Groupon worth $25 Billion at IPO? A lesson in pre IPO PR.

So why is Groupon worth $25 Billion all of a sudden, when in December they were “only” worth $6 billion? Heck, less than a year ago they were valued at $1.3 Billion. So why the explosive value?

Simple, it’s all about setting the expectation for the market prior to going public. Groupon is worth what the public wants it to be worth. Sure their revenues expectation for 2011 are around a couple billion, sure they are highly profitable and growing extremely fast and sure they got almost $1 billion in investment at the beginning of the year on a valuation of $5 Billion.

So why, only a few months later, is this company worth $25 Billion? Because they are telling you, through the media that they are. Make NO mistake, investors, analysts and executives surrounding Groupon are highly intelligent, highly powerful individuals who know how to massage the industry’s expectations and play the investment/VC/Valuation game. A Groupon opportunity comes by only once every 10-15 years and they are all in. A Groupon IPO will make, not a few people, but many people, an enormous amount of money in an incredibly short period of time.

This is a classic valuation play when you have an enormous amount of money and really powerful investors in the picture. Investors want their 10 times return, so riding the Groupon wave they are pumping the media and the market with valuation expectations. Not only is it working but we would not be surprised if its valuation goes higher. Their goal is to IPO at atleast $15 Billion, making everyone involved a ridiculous amount of money. One of the most effective ways of getting that valuation is to set an even higher expectation of value, oh say $25 Billion, and let the media post, blog, write and share that story over and over again. Even if the media doesn’t agree with it.  Sure this approach only works if the company being promoted is actually growing fast, but really, the entire industry is inflicted with “Grouponitis”.  Groupon cannot lose in this scenario.

Typically, online based companies and software companies such as Groupon are sold for around 4-5 times revenues, some exceptional ones go much higher. At the present time based on 2011 expected revenues, Groupon would be sold around $8-10 Billion. So where is this $25 Billion coming from? On expectation of future revenues? Perhaps, but much like Facebook, Groupon is hot. As such here is the formula for its valuation:

1. Actual worth based on average IPO size of similar companies
2. Expectation of future revenues and profits based on present growth patterns
3. Its “hottness” factor
4. Market’s manufactured expectation (set a large valuation and let the media post it, talk about it and thus set the industry’s expectation)

Chart courtesy of Silicon Alley insider

-Groupon says no to Google’s $6 Billion offer
-Groupon raises almost $1 Billion in early 2011
-Investors need their money back quickly given the increased competition in this space (Google, Microsoft, Newspapers, publishers, Media companies, Living Social, etc).
-They do not want measly 5x return, they don’t even want a 10x return, they see that the market is ripe for a 20x return. Pump, pump, pump a valuation around $25 Billion…….go IPO between $15-$20 Billion.

Not too bad for a 2 year old company

The $25 Billion number or any valuation expectation “leaked” to the media and public almost always comes from “people with knowledge of the discussions who asked not to be identified.” How convenient.

Oh, and a $25 Billion valuation would place a Groupon IPO just above what Google was valued at in 2004, $23 Billion. Just saying….

How does this impact Canada or anywhere else for that matter? It will excite the market further and motivate publishers and media companies to get into the Daily Deal industry even more quickly.

Your thoughts?