The rise and fall of Groupon: Their $6 billion mistake

In December 2010, Google offered $6 billion to buy a 2-year-old coupon website that was run by a 30-year-old college dropout. Even though since then Google has bought a lot more expensive deals for even more money, it would have been Google's priciest acquisition of all time by a large margin. The college dropout, Andrew Mason, he turned it down. Said the reason was he wanted to control the company's destiny. Early on, it looked like he would have been right. Initially, the company went public at a $13 billion valuation. Years later, the stock was down over 80%. It was in a free fall. It would have to do a 1 for 20 stock split just to keep its stock price above a dollar and stay on the NASDAQ. What the hell went wrong? This video is the rise and fall of Groupon.

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More on them later. And if you're interested, I take every one of these videos and I make a deep dive document to accompany it. You can download it for free for this one on my website at girdley.com/youtube. In 2006, a music major named Andrew Mason was frustrated trying to cancel a cell phone contract. And he thought to himself, what if I could go through and negotiate as a group with a bunch of my friends and have leverage over the vendor? His former boss was a guy named Eric Lefkofsky. He was a serial entrepreneur. He had enough money to hand Andrew $1 million and tell him to go build it. Mason launched the product. It was called The Point in 2007. It was a place where people could form collectives, organize, and then go basically try to make change with companies or businesses. There was a problem with this idea. Nobody wanted it, or, well, you heard how hard it was for me to just explain what it did, even figure out how to get the first step on it. But even though the overall platform was a failure, one group of people started to use it in a pretty unique way. They would organize buying groups where they would go in and as a group come in and say, hey, we're all going to buy this thing from this business, we'd like a big discount. Bofsky saw the writing on the wall. Serial entrepreneurs are pretty good at this stuff. They see patterns and what's working. They tell you to do more of that. So he told me Hey, Mason, get rid of all that other activism stuff and the change and just focus on group buying. So in November 2008, the newly named Groupon launched in Chicago, and the first deal was half-off pizzas in the very first floor of Groupon's office building. This was perfect timing. You had a generation of folks in the millennials who were aging up and having money ready to spend it as a group. They love nothing more than a group activity, trust me. But at the same time, 2008 was the outcome of the Great Recession. People were hurting and they wanted deals. Early on, this model was dead simple. Groupon would send out a potential deal each and every day. You get one of them in your inbox and enough people signed up for it, everybody would get that deal and it would tip. In other words, there would be enough that the merchant would honor it. The business model was that Groupon would keep half of the revenue. The business would get the other half of it, and supposedly the business would leave with a new long-term customer. But that would prove to be a fateful assumption that will come back later in the story. The idea spread like wildfire. Within a few weeks, they were opening in new cities. and eventually they were opening 4 new cities per month. January 2010, they did $11 million in revenue. A year later, in January 2011, they did $89 million in revenue, an almost 9x increase in one year. A Forbes article at the time reported that Groupon was on pace to hit $1 billion in revenue faster than any startup in history, faster than Amazon, faster than Google, faster than all of them. Here's one thing that VCs in Silicon Valley love more than anything. It's rapid growth because if you're growing fast now, indicates you have a good chance to continue to grow faster in the future. And investors came calling. Basically, Groupon hit a billion-dollar valuation within 16 months of founding. Before I continue with the story, sometimes walking in this drainage ditch, it's not as pleasant as it looks. It gets a little hot, but it's wintertime here in San Antonio and it's so nice. The wind is flowing. I'm really enjoying it. Anyway, late 2010, Yahoo came calling. They sat down with Andrew Mason and they offered $3 billion for Groupon. The guys didn't think too long about it. They declined the offer. Google at the same time saw Groupon as the missing piece for their local advertising strategy. Remember, Google is an advertising business, and the way they get you in to look at their website is just by sharing search results. And Google wanted Groupon bad, so much so that they offered the $6 billion that I talked about at the beginning of this video. Mason at the time was like the super millennial entrepreneur, and he responded to them that life is not only about money, it is also about controlling your destiny. And the people that you work with and turn down their offer. To control their own destiny but still cash out, Groupon and its investors decided to take the company public. And in 2011, they filed for an IPO. There's a problem with IPOs, well, if you're Groupon at the time, which is IPOs require you to be a huge, provide a huge level of disclosure of what's going on. There's all kinds of forms that get filled out so investors, they know what they're buying into. Inside of the financials for Groupon were a bunch of kind of financial voodoo, as the Wall Street Journal would call it. Things like adjusted cost segregated operating income. I mean, look, if you're making up your own kind of acronyms to describe what's going on on your books, there's some funny stuff going on. And that's what they were doing. Using this weird kind of version of profitability, Groupon was reporting that they actually made $60 million the previous year. There was a problem with that. This metric excluded marketing. In other words, basically they were a marketing company. It was kind of like being a restaurant, but excluding the cost of food. From the way you were doing your books. The SEC wasn't going to have any of that. Basically, when they came in and forced Groupon to report things in a standardized way, they swung from a $60 million adjusted profit to a $420 million annual loss.

