Plunging Valuations and Surplus of Groupon Clones Sets Off Frenzy of M&A Activity

9/20/11Follow @bvbigelow

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an oversupply of daily deal companies, negative sentiment among analysts and investors following Chicago-based Groupon’s IPO filing, and an increasing reticence about among startup investors to back new companies.

The early success of Groupon and Washington, D.C.-based LivingSocial triggered a stampede among investors eager to get in on the daily deal bonanza by backing similar startups. CB Insights said 180 different investors have financed new companies in the sector, with several making multiple bets. Venture capital firms account for 46 percent of this total, and angel investors make up another 30 percent. Corporate investors, private equity firms, hedge funds and other types of investors account for the remaining 24 percent.

Because the online daily deal business is relatively easy to enter (due to low cost and technological barriers to entry that also are relatively low), the number of “me too” companies has proliferated. However, CB’s analysts report that many of the Web companies competing in the space are not significantly different from each other—making it even more of a buyers’ market for M&A activity.

Meanwhile, the CB report found that investor optimism for backing additional companies in the industry appears to have dissipated in July and August, with startup financing falling back significantly, albeit to historical levels. Worries about the overall economy and stock market volatility have only compounded investor reticence.

Nevertheless, the CB report found a “healthy stable” of firms rumored to be eyeing daily deal companies and for whom acquisition may be the preferred.way to enter the industry, “Given declining valuations and increased acquirer leverage,” the report says, “they may actually see opportunity to jump into the fray.”

CB Insights summarized its findings in this graphic:

Bruce V. Bigelow is the editor of Xconomy San Diego. You can e-mail him at bbigelow@xconomy.com or call (619) 669-8788 Follow @bvbigelow

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  • http://www.Exits-Blog.com Basil Peters

    Outstanding article, Bruce.

    This is a class case of a “wave of consolidation”. Very few entrepreneurs and investors appreciate that this is actually a common occurrence. Granted, this is an excellent, extreme example.

    In this space, it’s already too late for the companies that are not already in exit negotiations.

    I hate to see this happen. So many successful companies wait too long to start their exit and end up with far less than they could have received if they timed it better: http://www.exits-blog.com/timing-your-exit-dont-ride-it-over-the-top/