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GroupOn's Case of the Pre-Wedding Jitters

GroupOn says it won't be left at the altar: It will begin its roadshows as soon as it can, then plan an IPO for as early as October.

It was only a matter of time before someone blinked in the frenzied world that is social media.

Early this month, GroupOn, the fast-streaking digital coupon company that sells discounted deals for everything from teeth-whitening to spa trips, and which was expected to go public at a valuation of $20 billion, suddenly called off its roadshow prior to the planned IPO.

The initial cancellation appears to have been caused by a mix of public attacks on the company, questions from the SEC on their accounting (which resulted in the amended S-1 to restate the financials), along with the current market conditions, acoording to Trent Tillman of Syndicate Trader, which specializes in IPO and secondary offerings research. It could also be from the pre-wedding jitters.

But GroupOn now says it won’t be left at the altar: It will begin the roadshows as soon as it can, then plan an IPO for as early as October. Just expect a more chastened company, one with less swagger.

GroupOn is far more troubled than its backers concede. After years of spectacular gross revenue growth, GroupOn’s North American business is flattening out. It isn’t making much headway in foreign markets. For a company that touts explosive growth, flattening out here and abroad is not a commendable event. And competitors – from Amazon to Facebook and Google – may be closing in. Most important, insiders already have cashed out. Everything else is up for grabs.

For all the accolades from the tech literati, the GroupOn business model is not unique. And although having a war chest – the company has raised more than $1.1 billion – has given GroupOn great visibility and a leg up on the opposition, competition is catching up.

“With increased competition and GroupOn’s move into smaller, local markets, both the quality of the deals and their value has diminished,” says Karthik Balakrishnan of Globescape Capital, an emerging markets advisory firm in Washington, D.C. “It’s worse for GroupOn overseas. In key markets such as China and India, local players are already well established and facing competition from other domestic players.”

GroupOn insiders and cheerleaders are quick to point out that the company has a 2011 run rate of $2.6 billion. Still, the company lost $456 million in 2010 and could lose even more in 2011. Chief executive Andrew Mason warns future shareholders that GroupOn will continue to spend aggressively on marketing and sales. About 54 percent of its operating expenses go towards marketing; the remaining 46 percent on sales.

Skeptical analysts and industry specialists point out that the GroupOn subscribers per capital spend is less than $23 per year. There isn’t any sustainable repeat buying pattern. Perhaps most important, high-end merchants are wearying of GroupOn. Not only is a GroupOn transaction less profitable, it isn’t building traffic, they say. Several high-end New York restaurants that offered discounted dining through GroupOn say they were not satisfied with the response and also the fact that the promotion cannibalized their existing customer base.

The Securities and Exchange Commission, which itself has come under attack for its poor handling of the social media marketplace, is worried. In June, after Groupon filed to go public, the SEC asked it to remove an accounting metric, Adjusted Consolidated Segment Operating Income, which tended to emphasize revenue but did not fully capture expenditure. The SEC also seemed to be taken aback by GroupOn CEO Andrew Mason’s recent letter to his employees and shareholders that portrayed the company in a different light than presented in the S-1 offering statement of June and lambasted critics. In the current charged regulatory atmosphere that simply is a no-no.

But what has analysts and potential investors worried the most is that the early investors have taken out $900 million from the company. Not a great public relations move, acknowledged angel investor Jeff Clavier of SoftTech VC, and a minority GroupOn shareholder, in a recent media interview. It is as if the original investors are taking their profits now and raising questions about the long term viability of the business.

Then, of course, there is the question of GroupOn’s class A and class B shares. Large institutional investors have historically frowned on two categories because it usually short circuits governance. And with GroupOn being only three years old, giving inexperienced insiders disproportionately greater voting and oversight powers is simply asking for trouble.

Still, for the social media world, GroupOn is a hot company. Its shareholders include Accel Partners and New Enterprise Associates, two of the largest venture funds in the business. And it still is the 800-pound gorilla in its space. But it may need to rein in the expectations of its shareholders and its employees before it takes another stab at its IPO.

Says Syndicated Trader’s Tillman: “If the market stabilizes and it is clear that some IPOs are again having success I think they will attempt the offering again. But in this current environment, I don’t blame them for waiting.”

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