VCs like to boast about the potential winners in their portfolios, but Battery Ventures founder Rick Frisbie is circumspect about Groupon Inc., one of the hottest consumer Internet companies.
Battery invested in the two-year old shopping website last April in a $135 million round led by Russian investor Digital Sky Technologies that valued the start-up at $1.35 billion. Asked about Groupon Tuesday during his induction into the Private Equity Hall of Fame at the Dow Jones Private Equity Analyst Conference, Frisbie said the company has a lot of competition and its leadership position in the deal-of-the-day market might not be defensible.
“I’m still not absolutely convinced that Groupon will be the kind of success we hope it will be,” he said. Nonetheless, “it was too big an opportunity to pass up.”
Frisbie, who started Battery in 1983 with two partners, said the venture firm had looked at the group purchase market for a couple of years and had come close to backing Rue La La. But before Battery could invest the private sale site’s parent company, Retail Convergence, was acquired by GSI Commerce Inc. in a deal worth up to $350 million.
Battery looks at a company’s ability to defend its turf and its exit prospects in tandem, Frisbie said, and Groupon might be hot enough to go public or bought before competitors can gain much ground. He said the problem with the venture industry over the last decade has been too much money chasing too few opportunities in a stagnant economy, as reflected by public-market performance.
Frisbie also said the explosion of a class of investors known as super angels is not helping the venture market because they are looking for the same kinds of digital media companies as VCs. “Less competition is good for me,” he said. “I would prefer not to see the super angels out there because they’re competition.”
Venture capital has gone through cycles when it has been broken, Frisbie said. “I think that it actually was broken over the last decade.” What he’d like to see is a healthy public market, not necessarily because IPOs are key to successful venture exits but because they reflect a robust economy.
“Without the public markets, we’re in the business of grinding it out,” he said, looking for three times or four times returns.
COMMENTARY: According to a Rice University Study Groupon's business model is broken and in a process of slow decay. Here's Rice University's Study findings:
Daily-deal site Groupon skyrocketed to stardom in just two years, generating hundreds of millions of dollars in revenue and inspiring a number of copycats. But this flourishing group-buying model isn’t a guaranteed revenue driver for the participating local businesses, according to a recent study by Rice University.
The study from the university’s s Jesse H. Jones Graduate School of Business looked at promotions offered by Groupon, which features a daily deal for each city in which it operates and offers consumers a significant discount for a local good, service or event. The discount is valid only if a minimum number of consumers purchase the deal.
The Rice study found that 66% of the 150 merchants responding found the program profitable, while 32% said they were unprofitable. Forty percent of the respondents said they would not run such a promotion again. Groupon founder and Chief Executive Andrew Mason recently wrote that 97% of its merchants want to be featured on the site again, showing quite a discrepancy in their numbers and those found by the study.
Groupon, touted as one of the fastest growing businesses ever on the Internet, has received backlash from merchants recently who were not satisfied with the outcome of offers on the site. For example, the owner of Posies Café in Portland said in a blog post that Groupon is the “single worst decision I have ever made as a business owner.”
The owner criticized Groupon for not putting limits on the number of coupons it sells and taking too high a percentage of those sales. “There came a time when we literally could not make payroll because at that point in time we had lost nearly $8,000 with our Groupon campaign,” the owner wrote. “We literally had to take $8,000 out of our personal savings to cover payroll and rent that month. It was sickening, especially after our sales had been rising.”
The post traveled the Internet like wildfire and drew a quick response from Mason who explained that the company never prevents merchants from capping their deals. He stressed the company’s diligence in making offers valuable for merchants and consumers alike. However, it seems the success of a campaign also depends largely on the satisfaction of a business’ employees.
“Satisfied employees” is the most important factor for the Groupon promotion to work successfully for a business, according to the study. If employees remain satisfied through the promotion, the likelihood of its profitability is significantly higher. The percentage of discount offered and the number of Groupons sold did not predict the deal’s profitability, nor did the percentage of Groupon users who purchased beyond the Groupon’s value or purchased again at full price.
“Because the Groupon customer base is made up of deal-seekers and bargain shoppers, they might not tip as well as an average customer or be willing to purchase beyond the deal,” said Utpal Dholakia, author of the study and associate professor of marketing at the Jones School. “So employees need to be prepared for this type of customer and the sheer volume of customers that might come through.”
Other findings included:
- Among the service businesses, restaurants fared the worst and salons and spas were the most successful.
- Businesses with unprofitable promotions reported low rates of spending by Groupon users beyond the deal’s face value and low rates of return to the business again at full price.
- Respondents indicated they had largely negative perceptions of Groupon’s competitors.
“I think these findings show that social promotion companies need to better balance consumer appeal with positive outcomes for the small businesses offering them,” Dholakia said. “Right now, these deals are tilted too far in consumers’ favor.”
The daily deal space as attracted quite a few Groupon clones, understandable considering the company’s valuation crossing $1 billion. Other venture-backed companies offering similar deals include LivingSocial Inc., BuyWithMe Inc. and Bloomspot Inc. Public companies such as Travelzoo Inc., OpenTable Inc., and The Knot Inc. are also chasing the trend.
Dholakia conducted surveys with 150 businesses spanning 19 U.S. cities and 13 product categories that ran and completed Groupon promotions between June 2009 and August 2010. Groupon, which has raised at least $170 million from Accel Partners, Battery Ventures, Digital Sky Technologies and New Enterprise Associates, features about 330 deals in more than 230 markets worldwide.
Wow, it sure sounds to me like Groupon's business model is not a win-win situation for its customers, many who are losing money on their discount deal promotions. In order to succeed in discount coupon promotions, there has to be a return-on-investment on the deal, otherwise why do it. If so many brands are pissed off, this does not bode well as a sustainable business model. It is slow decay as unhappy customer's go for the exits. Groupon better do that IPO real damn fast.
Courtesy of an article dated September 29, 2010 appearing in The Wall Street Journal's Venture Capital Dispatch
I have not quite understand about your article but from the little that I read I can understand what she meant
Posted by: Dentist Seattle | 05/25/2011 at 01:40 AM
Groupon.. a successful new ecommerce trend, the best way to experience your city without paying full price.
Posted by: Gorupon Clone | 11/17/2010 at 02:37 AM