“A multibillion-dollar valuation for a company that is in a business with virtually no barriers to entry and is younger than my toddler is absurd,” Sucharita Mulpuru, Forrester Research retail analyst, wrote in a note to clients on Tuesday morning.
Groupon began in November 2008, growing out of an earlier company that Mr. Mason created in 2007 called the Point, which tried to rally groups of people behind charities and social causes.
Not all small businesses are sold on the golden promise of Groupon. Ina Pinkney, the chef and owner of a cafe called Ina’s, in Chicago, said she was curious about Groupon when she first heard about it a couple of years ago. She ultimately decided against using it.
“We did the math up front when they first started coming around to us and I said, ‘No, it really doesn’t make much sense,’ ” she said. “If we were to offer a $25 coupon for $50 worth of food, it doesn’t work.”
Groupon’s cut is half the dollar amount of the coupon, so the average amount of money Ina’s would collect for each Groupon customer was around $12.50, she said.
“I would never produce that much food for such a small amount,” she said.
She acknowledged that it might work better for a cupcake shop or a spa, where the material cost was much lower.
Ms. Pinkney, who uses social tools like Facebook and Twitter to help promote her business, said she was not convinced that a service like Groupon would generate repeat customers. “People don’t go back,” she said. “They just wait for the next Groupon and flock to that next restaurant.”
But for many retailers, it is less about the potential revenue a sale could generate and more about the promotional value of a Groupon spotlight and the hope it will attract new customers.
The company has grown fast. In 11 months, Groupon has ballooned from 200 employees. It moved its monthly company meeting to a local church because its Chicago headquarters, in a former Montgomery Ward warehouse, didn’t have a conference room large enough to accommodate the staff.
About 1,000 people work in the Chicago office and some 2,000 more are spread across its sprawling worldwide network, which includes the employees of its recent international acquisitions, ClanDescuento and Citydeal.de — group-buying sites in Chile and Germany. According to Groupon, the company is adding more than 200 employees a month.
Despite increasing competition from new rivals like Living Social, Gilt City and TownHog, and what appears to be an easily imitated template, Groupon has continued to pick up revenue momentum.
Although the company’s strong cash flow is attractive for Google, the bid is highly strategic, and in part, a defensive move, said Danny Sullivan, the editor of Search Engine Land, an industry blog.
Google has big ambitions for local services, which include listings of businesses alongside its mapping service, although Google has had only modest success with the program after years of trying. The company has recently stepped up its efforts, promoting a prominent executive, Marissa Mayer, to oversee the local business in October and trying to buy Yelp, the local review site, last year.
Google fears the damage rivals could inflict if they acquired Groupon instead. Facebook, which has become a larger threat in recent years, could use Groupon to enhance its formidable position in social networking, Mr. Sullivan said. Meanwhile, Microsoft could use Groupon to erode Google’s dominance in search.
“What’s the price of not buying it?” Mr. Sullivan said.