Groupon Worth $1.2 Billion? Not So Fast

TechCrunch is reporting that the group buying site Groupon, which raised a $30 million round at a $250 million valuation in December from NEA and Accel Partners and has raised $35.8 million altogether, is raising more money right now at a stunning $1.2 billion valuation. You can read the story here.

In light of the news, it might be interesting to contemplate the fate of some of Groupon’s predecessors, including the once-popular group-buying site MobShop, which raised $51 million from Marc Andreessen and Mayfield Fund before going belly up in 2001. As with Groupon, analysts loved, loved, loved the idea of MobShop. As with Groupon, MobShop had plenty of competitors. Know what? They all disappeared. Maybe it was purely bad timing. Maybe it was, a little bit, the sustainability of the concept, too. You decide. Is Groupon really worth $1.2 billion or are we heading down a well-worn path?

From a 2001 New York Times story:

MobShop Inc., one of a handful of companies offering group buying on the Internet, is closing its consumer operations, on the heels of the recent announcement that its chief competitor, Mercata Inc., was going out of business.

Group-buying companies, also known as demand aggregators, allow consumers to pool their buying power to purchase goods at lower prices. The approach initially received considerable attention from analysts and financiers, who called it one of the Internet’s most innovative consumer opportunities…

Mercata, which was majority owned by the Microsoft co-founder Paul Allen’s Vulcan Ventures fund, said on Jan. 4 that it would cease operations because it failed to raise more money, canceling a planned $100 million stock offering…

MobShop’s revamped strategy, along with Mercata’s failure, casts doubt on the viability of aggregate buying as a consumer business. In the price-aggregation model, prices go down as more consumers bid for them, creating bulk deals. The idea was that consumers would spread the word, creating a more effective marketplace over time.

Some analysts remain optimistic that group buying can work on the Internet and believe that the recent problems of Mercata and MobShop had more to do with market conditions than the concept itself.

But other companies offering aggregate buying to consumers have also struggled, including Priceline WebHouse Club, which shut down in October. LetsBuyIt.com, a group-buying company founded by Swedish entrepreneurs, filed for bankruptcy protection in December.

UPDATE: Marc Andreessen writes in to give me his “$0.02″:

I don’t know much about Groupon, but the other major difference is: 1999 versus 2010. 100x+ the number of Internet users times 100x+ bandwidth per user times 100x+ users more comfortable using the Internet for ecommerce and many other things in their lives = a massively larger market for Groupon than Mobshop. I.e., you wonder about whether Groupon is Mobshop; I wonder how many concepts that didn’t work between 1996 and 2000 will work now. I think lots.

Related

12 Comments

  • These are two completely different models. MobShop and Mercata were holding inventories. There is no way they could ever compete with the Walmarts and Best Buys on a pure volume play. Groupon, on the other hand, is not concerned with economies of scale, but with marketing and customer generation. Groupon is closer to woot than MobShop.

  • Though I am dubious of the reported $1.2B valuation that Groupon is commanding, the article doesn’t point out the big difference between today and 2001 when Mercata and MobShop were in business.

    In 2001, shopping category display advertising CPMs were $20-$60 vs. today’s $.20-$6 CPM. As a result, the cost of acquiring customers were significantly higher back in 2001 than today (more than 10X). Add to this Social Media mechanisms enable quick and frictionless acquisitions at almost minimal cost and I can see how today is not like 2001.

  • These businesses are completely different from Mercata and Mobshop. Those were primarily ecommerce plays and you were trying to take share in an online retail market. These businesses is playing in the $2 trillion offline local retail market. The “group” aspect is just a marketing ploy. The merchants don’t really care about group discounts. They just want an efficient way of doing customer acquisition. To read more, check out http://www.bensun.net for a more detailed analysis.

  • [...] This is just a magic business. Related to the previous concept is the idea of a “magic business” that Netscape founder and über-VC Marc Andreessen talks about. There are a handful of businesses each year that get started that are worth more than one billion. But even among those, there is a smaller number that are “magic” businesses, that tap into a broad societal trend and basically cannot help from becoming positively huge. Intel and Microsoft were magic businesses built on top of personal computing. EBay, Amazon, Google, probably Facebook, are magic businesses. Groupon is also probably in that category. Andreessen seems to agree — he was an investor in MobShop, a previously failed group-buying site, and yet is bullish on Groupon.  [...]

  • The main compelling aspect of Groupon is not the group buying idea. It’s the fact that for the first time, local service providers are able to effectively generate revenue online at scale. Joe’s Pub couldn’t previously sell beer online, and maybe the owner was skeptical about ROI of local online advertising, but now he can actually sell food and beer online (via a voucher) – to thousands of people in one day. The sale itself generates revenue, but it is also a very effective means of performance advertising, if you think about it.

    The group buying element just provides comfort to the vendor that the sale won’t flop, provides downside protection Groupon’s margins if an event sucks, and creates a viral trigger to compel those first visitors in the morning to buy (if the massive discount at new cool local places wasn’t compelling nature).

  • Andreessen is completely right. It’s little different than the Apple Newton not working in 1994, but the iphone / ipod touch / ipad / smart phones / et al. flying off the shelves in 2010.

    Sometimes a product is just way too early.

  • [...] This is just a magic business. Related to the previous concept is the idea of a “magic business” that Netscape founder and über-VC Marc Andreessen talks about. There are a handful of businesses each year that get started that are worth more than one billion. But even among those, there is a smaller number that are “magic” businesses, that tap into a broad societal trend and basically cannot help from becoming positively huge. Intel and Microsoft were magic businesses built on top of personal computing. EBay, Amazon, Google, probably Facebook, are magic businesses. Groupon is also probably in that category. Andreessen seems to agree — he was an investor in MobShop, a previously failed group-buying site, and yet is bullish on Groupon.  [...]

  • [...] group coupon product is similar to the bubble-era companies Mercata and MobShop, but it comes at a time when far more people are online and comfortable spending money there. It [...]

  • [...] group coupon product is similar to the bubble-era companies Mercata and MobShop, but it comes at a time when far more people are online and comfortable spending money there. It [...]

  • [...] group coupon product is similar to the bubble-era companies Mercata and MobShop, but it comes at a time when far more people are online and comfortable spending money there. It [...]

  • [...] group coupon product is similar to those of bubble-era companies Mercata and MobShop, but it comes at a time when far more people are online and comfortable spending money there. It [...]

  • While Mobshop and Mercata were too early, they did think very deeply about the group buying experience on the internet. In fact Mercata put a fence around most of the important aspects of group buying with the strongest IP patent portfolio in the space. Those patents are now being brought to life over at http://tippr.com. Look for Tippr to be the innovation and technology leader here while Groupon and LS blanket the world with brand advertising.

Leave a Reply

PEHUB Community

Join the 12505 members of peHUB to make connections, share your opinion, and follow your favorite authors.

Join the Community

Look Who’s Tweeting

PE HUB News Briefs

RSS Feed Widget

VCJ Headlines (subscribers only)

RSS Feed Widget

Buyouts Headlines (subscribers only)

RSS Feed Widget

Reuters VC and PE feed

RSS Feed Widget