As Wall Street Points Fingers at Groupon, Three Fingers Point Back

By Sarah Lacy , written on April 3, 2012

From The News Desk

Now I know how Goldilocks felt.

About the time Groupon was raising its $1 billion growth round and getting the big endorsement from some of the Valley's biggest names, I was bringing up all the problems with its haphazard Samwer-poisoned international expansion.

This lead to a lot of tense conversations with some of my best sources. For instance, my long-time friend Brandee Barker, who did PR for Groupon at the time, said of my coverage, "Wow, I'm not sure I've ever seen you take such a severe stab at a company." I humbly disagreed. Given the train wreck of wasted money and lack of accountability for Groupon's international division, I thought I was pretty fair.

As a consumer, I haven't exactly had a love affair with the company either. My husband and I have used a Groupon exactly once. And the longer the company is in business, the less relevant the deals are. "I don't want a massage in Timbuktu, I don't want a wax, and I don't want my nails done," my husband is saying right now, on one of many rants. My nanny just came in the room and added, "Are we complaining about Groupon? They email me way too much, and I don't care about any of the deals!"

But in the last few days, as Groupon's stock falls further -- just a nickel off its 52-week low in after hours trading today -- the Wall Street torches and pitchforks have come out yet again for the company. And I find myself in a strange position. I'm actually defending them. (Sort of.)

First off, I don't get Andrew Ross Sorkin's piece yesterday that Groupon is evidence why the JOBS Act is a bad move. He is talking about how the act would lead to more Groupons because of its provisions that ease regulations on investing in sub-$1 billion-in-revenue companies. That would make sense...except for Groupon had revenues of some $1.6 billion in 2011, so that change wouldn't have made any difference at all. Sorkin makes this point, but continues with the screed nonetheless.

He's uncharacteristically missing a huge point: The reason most everyone in the Valley was in support of the JOBS act was because it eases of the 500-shareholder rule allowing companies to stay private longer. This would actually prevent more Groupons, because it would allow rapidly growing companies to put off going public as long as possible. It would allow more companies to take the far more conservative Facebook route.

Both Groupon's rapid revenue escalation and its time to IPO and are key points to what the company has been going through since it went public. Even as a fairly big Groupon critic let me be clear: Most of Groupon's woes go back to one serious misstep. It went public years too early.

There is no company in the world that goes from zero to $1 billion valuation -- the fastest growing ever, gushed Forbes in 2010 -- in less than two years without having serious stress fractures, business model questions, and management team issues. None. That's like a kid growing a foot overnight and not having stretch marks and leg cramps. Even the Valley golden child Facebook had issues two years in.

Think back to how many scandals Facebook has endured over its lifetime: Presumptive founders wanting payouts, privacy scandals, business model difficulties, and many, many iterations of its senior management team. Facebook spent the first few years of its existence shedding full teams of managers, like a snake annually shedding its skin, until finally it hit on the right team to lead a $100 billion company. Facebook waited for it all to come out of the closet and for all its internal issues to get solved before it invited public shareholders to the party.

I'm not saying Groupon, with five or so more years as a private company, would magically turn into Facebook, far from it. But one way or another the mess of Groupon would have been sorted out with a little more dignity for the people genuinely working hard to build that company.

Rest assured, Facebook going public two years in would most certainly have been a disaster. It just wasn't ready. No company that grows that fast and establishes an entirely new market along the way is. Mark Zuckerberg most certainly wasn't ready as a CEO. And -- duh! -- that's why it didn't file.

This is what bothers me about so many Wall Street-minded people like Sorkin, now holding up Groupon as a poster child of the tech startup world's excess and over-promises: Wall Street has no one to blame but itself.

Since the dot com bust, Wall Street firms have been aggressively lobbying every single fast-growing private company to go public as soon as possible. Facebook has withstood the pressure since at least 2008. Sorkin himself detailed the wild-eyed enthusiasm with which firms pitched Groupon over the summer, desperate to take it public, in his words missing all sorts of the "red flags" in their zeal. Recently the Wall Street Journal did a bizarre post essentially calling Twitter a laggard for not being in a bigger hurry.

LinkedIn, Twitter (so far), and Facebook were all smart enough not to listen to the cheesy bulge-bracket pitch and took their time. Maybe it was greed and maybe it was naiveté, but Groupon wasn't. But that doesn't mean it's an "Emperor Has No Clothes" company that was actively trying to pull the wool over potential investors eyes. It just had serious problems that it should have figured out while still private.

Desperate to invest in private companies while they're still in early hyper growth? This is what you get, Wall Street. You can't have it both ways.