I was reading Kara Swisher's BoomTown article
today about how Groupon now has a valuation of over $1 billion and just raised $135 million in their most recent fund raising round from Digital Sky Technologies and Battery Ventures. I couldn't help thinking back to the roaring late 90's and some of the group shopping sites that predated Groupon. What did principals from companies like MobShop and Paul Allen's Mercata think of the obscene valuation Groupon has generated in 2010?
Luckily, I didn't need to go far to find out. Jim Rose, the founder and CEO of MobShop, is a former colleague, and knows a thing or two about trying to make a go of it in the group buying space. But, I didn't even have to send Jim an email to solicit his thoughts as Connie Loizos of peHUB had already beaten me to the punch
. As I expected, Jim feels that Groupon is definitely overvalued and he pointed to two primary areas of contention he has with the Groupon model. The Recession Economy
Jim rightly points out that Groupon's tremendous growth and extremely willing participation by its advertisers is likely significantly influenced by our recession economy. Profits have taken a back seat to simply keeping the doors open, and advertisers have fed very price conscious consumers a steady stream of unsustainable deals. Would Groupon grown like it has if we were still in the go-go era of 2005, when your crazy uncle's trailer property down by the river was worth $250k? Supply and Demand
What will happen to all the deals Groupon advertisers are offering if we start seeing sustained growth in the economy and significantly stronger jobs data. If I am a plumber in Denver, flush with work, am I still going to be willing to offer a $10 service call offer that is 1/5th of what I would typically charge? Can Groupon continue to source a supply of significant discounts in a healthy, growing economy?Differentiation
Jim has some valid points, and they certainly would make me pause if I was considering an investment in Groupon. However, Groupon has several and significant differences in its business model from its Dot Com era predecessors. While I have no doubt that MobShop and Mercata would have fared much better in today's established ecommerce environment, as sites like BackCountry.com's SteepandCheap.com have shown, there are still fundamental issues that would put it at a disadvantage to Groupon. Get Local
The real difference maker with Groupon is that it is local. Local works, we know this and one has to look no further than Craigslist for validation. Sure, I might have considered buying a new Honda Civic via MobShop (they actually tested this) today if I thought it would save me money, but there is something simply inherently more appealing in seeing deals from stores and services I frequent on daily basis. This is especially true if they are really big deals.
The local aspect also gives you much greater supply. While you might not be able to entice Sony to blow out Vaio laptops on Groupon, you can certainly attract a lot of local service providers and vendors when you show them some hard data on how many customer they can acquire. A small local gym here in Seattle was recently featured on Groupon where they offered a blowout deal on a 30 day pass. A friend who is a trainer there told me they had over 1400 sales. This is not Bally's, this is a 6k square foot yoga and personal training gym. I have no idea how this will fare, but it shows you what can be done with Groupon and a local offer. Well Socialized
MobShop didn't have Facebook and Twitter. Not even MySpace, remember them? Groupon has Facebook, Twitter and for us old folks, an email link. So, let us look at that gym example. I see the smoking gym deal and want some company as I sweat our the demons doing some hot yoga. I instantly post it on my Facebook account and Tweet it to my followers right from Groupon. Folks that I might barely know might be sweating next to me in hot yoga next week.
Local and social are a powerful combination. Is it a $1 billion + combination? That remains to be seen. Groupon is profitable though, which gives it at a significant leg up on just about every other web start up, in 2000 or 2010 for that matter.
Can local and social keep the advertisers active and offering killer deals to the Groupon masses, even if the economy improves?