Tomorrow, March 7th 2014, is the scheduled IPO for Coupons.com, Inc. For those interested, or not, here's my 10 cents on why the SEC filing is a little on the conservative side (they always are). It says Coupons.com, Inc. has never been profitable since they began in 1998. While that's true, it isn't completely true. In another lifetime, Coupons.com was once profitable, under the brand name CouponNet, and I have every confidence that Coupons.com, Inc. will be profitable too.
20 years-ago, I registered a couple of domain names - Coupon.com and Coupons.com. In fact, I had to fight hard to register Coupons.com because, back in 1994, Network Solutions were only registering one domain name per applicant. After carefully explaining that coupons.com was the plural of coupon.com, and that Network Solutions would find themselves with an intellectual property dispute if they registered it to someone else, they reluctantly registered the domain name to me. In December of 1994, I put the first downloadable coupon on the web, which was for a British pub in the Los Angeles area (not exactly a surprise for those of you who know me).
I grew the site with what was social media back then - a very early web-based forum which earned (under the brand name CouponNet), a Very Innovative Practice Award for Best Online Community from CommerceNet in 1996. The auditor, from Arthur D. Little, told me that we had received more nominations than all the other category winners combined - which included Fedex, Ford, Amazon, and the US Social Security Administration. In spite of all this success, the VC community didn't understand couponing because, in their words, they would "never be seen dead using a coupon" (you know who you are). Consequently, I funded it all myself, and, in true dot com form, ran out of money in 1997. The site was put on the back burner, and I went to work as a DoD contractor to bring their contract management workflow onto the web. This had the advantage of getting down and dirty with encryption to see if there was a way of making digital rights management (DRM) actually work in commerce. The answer turned out to be quantum, depending on which way you're either a) looking at the problem, or b) understanding the answer. The Coupons.com server eventually melted down, no longer even able to survive a daily reboot. When I went to archive the hard drive, it was the only one I have ever seen with 100% disk fragmentation.
During the summer of 1999, I explored getting Coupons.com back online. As it turned out, I had a nightmare of a commute to the DoD job along what is now known as the most congested stretch of California freeway. My commute shrank from 90+ minutes to around 35 minutes if I waited until after 7pm to leave the compound. So with time to kill, I spent an hour a day, after work, getting Coupons.com back online and found it was much different this time around. Firstly, I put live advertisers up in September 1999, and there was an immediate revenue steam. Secondly, by the end of December 1999, there was positive cash flow and enough profitability for me to start working on it again full time, which happened to be quite convenient as my DoD contract ended in January 2000. They asked me to hang around for another month, so I did.
Now, you'll probably notice that there is some significant divergence here from the official Coupons.com, Inc. story. It has a simple explanation. The day before Christmas Eve 1999, about an hour before I was about to jump on a plane to the UK, a gentleman named Steven Boal called me. At the time, Steven's company, Xadvantage Corp., was one of Coupons.com's highest grossing advertisers, and we were providing thousands of referrals every month to his ValuePass.com web site. His main competition for these referrals was an advertiser called Coolsavings.com, which was a direct competitor that was generating twice the number of referrals. Steven understood the dynamics of this, and, wanting to shut his competition out, said he wanted to buy Coupons.com outright for the traffic it was already generating. He had VC financing lined up, so we started serious talks in early January 2000, and by the end of January, Steven had acquired both domain names from me (coupon.com and coupons.com) in a cash and stock deal. As CEO, he also renamed his company, which was founded in 1998, to Coupons.com, Inc., and that is the company now preparing for an IPO.
So, as a shareholder, I'm excited for the IPO (I've waited 20 years for this day to arrive, longer than anyone else actually working at the company today). But as the previous owner, I also know it's capable of reaching profitability because I've seen it happen before. What you should know is that there are some significant changes that have happened over the last 20 years that make the business of couponing more attractive now:
- We don't do coupons (part 1).
Getting funding was supposedly very easy during the dot com boom. Not exactly true. VC's did fund a lot of start-ups, but the vast majority of investments went into Silicon Valley-based companies. I was based in Los Angeles. There was also a certain lack of maturity in the types of investments made. VC's, who were never short of cash or an expense account, did not understand or identify with the average working person/family who used coupons to enhance their purchasing power. The reaction I received more than once, in spite of winning awards, was a look of horror at the very idea of couponing (no names... yet) - as if their association with a coupon would suddenly bring them down into a world of poverty. It took the economy crashing in 2007/2008 for this stigma to be completely eliminated. Kudos to Steven Boal, as he found a continuous stream of funding for the last 16 years.
