📉 The crazy rise and fall of Groupon

Hey Founders,

Welcome to The Runway Ventures, a weekly newsletter where I deep dive into startup mistakes and lessons learned to help you become a better founder.

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☠️ 1 Failed Startup: Groupon

🚀 The Rise of Groupon

Founded in 2008 by Andrew Mason, Groupon was a pioneering daily deals platform that offered group discounts of up to 80% on various products and services from local businesses (i.e. restaurants, retail stores, spas).

🔖 Their products? Digital coupons.

• The Problem — After the financial crisis in 2008, consumers wanted to cut expenses by getting discounted deals and businesses faced challenges in attracting new customers.

• The Solution — Groupon provided a platform where consumers could get group discounts and local businesses could attract new customers through these deals.

  • Essentially it’s a win-win deal. Customers got discounted deals and local businesses got new customers.

🔥 Within 3 years of its launch, Groupon became the fastest-growing startup, operating in 35 countries with 150 million subscribers to its newsletter. In 2010, Groupon famously rejected a $6 billion acquisition offer from Google.

Why? Because Groupon had its own plan.

🤯 In November 2011, Groupon went IPO with a $13 billion valuation (one of the biggest IPOs since Google's debut), despite concerns about its business model (more on this later).

📉 The Fall of Groupon

⚠️ While Groupon's IPO was being prepared, cracks in its business model started to appear.

Groupon’s merchants complained that the customers acquired through deeply discounted deals did not become loyal, leaving them with only the costs. As a result, businesses pulled back from offering deals, forcing Groupon to expensively acquire new merchants.

This caused Groupon's Q1 results to show a $37 million loss after going public, leading to a downward spiral of bad press and disappointed investors. Besides, questionable accounting practices and an inexperienced founder/CEO made the situation even worse.

📌 Here’s what happened to Groupon:

Despite multiple turnaround attempts, Groupon continued its terminal decline, losing money and facing the risk of running out of cash if its journey toward positive cash flow doesn’t work out.

Want to learn more about Groupon’s downfall?

• Groupon: The Rise, Fall and the Here and Now

• Groupon to cut 1,100 jobs, exit 7 countries

• Lesson from the Fall of Groupon: A Tale of Shifting Fortunes

⚠️ 2 Mistakes

Mistake 1: Unsustainable business model

💰 For us to understand why Groupon’s business model wasn’t sustainable, we first need to understand how its business model worked:

• Groupon operated a two-sided marketplace business model.

• Groupon made money by keeping a percentage (typically 50%) of the revenue from each coupon/deal sold.

• For example, if a merchant priced a $100 service at $50 on Groupon, the merchant got $25 and Groupon kept $25 as commission when the deal was redeemed.

• The commission percentage varied based on negotiations with merchants and marketing services used.

💸 Here’s why the business model wasn’t sustainable:

• Low customer lifetime value (CLV)

  • Groupon's business model relied heavily on offering deep discounts to attract customers, which did not result in long-term customer loyalty for the merchants.

  • Many businesses complained that the deals were not profitable and did not lead to repeat customers. This led to a decrease in merchant participation, which in turn reduced the attractiveness of Groupon’s platform to consumers.

• Alternative advertising channels at lower costs for merchants

  • Small businesses had more efficient ways to advertise (i.e. FB, IG), and there's almost no reason for a company like Groupon to exist anymore.

  • This means more merchants would leave Groupon, leading to low revenue for Groupon.

Mistake 2: Leadership and operational missteps

It seems that Andrew Mason lacked the experience needed to navigate a rapidly scaling public company. Besides, Groupon also faced allegations of questionable accounting practices, which further eroded trust.

The lack of experienced leadership and the negative perception caused by accounting issues led to poor strategic decisions and operational inefficiencies. Mason’s eventual dismissal in 2013 marked a significant leadership crisis for the company.

🧠 3 Lessons Learned

Lesson 1: Customer lifetime value is key

A sustainable business model shouldn’t only attract customers but also ensure their long-term engagement and loyalty.

Lesson 2: Experienced leadership and transparent operations are important

Effective leadership and transparent operations are crucial for navigating growth and maintaining trust with stakeholders, especially when you’re running a public company.

Sometimes, founders who started their companies might not be the best persons to run the companies, hence the need to hire an external CEO with the right experience and expertise to continue running and growing the companies.

Lesson 3: Localise your product for local market adoption

Even though Groupon grew to 35 countries within the first 3 years of its operation, it seems that Groupon was outcompeted by local competitors, leading to low market adoption.

For example, Groupon relied heavily on email marketing to promote deals to its subscribers via email. However, people in Thailand mainly use Facebook or Line instead of emails. That was one of the reasons why Groupon could hardly gain traction in Thailand and eventually exited the market.

That's all for today

Thanks for reading. I hope you enjoyed today's issue. More than that, I hope it has helped you in some ways and brought you some peace of mind.

You can always write to me by simply replying to this newsletter and we can chat.

See you again next week.

- Admond

Disclaimer: The Runway Ventures content is for informational purposes only. Unless otherwise stated, any opinions expressed above belong solely to the author.

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