The filing of the Groupon S1 has resulted in a lot of discussion about Groupon’s business model.  Most of the comments were negative, going as far as calling Groupon a “Ponzi Scheme,” although there were a few defenders, such as Steve Cheney.

I was particularly intrigued by a thorough analysis by Yipit that shows that Groupon’s economics appear to be deteriorating in a more mature market such as Boston.  If that is indeed the case, then it supports my previous contention that Groupon does not really have network effects as a business. Why?  If it did, then performance should improve over time and Groupon should be stronger (not weaker) in more mature markets.

The combination of uncertainty about the sustainability of the core model combined with rapid expansion (including international expansion) is what makes Groupon such a risky bet.  It reminds me of an Internet sensation from Web 1.0: Kozmo.com.  For those too young to remember :), Kozmo.com was a rapid delivery service for web based orders of food and lots of other things.  They grew rapidly with revenues.  They appeared to be doing well in their initial market (New York City).  They decided to expand rapidly, attracted head on competitors (Urban Fetch) and wound up running out of cash spectacularly.

The key lesson to be learned from the Kozmo.com flameout was: make sure you have a real Internet business with operating leverage and defensibility before embarking on all-out growth.  It will be interesting to see if Groupon turns out to be another Kozmo.com or the next Amazon.  I am with Joe and the Yipit follow-up post that it is too soon to tell, but it is far from obvious and there are a quite a few warning signs that suggest it might just be the former.  If the IPO succeeds, the number one priority for Groupon has to be how to generate cash in its core markets to fund new/growing markets.

The filing of the Groupon S1 has resulted in a lot of discussion about Groupon’s business model.  Most of the comments were negative, going as far as calling Groupon a “Ponzi Scheme,” although there were a few defenders, such as Steve Cheney.

I was particularly intrigued by a thorough analysis by Yipit that shows that Groupon’s economics appear to be deteriorating in a more mature market such as Boston.  If that is indeed the case, then it supports my previous contention that Groupon does not really have network effects as a business. Why?  If it did, then performance should improve over time and Groupon should be stronger (not weaker) in more mature markets.

The combination of uncertainty about the sustainability of the core model combined with rapid expansion (including international expansion) is what makes Groupon such a risky bet.  It reminds me of an Internet sensation from Web 1.0: Kozmo.com.  For those too young to remember :), Kozmo.com was a rapid delivery service for web based orders of food and lots of other things.  They grew rapidly with revenues.  They appeared to be doing well in their initial market (New York City).  They decided to expand rapidly, attracted head on competitors (Urban Fetch) and wound up running out of cash spectacularly.

The key lesson to be learned from the Kozmo.com flameout was: make sure you have a real Internet business with operating leverage and defensibility before embarking on all-out growth.  It will be interesting to see if Groupon turns out to be another Kozmo.com or the next Amazon.  I am with Joe and the Yipit follow-up post that it is too soon to tell, but it is far from obvious and there are a quite a few warning signs that suggest it might just be the former.  If the IPO succeeds, the number one priority for Groupon has to be how to generate cash in its core markets to fund new/growing markets.