One of the reasons a bubble formed in the tech sector back in the 1990s was that companies with very little history and flimsy financials were able to go public at hundred million dollar valuations. While the market for tech IPOs seems to be gathering steam, one encouraging sign is that the SEC is taking a hard look at some of the questionable accounting of Groupon, which has drawn a lot of criticism for its fishy S-1 filing and rush to spend capital paying back early investors and employees.
Groupon had an operating loss of $420 million last year. But the daily deal giant asked that stock pickers use a strange metric to gauge the company’s profitability: adjusted consolidated operating incomes, or adjusted CSOI. As Reuters Breaking Views column pointed out, “Strip out marketing expenses, acquisition-related costs, stock compensation, interest expense and payments to the tax man and, presto, the Chicago startup led by Andrew Mason earned $60.6 million. If investors accepted this fantastical form of accounting, all sorts of companies would be worth billions more too.”
And here is the breakdown from Peter Kafka on how Groupon used its investment capital. “Groupon raised a total of $946 million in two funding rounds last winter. It kept $136 million of it help run the money-losing company. The remaining $810 million was paid out, via stock purchases, to CEO Andrew Mason and some of his backers, including Eric Lefkofsky, and, notably, the Samwer brothers, who sold their CityDeal company to Groupon in 2010.”
We’ll reserve judgement until the company puts out its revised S-1, and acknowledge that this is a new market where growing fast is vital. But a money losing company that is using new investor’s money to pay back old ones and scrambling to dump the whole hot mess on a public hungry for tech IPOs is not a pretty picture.