Column: Groupon, once a high-flier, lives down to investors’ expectations

Nothing is more instructive -- and fun! -- than going back in time to a high-flying start-up’s initial public offering and comparing the expectations then with the realities today.

Say hello to Groupon, which was a quintessential high-tech consumer play on the day of its IPO, exactly four years ago Wednesday. That day, Groupon’s shares soared 31% above their opening price. The IPO raised $700 million for the Chicago-based company, and ranked as the second-largest tech IPO in history, behind only Google’s $1.7-billion offering in 2004. Groupon was valued at $16 billion, more than such retailers as Best Buy and Whole Foods.

On Wednesday, Groupon lost nearly 27% to close at $2.97. “Obviously this is not your fairy-tale first day on the job,� Rich Williams, who was promoted Tuesday from chief operating officer to CEO, told CNBC.

What happened? On Tuesday, the company reported a $27.6-million loss for the third quarter ended Sept. 30. Gross billings, revenue and profits were all down from a year earlier.

All this for a company that hawked online discount deals. I compared its wares just before its IPO to high-tech versions of “those fat coupon books offering discounts at local shops that are still flogged door-to-door as school and church fundraisers.�

The company had leaped into public consciousness with a couple of eye-catching deals, including a half-off coupon for the Gap. What may not have been so obvious to starry-eyed IPO investors was that its business model could be easily replicated by rivals such as LivingSocial, which competed by offering a half-off coupon for Amazon, which owned a huge stake in that company.

Another emergent issue was that Groupon’s accounting methods were, shall we say, colorful. It reported a non-GAAP home-grown metric that excluded online marketing expenses and stock-based compensation; that allowed it to report profits when actually, by real-world accounting standards, it was losing money. (Eric Savitz of Forbes labeled this “the Bubble 1.0 approach to accounting.�)

An SEC inquiry followed, along with signs that consumer demands for refunds were running ahead of expectations and that many merchants who offered cut-price deals through Groupon were unhappy that their expensive come-ons weren’t yielding lots of long-term customers.

Investors have been souring on Groupon for some time -- in fact, pretty much since 2012. This week’s signs that things aren’t improving plainly caused many holdouts to give up.

Is there a lesson for today’s crop of high-tech “unicorns� valued north of $1 billion based on a hot story? You can bet on it. But you can also bet that overconfidence hasn’t been washed out of the start-up culture quite yet.

Shortly before the Groupon IPO, I described its founders’ decision to turn down a reported $6-billion acquisition offer from Google in favor of the public offering as “either as the peak of early 21st century hubris or a heck of a canny move.� They should have taken the money.

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