Friday, October 21, 2011 at 5:13 pm.

Here’s what actually matters about Groupon (and what doesn’t)

Andrew MasonCue the knives and daggers! Groupon is proceeding with its IPO process, and will reportedly conduct its big road show next week. You can watch CEO Andrew Mason pitch the company to potential investors in this amusingly serious video here.

Disclaimer! I am not a stock analyst, so please don’t read this as any sort of suggestion to buy, sell, or short Groupon stock. I do not trade individual stocks — learned my lesson! — and I don’t advise any amateurs to.

What I will attempt to do, however, is to look at the company from a high level and point out what actually matters to Groupon’s eventual success or failure. I am not suggesting that I have the answers. I am mostly trying to ask the right questions, which I think many people are not doing.

Here goes:

1) Is Groupon’s core business — selling discounts to people — a real, sustainable, long-term business model, good for both Groupon and merchants? And can Groupon maintain the lead in this market?

A lot of people are distracted by how much money Groupon has been losing because of how much it is spending on marketing. I am less concerned with that, and recent results show improvement. (Albeit with slower growth.) Marketing expenses made Vonage’s business look especially crappy at first, too, but the real problem for Vonage was that cable companies quickly bundled cheap VoIP service with TV and Internet access and made signing up for Vonage unnecessary.

The good news for Groupon is that it looks like only one competitor, LivingSocial, really matters so far. While it is incredibly easy to start a Groupon clone, many of them have already vaporized. I am not yet inspired by Google or Amazon’s Groupon lookalikes. I do not yet trust any media or telecom company, regardless of its size, to become a web or mobile software company in a way that threatens Groupon.

It will probably be a few more years until the long-term potency of the Groupon model is apparent — if it’s a consumer fad or not, if merchants keep coming back, which merchants it’s a good fit for, if Groupon can successfully build new products, etc. But it is certainly on the right track and the noise about competition is, I think, overblown. And, after all, this is why an IPO is considered an investment opportunity, and isn’t for most people — it is a gamble on Groupon’s future, not a savings bond.

2) Can Groupon get merchants (and customers) to move into self-service tools like Groupon Now?

This is the tricky part that makes hiring a massive local-sales staff look easy. Having worked in low-level jobs in the food and retail industries, I know how tech-phobic and — frankly, sketchy — many local merchants can be. Many are still likely skeptical of Groupon, the Internet, anything involving smartphone apps, credit cards, anything that requires them to legitimize their finances, etc.

Google was able to get Internet advertisers to start spending lots of time and money via a self-service tool. Can Groupon get local merchants, who can barely figure out how to reboot a cash register, doing the same?

Over time, someone probably will — technology is bound to reinvent every commercial industry over a long-enough timeframe. But will Groupon be the one to do it? That is the big question.

3) Can Groupon maintain a cool, aspirational brand?

Coupons aren’t cool. Groupons are kind-of cool. They don’t feel as cheap, and anyway, in a down economy, saving money is a little sexy. (And in Chicago, the company’s presence has legitimately changed the scene… doing things like renting out Wrigley Field for a “Ferris Bueller” screening.) The key is to figure out a way to maintain a premium brand and never seem like a tool that only cheapskates use.

Part of that means featuring deals from aspirational merchants, and not just hole-in-the-wall places that need customers. In New York, for instance, I have not been impressed with the restaurant selection on Groupon, whereas other sites like Gilt City and Savored do have better restaurants onboard. Maybe I’m not squarely in Groupon’s target audience, but I’d rather save less money at a better place than save more money at a mediocre place.

Groupon isn’t likely to become an Apple-like luxury brand, but it can’t become Gateway. (So step up the photography, folks!)

4) Is Andrew Mason the long-term leader for Groupon? If not, does he have someone on deck?

I consider myself lucky to have spent a tiny amount of time with Andrew. I think he is very smart and could be a great CEO indefinitely. He should be an inspiration to undergrad music majors everywhere. But I also think that he didn’t start The Point — Groupon’s predecessor — to sell coupons for discounted pole-dancing classes to people.

It is entirely possible that Mason is now hooked on the idea of reinventing local advertising for at least 10-15 more years. But also, maybe not. Watching Groupon’s roadshow video, I was particularly impressed with Jeff Holden, Groupon’s SVP of Product and former Amazon consumer-products exec. Actually, Groupon’s whole management-roster slide is now pretty impressive, even with some turnover. (Turnover happens in startups, by the way. Even very successful ones. Look at Twitter and Etsy. It’s not that big of a deal.) So I think that part should be okay.

Now, a word on the Groupon haters, and what doesn’t matter.

More than any other company I’ve observed during this tech boom, Groupon’s success seems to bring out the worst in people. It seems anyone with any connection to the tech industry will go out of their way to slam the company, if given a mic and camera backdrop. Some have even launched public personas on the basis of being Groupon trash-talkers. Whatever.

Yes, there are serious questions about Groupon’s long-term future, just as there are about pretty much any business. And yes, it is generally a good thing that journalists, analysts, and random people on the street are being more skeptical about seemingly successful companies these days — thank you, Bernie Madoff.

But I think a lot of the criticism and vitriol being lobbed at Groupon is the result of jealousy: Both of the wealth its founders have quickly accumulated, and the fact that its basic concept seems so simple — the “why the heck didn’t I think of that?” factor.

As a result, there is a lot of news copy out there that attempts to skewer Groupon about various things that I think don’t matter. These include:

  • The fact that its founders sold some of their stock in prior funding rounds. Yes, I get it, they are now rich. But there were also savvy buyers on the other end of those transactions. Reducing some risk and the stress that comes with it is a smart financial move, when available, for an entrepreneur. Everyone knew what they were getting into. You should be judging Groupon’s leaders on their ability to run Groupon, not on how much money they have.
  • The fact that individual Groupon employees or groups of employees whine about their jobs. There are unhappy employees at every company in the world. Even at Apple, Netflix, Google, Facebook and Amazon. Especially at those companies, probably. Find me a room of 24-year-old yuppies and I’ll get you a list of horror stories. But this doesn’t matter! Assuming the churn rate isn’t unmanageably high, what matters is the ability for Groupon to recruit and train new employees to be as good as who they are replacing, for as long as they care to work there. People aren’t expected to stay at their first jobs more than a year or 2 or 3. It’s the engine that counts in the long term.
  • The fact that individual merchants or customers had bad Groupon experiences. It’s not for everyone. Nothing is. Bad stuff happens to good people. Also, guess what: A lot of merchants are incompetent and deserve to go bust. Many businesses fail for reasons that have nothing to do with Groupon, and if they want to blame Groupon for their problems, who’s going to stop them? What matters, ultimately, is whether on the average, over the long run, Groupon is good or bad for merchants, and whether Groupon can adjust its business accordingly, in a favorable way. And that’s not something a single angry merchant or customer can tell you.
  • Groupon’s accounting issue. It was a problem and the SEC took care of it. (Amazing! The government actually did its job.) This is ultimately a technicality, and it needed to be fixed so potential investors had a better idea of what they were buying into. It did slow down Groupon’s IPO process and likely reduced its valuation. And now it’s done.

The bottom line is that nobody really knows if Groupon is going to be a huge business someday, an average-sized business, or a total wash. That’s true of pretty much anything. But I think it’s important to at least look at the right things. And in Groupon’s case, many people aren’t doing that.

Also: Commerce as content, shopping through art