value in three years is no mean feat -- the company is the new darling of the Web 3.0 age.

But like most Groupons for a tanning salon, a promise to make my teeth whiter or food at a local joint that I never wanted to visit in the first place, I will pass on this great IPO once-in-a-lifetime deal.