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There was another problem. The way they were structuring the deal was not really going to control their destiny. It was controlling their own pocketbooks. When they raised $1.12 billion in the IPO, 84% of that wasn't going into the company to help it grow faster and become a bigger sustainable business. It was going straight into the early investors and founders' pockets. Early investor Eric Lefofsky, he got $398 million. Andrew Mason got $28 million. Here was a company that was growing incredibly quickly with a shaky balance sheet and a fundamentally broken investment model. And here these guys were basically flipping it on the public in an IPO. During IPO periods, the people that are the insiders like these two guys, you're supposed to be quiet. You're not allowed to go out and kind of hype up the stock. And the reason to do that is to make sure, well, basically everybody's rational when they approach it. But Lefofsky, he didn't play by the rules there. He supposedly told a Bloomberg reporter during this quiet period that Groupon would be wildly profitable in the future. What made worse was the surfacing of a profanity-laced internal memo that basically trashed the bankers, the SEC, and the press. And when the government got word of that, it made Groupon include that memo in its public filings. So everybody got to read it. Even with all this, Groupon went public in November 2011. They may as well have been in the red flag business as much as the marketing business with all this stuff going on. Oh, and my editor reminded me, please consider subscribing. It makes them happy when they see those numbers go up and help you see more of these videos. Appreciate it. On November 4th, 2011, 2011, Groupon went public. Their initial shares were priced at $20, and it went up during that day to $28. It was the biggest single-day pop basically since Google, and the whole business was valued at $16 billion. After going public, Groupon started to report quarterly earnings. The very first quarter, Q4 2011, even their adjusted income statement showed a quarterly loss of nearly $10 million. In March 2012, the company had to come out and announce that their previous books were needed to be restated. Auditors had found that there was a ton of material weaknesses in the way they were accounting for things. In other words, Groupon had gone public and their foundation, their business, was a total mess. By the end of 2012, the stock would be down over 80%. If you'd bought in at the very peak around $28, well, your share price was now around $5. And while it's clear from all this that the kind of top-down aspects of the building of the business were broken, what was really killing Groupon was something far more insidious and coming from bottom up. If you take a look at two-sided marketplaces, eBay is one where buyers and sellers match, Uber where drivers and riders match, Airbnb where the same happens but for places to stay. Groupon in theory was that it would match consumers with willing vendors and restaurants and that sort of thing that needed them. The problem was, is that Groupon was in effect payday loans, but for small businesses. These people were basically signing up for Groupon to get quick cash in, oftentimes making sales that were money losers for them. And the other problem was, if you were this business that basically attracted a customer through Groupon, you were attracting exactly the type of customer you don't want. People who only show up when there's deals and you cut them a special one. Unlike Uber and those sort of platforms who create value for both sides, Groupon wasn't sustainable because it was fundamentally value-destroying for one side of the marketplace, the suppliers. A study from Rice showed that fewer than 20% of new customers brought in by Groupon stayed as continuing and good customers paying full price. It wasn't like this is a secret. During the IPO process, the SEC had actually asked Groupon, "How many of your customers that are new?" In other words, brought to these businesses you're partnering with, "Actually come back?" Groupon didn't have an answer. Well, sometimes businesses don't have answers for questions when they don't like the answer, so they don't study it. That's what Groupon had been doing. And made worse, imagine you're one of these folks who's giving half-off massages or half-off dinners. You have a massive influx, and suddenly all your regulars can't get service or can't get food, and it scares them off as well. Making the damage even greater. By the mid-2010s, for the merchants that Groupon hadn't killed, many other ones started pulling back. They just realized that these were deals that they didn't want and customers that they didn't want. So suddenly Groupon was struggling to find deals to put into its daily newsletter. At the same time, Groupon started to get in trouble with the mail carriers. So if you send email, basically you are wholly dependent on the other side, whether it's Google's Gmail, Microsoft's Outlook, Yahoo to basically be okay with delivering your email to the end user consumer. And in this case, Groupon's emails, which were basically getting devalued by customers because the merchants weren't putting good deals in them, suddenly started to look more and more like spam to these mail recipients. What once had become an exciting inbox delivery— I remember when the Groupon stuff would show up, there was a level of excitement there— suddenly it got old and the fad ended, and it's just kind of annoying. At the same time, copycats flooded the market. Amazon backed a company called LivingSocial, and suddenly, by some measures, there