Grow, Groupon, grow; Size matters more than ever after spurning Google.(Groupon Inc and Google Inc)

Crain’s Chicago Business December 13, 2010 | Pletz, John Byline: JOHN PLETZ Groupon Inc. has turned into a darn big two-year-old. For the sake of its owners, the daily-deal website had better grow into a whole lot bigger three-year-old.

After turning down a $6-billion takeover offer from Google Inc., Groupon CEO Andrew Mason and his financial backers must further beef up their Chicago startup, and do it fast, to maintain Groupon’s singular advantage–its bulk–and stay ahead of the thousands of clones crowding into its marketplace, as well as the tech giants, including probably Google, that make Groupon look like a pipsqueak.

Mr. Mason and his team also will need to raise more money, on top of the $135 million they got last spring. And while they’re adding markets, merchants and manpower, they must manage Groupon through a critical growth stage that has overwhelmed many entrepreneurs before them. In this sector, where there are no barriers to entry, size matters most. But just being first isn’t enough, as America Online, Netscape and MySpace show.

“The space is exploding, and you’re going to have some very deep-pocketed companies competing in this space,” says Lou Kerner, a New York-based analyst at Wedbush Securities. “Going it alone is a much riskier path for Groupon.” If Groupon’s brain trust–Mr. Mason, Chief Operating Officer Rob Solomon and majority stakeholders and advisers Eric Lefkofsky and Brad Keywell–pulls it off, the company could go public and become the tech superstar long hoped for by Chicago and Illinois. If not, Groupon will be the biggest lost opportunity since Marc Andreessen left the University of Illinois at Urbana-Champaign for Silicon Valley two decades ago to commercialize the first widely used Internet browser, Netscape.

Groupon declined to make executives available for comment, but on Thursday’s “Charlie Rose” show, Mr. Mason said: “I think about what causes Friendsters and MySpaces to collapse. It’s usually those companies losing to themselves, losing their sense of focus. . . . As long as we continue to be as fanatical as we were when we started the company, we’ll be in good shape.” Already, Groupon is facing intensifying competition from Seattle-based Amazon.com Inc., which invested $175 million this month in daily-deal site Living-Social, and Palo Alto, Calif.-based Facebook Inc., which launched its own mobile deals channel last month. go to web site groupon houston

“The big guys are officially taking note of the space and taking action,” says Tim O’Shaughnessy, CEO of Washington D.C.-based LivingSocial, which is second to Groupon in the sector. “We thought it made sense to have a relationship with the biggest e-commerce player in the world.” But Groupon’s toughest rival could soon be Google.

“Google clearly was interested in spending a lot of money on Groupon,” says Rob Enderle, president of technology consultancy Enderle Group in San Jose, Calif. “They’ll invest in it until they get it right, like they did with Android. They can duplicate what Groupon has done. They could probably do it in 18 months.” Google has a consumer base that Groupon can only dream of. Billions of people use its search engine and hundreds of millions have Gmail accounts. Even its web browser, Chrome, while still a distant No. 3 to Microsoft Corp.’s Explorer and Mozilla Corp.’s Firefox, claims more than 120 million users. Google also has technology and wealth–$33.4 billion in cash plus stock worth $189.1 billion. go to site groupon houston

For now, Groupon is easily the sector heavyweight. It has 79% of the group-buying market, according to New York-based data researcher Experian Hitwise. In just two years, the company has signed up 40 million users, who receive its deals every day on everything from manicures to car rentals in 300 markets and 35 countries. It is adding 1 million subscribers a week and closing in on $1 billion in revenue on an annualized rate and up to 1,000 employees in Chicago and 3,500 worldwide.

Groupon also is profitable and boasts a powerful brand that’s synonymous with group-buying online.

But to stay on top, Messrs. Mason and Solomon will need to do more than simply enter new markets and add customers. They must recruit top talent and put in place technology and procedures to avoid getting bogged down in day-to-day minutiae.

“You can’t just keep growing a labor-intensive business and expect to generate the same traction as in the past,” says Allen Michel, a professor of finance at Boston University School of Management. “That’s why Google was an ideal partner: Its business is to automate things. Groupon hasn’t done it or shown they have the technology.” Groupon already is stepping up its game by slicing and dicing deals by geography, demographics and buying patterns, allowing it to offer up to seven deals each day in a market such as Chicago instead of just one. It has launched online “stores” and a subscriber “my deals” feed that give merchants a way to offer deals to Groupon members beyond the featured daily deal. The features create a recurring revenue stream, albeit with a lower cut for Groupon, at 10% to 30% of the deal instead of the typical 50%.

The stores potentially offer Groupon a way to automate the process of lining up customers, which is crucial as the company enters smaller markets or has to look harder for new customers as its business matures.

For Groupon’s investors, refusing $6 billion from Google may have been the easy part.

Pletz, John