Smart corporates are scared of Groupon

The flotation of Groupon at a heady valuation last week had the requisite first day pop as shares climbed from $20 each to close at $26.11 to get the pundits talking about whether that company will be a dot.bomb or the next Amazon.  

Looking beyond the headlines, however, there is a new retail sector being created by venture capitalists and entrepreneurial opportunists, with corporate venturing units’ executives being some of the most aggressive at pursuing such opportunities. In fact corporates have positioned themselves as backers of many of the leading players in the sector.
Groupon, armed with an additional $700m, and an eye-watering market capitalisation of $12.7bn for a three year old company, is well-positioned to consolidate this sector. The company and its peers have created a new model of selling things over the internet.  Groupon can now attempt to use its size to become a mature player in its sector. This seems guaranteed, even if investors in the coming weeks get burned.

Georg Von Holtzbrinck publishing and Otto Group are two Germany-based corporates which have benefited from this initial public offering, as backers of City Deal, which owns 10.3% of Groupon. And this relationship taps Groupon into the close-knit scene of German investors, including the Samwer brothers and Rebate Networks, that have gone on to invest in so-called Groupon clones in emerging markets and which could be either joint venture partners or acquisition targets to use up some of the IPO proceeds.

Groupon’s private backer in DST has already provided a partnership to target the China market through. Effectively, Groupon could be argued to have set up potentially an interesting outsourced corporate venturing model itself without needing to get a team in place.

Yet for others Friday’s float could be a concern.
If the hype surrounding Groupon is correct, then its future competitors are not other daily deals sites, but retailers, search engines, media companies and others chasing or deploying advertising money.
No wonder its biggest competitors of the future, Amazon and Google, are using venture capital investments and their own in-house teams to explore the sector. Google even tabled a reported $6bn bid late last year, which Groupon executives must now feel partially vindicated in rejecting.
The defence strategies against what Groupon, and its imitators, will do to the internet have been very interesting.
Amazon’s bet has been to back what appears to be a strong Groupon competitor in LivingSocial with a $175m investment last year.
Google’s strategy looks to be more complex. Having failed to buy Groupon outright, Google is taking a wide-ranging approach to defending any threat Groupon, and its competitors, pose to its business model. It is working in-house, as well s buying smaller companies in the sector, while its corporate venturing unit Google Ventures has backed WhaleShark Media, a consolidator of the sector. Arguably Google’s acquisition of the classic restaurant guide Zagat, also looks like the acquisition of an option to play the daily deals sector using the voice of an august publication.
In a seeming more opportunistic development, Intel Capital also positioned itself in the sector backing Turkey’s Grupanya.
Two other capital market stories from last week point to an arms race for capital in the sector. Lashou, sometimes known as China’s Groupon, filed its S-1 with the Securities and Exchange Commission, while US-based local business listing company Angie’s List is also eyeing an imminent initial public offering.  Lashou has corporate venturing-style backing from Reinet Investments,  which span off from luxury goods group Richemont, while Angie’s List is backed by marketing company Aquent.  LivingSocial was also linked with pursuing a flotation in July.
Groupon’s IPO valuation may be read by many as the sign of a giant internet bubble. Yet it could also be remembered as one of the key moments which has changed the way people consume. Some of the most savvy corporates have positioned themselves in the sector just in case it is the latter. Interesting times in daily deals await.