Groupon filed for an IPO. They have 83 million couponers in their club. They've grown their revenue 20,000% since June of 2009. These are gaudy numbers. And Groupon CEO Andrew Mason has outlined several characteristics that he says define the company and should justify investor confidence in an increasingly competitive space. This via Huff Po:

"We don't measure ourselves in conventional ways"..."we are unusual and we like it that way"..."we are always reinventing ourselves"..."we aggressively invest in growth."

So Groupon has big numbers, says edgy things about themselves, has a super-slick tech interface, and writes funny-as-hell copy. Man, that copy is Onion-like funny sometimes. The net-net: Groupon has produced diamonds while the global economy has become so many lumps of coal. But what about the companies they prospect for and the investors they court?

Let's start with a basic question: Does Groupon create profitability for the companies it works with? Fellow Austinite Sam Decker wrote a piece entitled"Analyzing Groupon Profitability" about this very question last October. Frankly, it has more analysis in it than many people would be wiling to do, including myself. Here's an excerpt worth noodling:

Assume you’re the owner of a spa salon and you offer a coupon of $50 for $100 of spa services (to make it easy), and you sell 1,000 of them.

You get $25 from each sale (because typically 50% of the $50 goes to the group buying site). If you had 50% margin on the $100 list price, then you’re losing $25 on each deal and 1,000 of these coupons is costing you $25,000 in negative margin.

On the plus side you’ve acquired 1,000 new customers. However, how many of those are actually ‘new’? This is the first key assumption and the maturity and visibility of your company will be important in determining this value. Let’s assume 20% of those who received the coupon would’ve bought at full price. That’s 200 customers that would’ve given you $10k in margin, but instead cost you $5,000. That’s a $15k net swing.

The remaining customers are new, 800 customers that cost you $20k in negative margin But, how many will buy again at full price over the year? This is another key assumption and the type of business you have and the kind of service or product you provide have impact on the lifetime value calculation. For this exercise let’s assume 20% of the 800 new customers will come back and spend $100 in services again three more times in the year. That’s 160 customers driving $150/yr in margin (3x $50 margin) = $24k in margin.

As Sam concludes in this hypothetical situation, Groupon is not profitable for the company that uses them. Sam goes on to quantify additional factors that couldlead to profitability for the company running the Groupon. This analysis really stuck with me and made me think that Groupon might just be in the business of extracting shovels of value from the many organizations who work so hard to create it for themselves. But in the short term, their need is so great that there's no time to think it through. Saying "yes" is too easy. The copy is too funny/ And then they see the shovel-shaped hole left in their revenue and perhaps even their brand left by this interaction. You got Grouponed!

Something else jumped out recently through the Twitter stream while I was considering the above. A gent named Peter Kafka wrote a piece entitled "Where Did Groupon's Billion Dollars Go?" Good question. And the answer comes from a review of their S-1 filing:

The details: 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.

Hmmm. This info puts these quotes from Mason, "we are always reinventing ourselves," and "we aggressively invest in growth" in a whole new light. As in, 'we are always buying new things for ourselves' and 'investing in our own personal portfolios.'

This whole operation starts to feel a little bit like strip mining to me. From the wiki: "This type of mining is generally only feasible when there are large amounts of mineral to be extracted very near the surface." Exactly. 

My unofficial gut read on this? All buyers beware of the meta effects of this trend in the market. And consider how it may just be thinning out the already brittle value of the many for the gain of the very few. Then again, that might be exactly why you want to buy Groupon. Just know that you might be a party to changing the small business landscape for the worse.

As my fellow FearLess contributor Gino Bona quipped, "Groupon is empowering groups. But Groupon is empowering groups to do the wrong thing.  And in the process, these Groupon-led groups are devaluing businesses while Groupon rakes in a staggering profit based on the thinnest of values."

Let the free market debate rage in the Comments section.

Original wording by Adam Butler as published at fearlessrevolution.com

Illustration by Rachel Marshall