My idle thoughts on tech startups
Groupon / Google – NYT Got It Nearly All Wrong
There’s been so much virtual ink spilled over the potential acquisition of Groupon by Google that I’m loathe to add to it. I know most people aren’t in the “optimism” business as I am so it’s easy to criticize the deal and valuation from the cheap seats. But after reading the New York Times’s massively flawed analysis published last night, I couldn’t leave well enough alone.
- First Groupon isn’t a social network and wouldn’t really do much to “give Google a much-needed path toward social networking” as NYT suggests.
- Post-money valuation of a startup’s last VC round is a barely useful data point for determining an appropriate acquisition valuation.
- The “no barriers to entry” argument is often a red herring, or at least a limited grasp of intangible barriers to entry like brand, operational excellence, etc. E-commerce hardly has “barriers to entry” and last I looked, Amazon was doing just fine.
A lot of the griping in the NYT piece isn’t around whether Groupon is an exciting business or whether there’s good strategic fit with Google, but rather the rumored price of ~$6 billion. Forget strategic fit or synergy for a moment and just evaluate Groupon as a standalone business. Let’s assume for a moment that the rumors of $50M/mo revenue run rate for Groupon are accurate, so Google would be paying 10x annualized revenue. That would be a very high revenue multiple for a pure e-commerce business which would have modest gross margins (e.g. <25%). It would be entirely reasonable for a pure software business with very high gross margins (e.g. >80%).
Groupon is sort of in the middle with ~50% margins so 10x revenue is certainly a high multiple but not totally ridiculous. But look at the movie rather than the snapshot. Groupon may be a $600M revenue business right this second, but it’s on an nearly unprecedented ramp. We all mentally compress time frames here but keep in mind Groupon is basically two years old (after the pivot from initial launch as The Point). Of course Groupon won’t grow at a stratospheric rate forever, it will likely face margin compression over time, etc. But the local advertising market is hardly small so it’s reasonable to assume Groupon still has very good growth prospects going forward. So once you value Groupon on a growth basis it’s actually not a stretch to put together a traditional DCF that makes a $6B acquisition seem reasonable.
Once you think about the synergy and leverage between Groupon and Google the price starts to look even more reasonable. The two companies have obviously thought about this far more deeply than I have, but just off the top of my head there are a bunch. Groupon’s SEM expenditure won’t disappear (and it’s a small amt of forgone revenue for Google), but as a combined entity that cost line goes down improving net profitability. Groupon’s local sales force could cross-sell AdWords. Google could add “daily deals” as a new performance-based ad unit to it’s global platform, accelerating Groupon’s own insane organic growth. Groupon deals could be integrated into various Google properties (Maps most obviously). There’s clear operating leverage here.
Layer on the strategic imperative around local and diversifying revenue beyond search for Google, and an appropriate premium for what is the category leader (by light years, despite ample competition). Whoops… all of a sudden $6B starts to make a lot a sense. And for Groupon it’s a good valuation from a great buyer.
I hope the deal closes and good for both Groupon and Google it it does. I’ve had the pleasure of briefly meeting Andrew Mason and spending some time w/ Eric Lefkofsky and Brad Keywell, they’re a great group and hats off to them for building an incredible business.