Whenever Chicago is discussed as a new hub for digital business startups, boosters inevitably cite Groupon because it has become unbelievably big, unbelievably fast. Critics inevitably stress the unbelievable part.
Management of the discount Web giant has not done any favors for itself or this city, whose reputation as a startup incubator has become tethered to it, with what the company acknowledged last week. It's facing its latest accounting screw-up, formally conceding "a material weakness in its internal controls."
This "weakness" most recently showed up as a revised, bigger loss in the fourth quarter, a three-month stretch that analysts expected would deliver the company's first profit.
Groupon said it underestimated the amount of money it needed to set aside for customer refunds. The foul-up occurred because the company was unprepared for the fact that higher-priced transactions required a greater reserve.
But it's an all-too-familiar stumbling block for Groupon Executive Chairman Eric Lefkofsky, Chief Executive Andrew Mason and the venture they co-founded less than 31/2 years ago and is valued at $9.7 billion. And it continues to undercut faith in a business model far too many already view with skepticism.
"Whenever you have a young company, especially with young leadership, there are wizened old faces that are skeptical about the young guys pulling off what they've set off to do," said James Post, a professor at the Boston University School of Management.
"Groupon's had a tremendous run. Most observers would say they're at a critical point in their life history, and the thing about critical points is they can go one way or the other," Post said. "It's going to be the skill of that management team that makes the difference."
Many have made big bets on Groupon, despite all the questions about its sustainability. There are the businesses that use it as a marketing tool, and the consumers who use it as a way to save cash. Then there are the investors who saw an IPO introduced at $20 in November rise as high as $26, only to see a decline exacerbated by the most recent revelations. Shares are now down to about $15.
Beyond the market's shaken confidence, the Securities and Exchange Commission is said to be looking into this latest gaffe, as are investors' lawyers.
Few stakeholders, however, have as much riding on the nascent company as Chicago and its hopes to become a Midwestern hub for tech startups.
Less than 5 percent of this city's tech talent is with Groupon, estimates Matt Moog, founder and chief executive of Viewpoints.com and a leader in Chicago's digital startup scene. But he concedes Groupon casts a far larger shadow when outsiders look to whether this is a fertile place for an entrepreneur to launch a company worth $10 billion to $20 billion.
"If you're looking at our national reputation, it's important that Groupon succeed," Moog said. "This is a setback. But is it more perception than a substantive problem with the business? If there were fewer merchants (participating in Groupon deals) or there were fewer consumers taking advantage of the deals, I'd worry about that a lot more than I would worry about a short-term accounting issue."
Taken in and of itself, that might be all it's seen as. But that means disregarding that this is a company that has gone without a chief operating officer since Margo Georgiadis returned to Google just five months after Groupon hired her away last year.
