In January 2011, daily-deals site Groupon (NASDAQ:GRPN) put out a press release with the following title: “Groupon Raises, Like, A Billion Dollars.”
Well, it wasn’t actually a billion dollars — Groupon actually raised $950 million. (In retrospect, it served as an omen of the company’s future accounting issues.)
The announcement included a who’s who of the world’s top venture capitalists: Andreessen Horowitz, Battery Ventures, DST, Greylock Partners, Kleiner Perkins Caufield & Byers, Maverick Capital, Silver Lake and Technology Crossover Ventures … with all that smart money behind it, what could go wrong?
A lot, apparently. The headlines surrounding Groupon have been mostly bad since the company’s IPO. The company has had two earnings restatements, growth has decelerated, Starbucks‘ (NASDAQ:SBUX) Howard Schultz left the board and the business model is being shifted to selling goods. Groupon’s stock has plunged from $31 to $4.79 during the past year, putting GRPN at a valuation currently 40% less than it was during December’s venture round!
And the most recent hit: The Wall Street Journal is reporting that some of Groupon’s marquee investors are fleeing. Andreessen Horowitz dumped all its holdings, Fidelity cut its stake by about a third and Maverick Capital reduced its share count from 6.3 million to 2 million.
Still, not all of Groupon’s investors are bearish, and some actually have upped their investments in GRPN — those in the bullish camp include T. Rowe Price (NASDAQ:TROW) as well as Morgan Stanley (NYSE:MS), which was the company’s lead underwriter.
The lesson? Sometimes, the so-called “smart money” makes mistakes. Even the world’s top financial minds can get caught up in bubble behavior and make bad deals — in fact, that’s a common theme in tech history, as exemplified by the 1990s.
If anything, the optimism of the smart money might actually bode poorly for hot tech companies. After all, the descent from popularity suffered by Groupon also has played out in several other deals, including Zynga (NASDAQ:ZNGA), Facebook (NASDAQ:FB) and Angie’s List (NASDAQ:ANGI).
Thus, when considering a hyped investment — especially in an IPO — patience can be your greatest virtue. More often than not, you eventually can get in at a much better valuation and avoid some heavy losses.
Tom Taulli runs the InvestorPlace blog IPOPlaybook, a site dedicated to the hottest news and rumors about initial public offerings. He also is the author of “All About Short Selling” and “All About Commodities.” Follow him on Twitter at @ttaulli. As of this writing, he did not own a position in any of the aforementioned securities.
