10 HUGE Questions Raised By Groupon's IPO Filing

1. What is Groupon's REAL long-term competitive advantage?

This is really the most important question any potential Groupon investor ought to ask

themselves. Any potential investor in any company, really, but particularly an unprofitable, high-growth, risky company in a brand new market.

What is, in one sentence, your long-term competitive advantage? What is your "moat" in Warren Buffett's expression? What is the thing that is unique to Groupon and that is going to ensure its long-term success?

Is it first-mover advantage?

Is it scale?

Is it your brand?

Is it excellent execution?

It can be any of these or a combination of them, or something else entirely. But there needs to be a really good answer to that question.

2. Why are people not buying groupons anymore?

As Yipit's David Sinsky notes,

As Yipit's David Sinsky notes, Groupon's business seems to be declining in its bigger markets. The big reason is that people are just buying less and less groupons.

If people stop buying your product, that sounds like something your investors ought to know about.

So, why is that? The novelty wearing off? Competition? The crappy economy? Wizards?

3. How is the international business faring?

Image: Asthma Helper via Flickr

The filing doesn't really give any details on the international business, except its relative size and two short "case studies" on London and Berlin. We've heard that Groupon's international operations are in something of a disarray. Given that they're a huge part of the business, we ought to hear more about them.

4. What's the repeat rate for merchants?

Image: Flickr Guy Schmidt

One of Groupon's comparative advantage is that it has a database of thousands of small merchants who have used Groupon. However, that advantage is only worth much if those merchants want to run groupons again. Do they? If so, at what rate? Groupon has said in the past that 1500% 90 to 98% of merchants are happy with their experience. Yet we haven't seen that in the filing. What gives?

Image: Courtesy of Pension Risk Matters

Groupon says that it pays attention to a metric called "Adjusted Consolidated Segment Operating Income" which counts customer acquisition costs as capital expenses. On its face, this seems ridiculous. Why not just cop to the reality, which is that Groupon loses tons of money but that's fine because it plans to make tons of money from that later?

6. Why have your insiders trousered so much money?

Groupon founders have trousered hundreds of millions of investor dollars. They also paid themselves dividends out of the revenues of a money-losing business. While there's a good case for letting founders "take some chips off the table", this seems more like "breaking the bank." Why trouser so much cash from the business? Did someone have a hundred million dollar mortgage they needed to pay off or they couldn't focus on the business?

7. How many merchants get a better than 50-50 deals, and why?

Image: AP

Groupon typically takes a 50 percent cut of the coupons it sells. But we've reported that in many markets Groupon gives merchants an 80-20 split. Is that a specific thing to gain share in specific markets or verticals? Or is that a growing trend?

8. Why are your margins declining?

It's not just that Groupon's losing money. It's that its margins are declining. Groupon bears say that Groupon can't be a long-term success because it's in a business with such low barriers to entry. Groupon bulls say that there are barriers to scale in the daily deals business.

If the bears are right, Groupon's margins should decline as competition eats into them. It's what seems to be happening. But we can't be sure. So, why are margins declining?

9. What must happen for the company to be profitable?

Image: Flickr/Eric Charlton

Groupon is wildly unprofitable. That, in and of itself, isn't a dealbreaker. You should be able to go public without profits--if you have a clear reason why you're not profitable and a clear plan for getting there.

Famously, Amazon spent 6 years as a huge, unprofitable public company. But Amazon's founder Jeff Bezos always had a good reason for that: to be a huge online retalier, he had to put "scale before profitability." Amazon had to achieve huge scale before it could be profitable. Bezos was always clear about that vision and what needed to happen.

Given that Groupon is in a brand-new, incredibly fast-moving market, it doesn't make sense to ask when it will be profitable. But it does make sense to ask what must happen for it to be profitable. How many cities? How many subscribers?

10. What's the rush?

Image: Ray Rivera

Seriously. What's the rush?

As Fortune's Dan Primack points out, Groupon shouldn't have to go public now. It would still have a lot of runway left if its investors and employees didn't trouser hundreds of millions of dollars of investor money and revenues. We already knew Groupon wanted to go public fast.

Whether it's a used car or a billion dollar revenue run-rate company, it's never a good sign when someone wants to sell fast. So, what's the rush Groupon?

Read more: http://www.businessinsider.com/groupon-ipo-explainer-2011-6#10-whats-the-rush-1#ixzz1OGuBc7yQ

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