Groupon, Zynga and Krugman's Frothy Valuations

A lot of opinions are being generated over the delay of the Groupon IPO. Many are becoming bearish on Groupon, and many are becoming bearish on the future of social media or at least the valuations of social media companies.

I think it’s a bunch of whistling in the woods. Social media is in its infancy. There aren’t even decent metrics to measure a lot of the statistics we have from the introduction of social media, so it’s awfully hard to have an opinion on whether this is frothy, or understated.

One thing we do know. There is something there and it’s big.

I have a different perspective from a lot of people because of my age. You don’t become bald without a little experience. I also look at things a lot differently because of my lifelong occupation, trading.

For those of you who don’t know, I have traded my own money for over 20 years. I never had a customer, a limited partner or anything else. When I placed a trade and put my hands on the chopping block it was my personal family’s money. I never had a trust fund or a family wealth safety net. It gives me a far different perspective on marketplaces than someone trading other people’s money.

Groupon or Zynga are not like the techs of the late 1990's. They actually generate revenue. Both are dealing with growing pains that come from the natural successful evolution from a start up business transitioning to a larger entity. Since they have filed for IPOs, instead of getting scrutiny from amateur analysts, the real pros on Wall Street are digging into their business models. Real pros don’t just opine, they ask tough questions.

Some valuations have gotten frothy. It’s just a case of too many dollars chasing too few businesses. Smart investors filter out the noise and look at the metrics they always have to decide how to value a company. In the start up world, much of it depends on how much you believe in the management team.

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With regard to Zynga, their business is heavily dependent on Facebook. That’s not necessarily a positive or negative, but when you commit investment capital you need to have both eyes open going in. The other negative to the business is that they constantly have to be creative to engage their user base. That costs Zynga working capital dollars that they consistently have to generate and plow back in the business. It also means the people that work there are on a constant creativity treadmill. However, based on a Wall Street Journal article I read over the past week end, they are really innovative in using data to determine what they do. While the easy money seems to have been made in Zynga, I like the company, because I like the management.

What about Groupon? Many I speak with refer to the indefensible barriers to entry they have, and the fatigue that businesses supposedly have over getting calls from them. This might be true. I think the delay to their IPO has more to do with the creative accounting that they tried to use to value their company. They need to redo the road show and answer some objections from institutional clients. They are still the 800 pound gorilla when it comes to social couponing.

Groupon has an incredible amount of data. They also have one of the largest email lists in the world. When location based couponing becomes the norm, why won’t they be first in line to win that battle? Knowing that data and utilizing it effectively should put them two to three steps ahead of potential competitors. As we have come to find out, it is expensive to run a virtual coupon business. As the business scales, customer acquisition costs escalate putting pressure on margin. However, that pressure will spur other innovation.

I was driving down the highway the other day and thought that someday, sometime in the future, a billboard company will be able to “see” the traffic that is coming down the road. They will tailor a digital billboard to try and sell to the needs and wants of the coming drivers. It will be able to change the billboard digitally hour by hour. They might even be able to direct message a phone. We don’t know how far technology will take location based business.

Groupon might have a hand in that business. They also might be able to instantaneously target customers that are simply walking down the street, or walking through the mall. The Tom Cruise shopping experience in Minority Report isn’t far off.

Stubbing your toe hurts for awhile. But, it doesn’t derail you from walking.

Consider the momentary disruptions at Groupon the equivalent of a pre-teen girl getting braces. It’s part of a maturation process. Certainly they have challenges. What business doesn’t?

Speaking of immature and overvalued, Paul Krugman wrote a column in the NY Times about 9/11 over the weekend. It was typical Krugman. Full of angst and why America deserved to be attacked on 9/11. He also politicized the after effects of 9/11.

What was interesting to me is that comments were disabled from his blogpost. It’s obvious he doesn’t care about what the rest of the world is saying.

Since I have began writing this blog I find interaction very interesting. Comments have caught me on bad math, have engaged me and others in debate, or simply allowed people to voice their own opinions.

Isn’t that what social media is about? Engagement, interaction?

To disable comments is to basically tell the world to go to hell. I am keeping my opinion and go screw yourselves.

Well, here is an innovative way to “comment” on Krugman’s NY Times piece.

Cancel your subscription.

He is a panelist on ABC Sunday mornings. Don’t watch. Would be nice if advertisers boycotted the show.

Better yet, if you are a donor to Princeton where he sits on the faculty, don’t donate money. If you have planned giving approaching, donate it to something else you deem worthwhile.

At many academic institutions around the country, there have been plenty of crackpot professors. Krugman isn’t alone. It doesn’t mean you have to support him.

Money talks and bullshit walks. When money dries up, people in charge start to shovel the sh#@t out the door so money can return. It’s time to end Paul Krugman.

In the subscription way, not the Jimmy Hoffa way.  

John Ransom | Create Your Badge

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