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Groupon’s IPO: Lessons Learned

What you can learn from Groupon’s public offering and its aftermath.

Earlier this week we wrote about the downside of filing an IPO, but often filing makes sense, despite the pitfalls. Groupon is one example. On Nov. 4, Groupon’s shares closed at $26.11 on its first day as a public company. According to its public filings, the company floated approximately 5 percent of new shares through the public offering. This is obviously a very small stake in the business, and it’s a major effort and cost to the business to embark on an IPO. A month later, their share price is down more than 25 percent (close to their initial offering price of $20 per share) during a period when the NASDAQ has remained flat.

What lessons does the Groupon IPO offer for your own growing business? We see two.

1.  Sell High

This clearly was not the intent of the Groupon shareholders and management team, but thus far, the market is signaling that they got a pretty good deal–at least for the 5 percent of the company they sold to new investors. The company’s current market capitalization is $12 billion for a business with $1 billion in revenue and negative earnings. This suggests pretty heady future expectations from investors.

Should Groupon have sold more shares? Effectively, Groupon brought in over $700 million of proceeds from their IPO at a 38 percent premium to their current share price. (Isn’t hindsight great?)  Selling 10 percent or even 50 percent of its shares would have been more profitable, although the bankers may have told Groupon that a larger stake would be a harder sell. Of course, most management teams never believe their company is overpriced, but maybe you should think differently.

2.  Take Advantage of Your Investors’ Need to Cash Out

Groupon didn’t go public only because they needed the cash. With $244 million in cash and relatively little debt on its books, Groupon was not struggling for financing, and may have been able to raise capital from private sources. But, given that its private equity investors had done extremely well with their investment, they likely were ready to cash out and needed to create a liquid market for their shares.

Of course, we will see if this is true once the 180-day lock-up lapses and “insiders,” including management, major shareholders and the deal underwriters, are allowed to sell their shares into the public market. Many PE investors need to return capital to shareholders within a specified timeframe and can’t put themselves in the position of a pure long-term investor.

The lesson here is that, if you are a long-term investor or management team member, you can use the opportunity to raise growth capital, allow your investors to sell out, and hold onto your own shares while you grow the value of the company. If the price drops following the 180-day holding period, as it has in Groupon’s case, you may even have the opportunity to buy additional shares (or employ a company share buy-back program) as your seed investors are exiting.

Time will tell who the winners and losers are in the Groupon story, but in the meantime, you can learn a lot about the experience and apply it to your own business.

Karl Stark and Bill Stewart are Managing Directors and co-founders of Avondale, a strategic advisory firm focused on growing companies. Avondale, based in Chicago, is a high-growth company itself, and is ranked No. 95 on the 2011 Inc. 500 list. @karlstark