The summer of discontent — well, that’s what it seems to be from the perspective of the not-so-new web darlings — might be coming to an end, but months (perhaps years) of misery awaits these erstwhile rocket ships. The news reports of late have reserved particular vitriol for Groupon, the company that has seen its market valuation decline almost 82 percent since its went public.
Over the weekend, The New York Times columnist James Stewart blamed network effects going into reverse for the declining fortunes of the new web companies, though I don’t think his argument applies to Groupon, which has its own unique set of challenges and isn’t in the same class of companies as Facebook. Today, Wall Street Journal reports that investors like Kleiner Perkins and T. Rowe Price have taken it on the chin with their Groupon investment, but for now they remain believers in Andrew Mason and rest of the team.
The Groupon debacle is particularly telling about Silicon Valley and investors. Why? Because I don’t think it belongs in same category as Facebook and even Zynga. I am not sure it even belongs in the basket of technology stocks. Let me explain:
Some deals are too good to be true
From the day it emerged out of anonymity, Groupon was hailed as the messiah of local commerce, a company that was going to revolutionize retail and advertising. I tried very hard to understand the company and figure out its technology edge. When I saw Groupon, I saw a company that was essentially using e-mails to conduct what was essentially a coupon-clipper business. (Even Groupon Goods, the new discount goods service, reminds me of QVC more than anything else.)
Nevertheless, the company kept getting valued at nosebleed valuations by private investors. Some of the smartest people on the planet were extolling virtues of the company. Google offered to buy if for $6 billion. Maybe I was too old fashioned to label the company as a “technology company.” So, I abstained from writing and tuned out GroupOn. That didn’t stop the company from going public and getting valued at around $12.8 billion, making it the biggest U.S. web IPO since Google. Nothing really changed after the IPO. The more time went by, the more evident it became, at least to me, that Groupon was no technology company. That is the most crucial point of the Groupon saga.
The momentum players
Of course, the problem with Groupon is not entirely of its making. In order for a company like Groupon to get valuations befitting a high-growth technology company instead of a coupon-clipper business, there need to be compliant and willing investors. Many have their own personal compulsions. Kleiner Perkins, having lost its shirt on clean tech and energy investments, decided to double down on social and web investments — price be damned. No one can fault them trying to remake their franchise, which as PE Hub’s Connie Loizos pointed out has been under attack from Marc Andreessen’s investment outfit, A16z.
Other late-stage investors in the company felt the heat from late stage investor DST Global, a relatively new and aggressive investor with faint regard for valuation. For others, it was merely a way to play the momentum, make a quick buck and show a win, so that they can go on and raise yet another big fund.