Groupon or Dupe-on?
Groupon plans to sell shares to the public in an initial offering later this year, but should anyone buy them? Observers have been very tough on the company lately. Some have questioned whether Groupon’s business model is sustainable. Others have called Groupon “effectively insolvent,” noting a balance of $290 million in current assets and $520 million in current liabilities.
This is quite different in tone from a Wall Street Journal article last December. “Walk around the company’s headquarters in downtown Chicago and it feels like the fastest growing company in history,” the Journal reported. “According to Forbes, it is, based on a study projecting that the company is on pace to make $1 billion in sales faster than any other business, ever.”
So what happened? Well, for one thing, Groupon may be doing better than some people now think, as a recent Journal analysis noted. But if Groupon really is so shaky, Peter Drucker would have likely pinned the blame on at least one thing: lack of financial foresight.
[EXPAND More] “Suppose that a new venture has successfully launched its product or service and is growing fast,” Drucker wrote in Innovation and Entrepreneurship. “The stock market then ‘discovers’ the new venture, especially if it is high-tech or in a field otherwise currently fashionable. Predictions abound that the new venture’s sales will reach a billion dollars within five years. Eighteen months later the new venture collapses. It may not go out of existence or go bankrupt. But it is suddenly awash in red ink, lays off 180 of its 275 employees, fires the president, or is sold at a bargain price to a big company. The causes are always the same: lack of cash; inability to raise the capital needed for expansion; and loss of control, with expenses, inventories and receivables in disarray.”
Earlier on, Groupon executives said the company was profitable; lately, though, it has been unprofitable. Drucker anticipated this, too. “Cash flow, capital, and controls should be emphasized in the early stages” of a new venture, he counseled. “Without them, the profit figures are fiction—good for 12 to 18 months, perhaps, after which they evaporate.”
The key is to avoid getting taken by surprise by financial needs, and then being forced to raise additional money in a hurry through venture capitalists or an IPO. “Financial foresight does not require a great deal of time,” Drucker said. “It does require a good deal of thought, however.”
Is Groupon on the wrong path? If so, how much is a lack of financial foresight to blame? [/EXPAND]