were over 500 exact clones of Groupon hitting up the same merchants to try to get them to do daily deals. There was just no barrier to entry in what Groupon was doing. It was just a mailing list. But the real killer was in the early 2010s. Google and Meta, who today control by some measures 80 to 90% together of the total ad spend on the internet between the two of them, they basically started to build real sustainable ad engines. And local vendors started to see that they could pay there and just pay a small percentage of revenue rather than giving up 50 or 75% to a Groupon. And while the guys behind Groupon had talked about the network effect of you have a matching of vendors and the customers on the mailing list, the reality was fundamentally people didn't want to be matched anymore. It was just a mess. On February 28th, 2013, the board learned of an $81 million reported loss. The company fired Andrew Mason. Mason famously wrote one of the most, well, famous departure letters in CEO history. And there's been some doozies in the history of American business, but he basically went out and said, hey, you know, I want to tell you that I've decided to take and spend more time with my family and quality of life balance and all that stuff. And then he wrote, just kidding, I actually got fired today. I'll see you guys later. Bye. But what was actually cool about it in the next part was he was brutally honest about why he was fired. The stock price was down. They weren't making money. There were material weaknesses in the accounting and the fundamental business model hadn't evolved in a way that was going to be sustainable because of the way he had structured stuff. And I appreciate this. His total comp on on the way out the door was the opposite of a golden parachute. He basically made about $5,000. And remember, he had made big money in the IPO, so he was doing just fine. The other joke he made was that he basically gained 40 pounds during all the stress and stuff of building Groupon, and he was looking for an opportunity to go lose that weight as well. And looking forward to it. The stock went up 4% on the news of his firing, which probably tells you all you need to know about how investors thought about his performance. So the board decided to put in Eric Lefofsky, And you remember this guy? He was the one who had made statements during the quiet period to basically the press when he wasn't supposed to and made $398 million in his pocket when the IPO happened. But unfortunately, none of this was going to fix the fact that the core business model of Groupon wasn't sustainable. Basically started to pivot the company into opening a bunch of new different stuff. They did a thing like Groupon Goods, which is basically like an off-brand version of Amazon, pivoted into payments and that sort of thing. But like many folks who are beholden to public markets and quarterly results, they were chasing revenue and not profit. Revenue actually peaked at $3 billion in 2014, but it wasn't good revenue. It was the type of stuff that was low margin, red ocean, and competitors could come in and, well, basically compete away all your profits. Lefosky would only last until about 2015 when the stock was down even more. But remember, he did okay. He got the $398 million. Then later on, he went on to found a healthcare AI company, which he took public in 2024 for a $6 billion valuation. So he's doing okay. Groupon kept shrinking. They cut over 1,000 jobs in 2015 alone, started to exit underperforming countries and cities, which, by the way, they were all underperforming. Just some were underperforming worse than others. And in February 2020, right before COVID hit, they had to go through the struggle I talked about in the beginning of the video, a 20-for-1 stock split to keep their price above $1 and stay publicly listed. And while COVID should have helped Groupon, they were so dependent upon in-person Vendors, when spa operators and masseuses and that sort of stuff couldn't offer deals on Groupon anymore because of the pandemic, well, hurt the business even more. Today, the business is worth about 1/12 of what Google offered for it back in 2010 when they offered $6 billion. They've continued to furlough more employees. They laid off 2,800 at one point. Believe it or not, they had 2,800 employees. And a lot of those people, by the way, I went to their office once when I was there for a conference. A lot of those people were just high-pressure salespeople smiling and dialing and trying to talk mom-and-pop businesses into taking the like payday loan version of what Groupon was offering. Revenue is down under $500 million, down from $3 billion at its peak in 2024. They have just over 2,100 employees, down from over 12,000 at their peak, and the stock is down by 97%. Groupon is a real lesson in our business models and innovations and changes in the world truly sustainable. And a lot of times over and over again, we see things like this or Prime Energy that really were just about fads that truly had no moat over time. And even though the businesses got really big, they didn't have any staying power. I think that's important for each of us as business owners. Sometimes there are changes that happen, and heck, in my world, COVID was one. In some of the stuff I'm involved in, COVID created massive amounts of demand. But eventually when COVID left, things went right back to normal. And that's generally the way the world works. And Groupon is a great case in point of that happening. All right. Let me know what you think about Groupon in the comments below. And if you enjoy this video, please tell me. It encourages me to make more. Catch you next time.