New Capital for Groupon Sets Stage for an Offering

New Capital for Groupon Sets Stage for an Offering - New York Times

Tim Boyle/Bloomberg NewsGroupon employees at the company’s headquarters in Chicago.

The 30-year-old founder and chief executive of Groupon, Andrew Mason, could raise as much as $950 million from investors in the next few weeks, laying the groundwork for a multibillion-dollar initial public offering in 2011.

The social buying site, which offers coupons for local businesses, has so far locked up $500 million in fresh capital from Fidelity Investments,Morgan Stanley, T. Rowe Price, and other large investors — allowing Mr. Mason and eight other directors to take a significant amount of cash off the table.

In the coming weeks, the company could bring in another $450 million, according toa Securities and Exchange Commission filing on Thursday.

If successful, Groupon’s latest fund-raising effort would be the largest ever for a start-up, a venture capital record held by DreamWorks Animation SKG for the last 15 years, based on Thomson Reuters data.

A spokeswoman for Groupon declined to comment on the outside investments.

The fund-raising is all part of the typical life cycle for an Internet start-up. But Groupon has gone from a quirky idea to Web darling in about two years — an especially fast evolution that got a turbo charge when the Chicago-based company spurned a $6 billion takeover offer by Google in the first week of December.

A frenzy of activity followed the failed bid.

Within days, institutional investors started lining up, ready to provide significant capital infusions. On Dec. 20, Groupon hired its first chief financial officer, Jason Child, a former Amazon.com executive. By Thursday, Fidelity, T. Rowe Price, Morgan Stanley and others had committed $500 million, according to two people with knowledge of the fund-raising who asked for anonymity because they said they were not authorized to speak publicly.

Meanwhile, Groupon, with revenue above $1 billion, continues to grow at a breakneck pace. In the last month, the site’s subscriber base has jumped 42.3 percent to more than more than 50 million worldwide, the company said. On private exchanges that facilitate trading in tech start-ups, Groupon has an implied valuation approaching $5 billion, up from $1.2 billion in June.

With its giant war chest and investor excitement, Groupon is planning to hold an I.P.O. at the end of 2011, these people said.

The company’s eagerness to enter the public markets stands in stark contrast to another Internet star, Facebook. The social media giant reluctantly — almost grudgingly — seems headed for an I.P.O. in the next two years. The S.E.C. is looking at private trading in Facebook shares, which may prompt the company to go public earlier than it wants.

If either company holds a public offering, it would be the most highly anticipated since Google’s in 2004. A multibillion-dollar deal would also go a long way to reviving the moribund I.P.O. market, which has been in a slump since the financial crisis. In the last three years, only 61 tech start-ups have gone public — and none valued at more than $1 billion, according to boutique investment firm Renaissance Capital.

“The market has been waiting a long time for that innovative young company, like a Groupon, to hit,” said Paul Bard, a vice president at Renaissance Capital. “Having one of these companies go public would validate the I.P.O. market for a lot of smaller companies waiting in the wings.”

Groupon could be rushing its debut, in part, to cement its dominance in the online advertising market. While Groupon is the 800-pound gorilla, it is a highly competitive space that has spawned scores of clones that are becoming viable threats. The No. 2 player, LivingSocial, has more than 10 million subscribers and recently raised $175 million from Amazon.

For now, Groupon has first-mover advantage. But that edge can quickly evaporate as Friendster and MySpace learned when Facebook entered the social media fray years ago.

“If they raise all this money privately and then become the first to go public in this space, they will become the de facto winner,” said Peter Falvey, co-head of technology investment banking for Morgan Keegan. “They have a good lead, but the idea is to go for the knockout punch — an I.P.O. would be a huge branding event.”

For Groupon’s new class of investors, it is all about that eventual payday. By jumping in now, T. Rowe Price, Fidelity and Morgan Stanley get an opportunity to peer into the company’s books and more important, get in before the public offering so the potential for a windfall is greater.

T. Rowe Price and Fidelity have participated in venture capital deals before. In 2008, the two firms teamed up on a $50 million fund-raising effort for Slide.com, a Web application developer. T. Rowe Price also has a stake in Twitter, which recently raised $200 million.

“Institutional players are dealing with a competitive environment, and they’re looking to put capital to work in a differentiated way,” said Tige Savage, a board member at LivingSocial. “They see it as an opportunity to get involved earlier at a better price and lock themselves into larger positions at these companies.”

As institutional investors patiently wait for their payout, Groupon’s directors could soon get a windfall. The company plans to use $344.5 million from the latest fund-raising round to let Mr. Mason and the rest of the board cash out some shares.

That would be the second time this year the company’s founder banked profits. “Historically, most private company investors don’t get meaningful liquidity from other private investors,” Mr. Falvey said. “Groupon is the exception, not the rule.”