- We don't do coupons (part 2).
In 1994, the first major obstacle came from Proctor & Gamble announcing that it would no longer advertise with coupons (it was costing them over a billion a year in ad revenue, and that was before paying out for coupon redemption). Stopping advertising with coupons made their shareholders very happy. For a short time, at least. Unfortunately, their shareholders soon became very unhappy as the expected profits didn't materialize. P&G's market share fell to all the other brands that still advertised with coupons. P&G were forced to aggressively re-introduce their coupons in the Sunday inserts in order to regain their market share. What I learned from this is that whatever you've been told about consumer brand loyalty - forget it. It doesn't exist in the way marketers think it does. Instead, incentives in the right place can work miracles.
- The learning curve (is almost over).
Probably, my biggest obstacle came from people not knowing anything about the Internet, and more specifically, the world wide web. We all know the "face palm" reaction to seeing an AOL email address today, but back then the web as we know it was still relatively unknown. The people that were online were still locked into their walled-gardens (AOL, Compuserve, Prodigy, etc.). It was only when those walls finally fell, and the web was fully revealed that people started on step 1 of getting on the web, which is to put their own initial web presence online. Doing this for others was how I funded Coupons.com back then, which always felt like one step forward, and two steps back. Step 2 starts when the realization that "a lot of money has been spent on a web site but no-one quite knows why" has occurred and some planning and organization starts. IBM apparently spent $10 million in the first year figuring this out. Step 3 finally starts when the web site starts to become an integrated part of how a company does business (intranet, workflow, customer portal, etc.). Paying for this knowledge is expensive, and providing it is thoroughly exhausting. Educating small businesses that need to market themselves with coupons and offers, and all of the above is an almost impossible task. For this we say "thank you Groupon" as they have almost single-handedly (at considerable expense to their own shareholders) educated small businesses on the benefits of the web, but also what not to do with coupons and special offers.
- Mobile Market
Mobile phones didn't exist to the same extent they do today. Critical mass for digital distribution via mobile devices has only really been around since the introduction of smartphones. I planned, designed, and prototyped mobile coupon infrastructure for what we had available in 1995, but I never saw a released-in-the-wild digital coupon do what it was actually supposed to do until a few years ago. Having the infrastructure available to do this at the check-out is critical and it wasn't there 20 years ago.
- >2% redemption rates.
The maximum 2% redemption rate was an almost ironclad guarantee that you could take to the bank. Most major brand redemption rates were 1% to 1.5% at most. I blew an early deal with Nestlé by telling them we were not limited in the same way that print ads were, and that we could get over 100% redemption rate on the right promotion. I thought that was a great new model, but when you have shareholders relying on a financial plan with a maximum of 2% redemption, this becomes a very big issue. However, all was not lost. In the long term, the disruption of the redemption rate is a very good thing(tm). Print coupon campaigns were designed around this rate, but, as we now know, that model is dying out, with the free standing insert consistently accounting for 88% of all the coupons distributed but only gathering a 0.5% redemption rate. By contrast we've seen the redemption rates of internet coupons increase from 3.46% in 2008 to 10.18% in 2012. What digital distribution provides is better consumer targeting and more efficient redemption practices, which, in turn, provide a lower customer acquisition or retention cost. If you have followed the growth of digital music against the fall of CDs, you have an idea of what to expect.
- No patent liability
I didn't patent the idea of web/digital coupons. Maybe I should of done, but it was too obvious an idea. Fortunately, I have all the prior art and have produced it against patent trolls in litigation against Coupons.com, News Corp. (Smart Source), and the New York Times. The bottom line is, today, anyone can put a coupon on the web without paying a patent license fee or royalty. However, if you want your coupon distributed in the major digital sales channels, you will probably still need to go through a company like Coupons.com. You're actually paying for the exposure, processing, and the associated digital security.
Finally, you should probably check out the analysis here at IPO candy which makes the case for $140/share. What they don't mention is the recent 2.5:1 reverse stock split (on Feb 19th 2014) bringing earnings within a reasonable multiplier for the IPO. This means the share pool is smaller and less diluted. They've optimistically predicted a $20/share initial price, up from the initial $12 to $14 filing range, but the actual initial price has just been set at a much more realistic $16/share.