Groupon IPO: An Internet star falls to Earth

Only a few months ago, Groupon was the Internet's next great thing. Business media christened it the fastest growing company ever. Copycats proliferated. And investors salivated over the prospect of Groupon going public.

Today, the startup that pioneered online daily deals for coupons is an example of how fast an Internet darling can fall.

Groupon is discounting its expectations for the IPO that in June was valued as high as $25 billion. In a regulatory filing Friday, the company said that it expects a valuation that is less than half that at between $10.1 billion and $11.4 billion.

It's the latest twist for the Groupon IPO, which was one of the most anticipated offerings this year. In June, after Groupon filed for the offering, the SEC raised concerns about the way it counts revenue. Then the stock market plunged.

Now Groupon faces concerns about the viability of its daily deals business model. The novelty of online coupons is wearing off. Some merchants are complaining that they are losing money — and customers— on the deals. And competitors are swarming the marketplace.

"Groupon is a disaster," says Sucharita Mulpuru, a Forrester Research analyst. "It's a shill that's going to be exposed pretty soon."

Groupon shows what can happen when a startup experiences steroidal growth in an unproven industry. To its defenders, the Chicago company is a victim of its success, its stumbles emblematic of a business in infancy. After all, Groupon has hordes of fans who rave about the company's deals and its liberal refund policy. And some merchants see the company has a way to get much-need exposure.

"It's free marketing and it brings in a lot of people," says Cono Moreno, owner of Brooklyn's Verde restaurant.

But critics say the issues Groupon is facing are symptomatic of something more troubling: questionable accounting, an overvalued business model and an industry that is turning into the digital equivalent of junk mail.

Groupon is expected to go public Nov. 4. The company could not comment for this story due to the quiet period for its IPO, during which time company officials are barred by regulators from discussing anything about the firm. But interviews with analysts, investment managers and merchants tell the story of a company that grew too fast as it raced to go public.

Groupon's beginning

Groupon began in 2008 when computer programmer Andrew Mason, a Northwestern University grad and former punk band keyboardist, figured out how to get people excited about the low-margin business of coupons.

Mason's brainchild: sign up merchants to offer coupons online through a website and Groupon's email subscriber list. Shoppers who see these ads on their computers, tablets or mobile phones can then buy the coupons, getting bargains on everything from knee socks to Botox. The deals are targeted toward customers' cities and preferences. Groups bidding on coupons equals — voila — Groupon.

By 2010, Groupon was in nearly 100 cities and 25 countries. Groupon's staff ballooned to nearly 10,000. Mason, now 30, was on his way to becoming the next tech billionaire.

The scene was set for an IPO. In June, Groupon filed documents with the SEC reporting $713.4 million in revenue in 2010, making it the first company to surpass the $500-million revenue mark in its third year, according to Forbes magazine. But Groupon began facing a growing perception that its business was unstable.

The online deal space was getting jammed with competitors, like Living Social, Amazon.com and Google. They are among the many copycats who are attempting to do what Groupon does. Big merchants are also running their own daily deals online.

At the same time that competition is building, consumers are questioning the quality of Groupon's offerings. Those who are disgruntled with Groupon often broadcast it on Yelp, the user review website that rates merchants. There's even something called the "Yelp Effect," named for the way angry customers drive down the merchants' Yelp ratings.

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