Groupon and Zynga: Cat vs. Dog for Wall Street’s Affections

Groupon and Zynga may not compete in the same business, but they are both racing to be the next darling on Wall Street.

Despite the obvious differences — Groupon is a local commerce company and Zynga is a social games company — many other similarities can easily be identified between the two.

The most obvious overlap is that they both expect to raise a lot of cash from the public markets. Groupon beat Zynga to the punch by saying earlier last month that it is seeking to raise roughly $750 million. Just last week, Zynga filed, saying its aim was to raise $1 billion or more.

In many ways, Zynga, based in San Francisco, and Groupon, based in Chicago, have been following the same formula: Get big fast, create new industries that are amazingly good at generating tons of cash and go public.

What’s even more amazing is that they are both comfortable going public before either knows exactly how its respective industry will shake out over the coming years.

Here are a few more parallels that can be drawn …

Vanity Fair profiles!: Both of the company’s chief execs have been profiled recently by Vanity Fair.

  • In August, Groupon’s Andrew Mason was portrayed as a six-foot-tall idiosyncratic, accordion-playing prankster, who once had an idea to give Michael Bloomberg a pony.
  • In June, Zynga’s CEO Mark Pincus, who helped create “silly” Facebook games like FarmVille, CityVille and Poker, was described as the five-foot-six guy who takes fun very, very seriously.

Compressed time frame: The ramp-up has been extremely fast for both companies.

  • Zynga was founded in 2007 and has grown to 2,000 employees from 157 in 2008.
  • Groupon was founded in January 2008 and has grown to 7,107 employees from 37 in 2009.

Wacky accounting: Both companies are using creative accounting procedures to explain their young industries and make their financial statements look better than they otherwise would.

  • Groupon: Adjusted Consolidated Segment Operating Income, or Adjusted CSOI for short. This metric represents the company’s operating income before it incurs massive marketing costs to acquire its subscribers.
  • Zynga: It reports both revenues and “bookings,” defined as the total amount of revenue from the sale of virtual goods during the same period the purchase was made by the player. Under GAAP accounting, revenues may be spread out over a year or more, which is the average life of a virtual good.

Strength in the oldest markets/games: The good news is that both companies perform best in at least some of their most mature markets and games.

  • Groupon: Chicago is Groupon’s oldest market and is where it likes to tests out new features and prove its business model. As of March 31, it had 1.5 million subscribers in Chicago and in the first quarter generated $21.5 million in revenue from nearly 1 million Groupon coupons sold.
  • Zynga: Zynga did not disclose how well individual games were performing but said FarmVille, which launched in June 2009, achieved record revenue in the quarter ended March 31, 2011.

Risks: Because both companies are relatively young, neither knows how its business will evolve over the coming years.

  • Groupon said in its filing that it has experienced “rapid growth over a short period in a new market we have created and we do not know whether this market will continue to develop or whether it can be maintained.”
  • Zynga provided a similar disclosure: “We began operations in April 2007, and we have a short operating history and a new business model, which makes it difficult to effectively assess our future prospects. Our business model is based on offering games that are free to play. To date, only a small percentage of our players pay for virtual goods.”

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