Analysis: Will Groupon fail?

In my various capacities as a startup advisor and Director of the Founder Institute in Colombia, I’m continually analyzing new business concepts and business models. On occasion, it’s useful to compare business ideas with established successes.  In the daily deals segment, the company that I’ve had trouble coming to terms with in terms of its long term viability is Groupon.  Although it’s much bigger than Latin American competitor Peixe Urbano, I’m not sure it’s future growth prospects are as assured.

As anyone in Venture Capital will tell you, you need to have some decent analytic skills (among other skills) to do that type of work.  Fortunately, after more and more cycles, you start to benefit from pattern matching new business concepts with previously reviewed businesses and even established successes.  Last year, I had the opportunity to sit down with Adeo Ressi, creator of the Founder Institute, during his office hours here in Colombia to review ideas from the first semester of enrolled founders and was humbled by the rapidity and precision with which he analyzed each idea and provided feedback.

When working with new startups, I’ve come across the Groupon example and whether to hold it up as an exemplary success or a house of cards is a question that continually comes up. Whatever the answer to that question, I do believe that the company has provided a catalyst to digital businesses in emerging markets that it probably never intended.  In Colombia, for instance, eCommerce had been advancing at a pretty vapid pace.  Once Groupon entered the scene last year, online retail sales have really started to take off (so much so, that it convinced myself and some investors to start an eCommerce women’s fashion site called SuperTrendi).

Nevertheless, when I look at Groupon, I see qualitative problems that I believe impact its viability.  For instance, the Groupon brand gets more tarnished by the day as a growing portion of users and businesses have either a mediocre or bad experience using the service.  On the quantitative angle, an analyst called Rocky Agrawal, just wrote an excellent piece on VentureBeat (disclosure: I’ve been a contributor to that tech blog in the past) about why he thinks Groupon is set for a fall.  Among other things, he sees a problem between the amount the company reserves for refunds and the amount of actual refunds that are requested (higher than the former number).  Finally, when the lockup period ends in May, it’s a relatively safe prediction to say that many directors and executives of that company will be selling large swathes of stock.

I don’t know if this scenario will come to pass, but I see other “gifts” that Groupon has provided to emerging markets, particularly in Colombia.  In addition to promoting eCommerce and opening a path for new Colombian entrepreneurs, it has almost single-handedly shown small and medium businesses in this country that online marketing CAN produce sales, hence, opening their minds to the potential of digital tools.

Finally, by building a large organization in this country, it is teaching a large cadre of professionals and executives invaluable lessons on the do’s and don’ts of running a startup. I’ve met  some of the local employees, including the country manager, and these are quite capable people.  Some of these, I’m sure, will help start a host of new startups in Colombia.  I’m sure this wasn’t the intention of Groupon’s founders, but such is life.