Google wants to buy you for $6 billion and you say no

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That’s exactly what Groupon did, the leader in local daily deals. The idea behind their service is simple: they negotiate huge discounts — usually 50-90% off — with popular, mostly local, businesses. Next send the deals to thousands of subscribers in their free daily email, hence generate the businesses a ton of new customers. People are happy with discounts, owners are happy with turnover. Groupon is happy too, predicting to generate $2 billion in sales* (half of this goes back to the businesses). After just 2 years of operation.

No wonder they were eyed by Google. The deal was going on and off for several weeks. It started with $2 billion, and according to the rumours, ended with a $5-6 billion offer, when the acquisition was officially cancelled. The obvious question is: are the Groupon directors insane?

For quite a while now, getting an offer from Google was one of the “holy grails” of startups. The giant was often buying, it bought 10 companies just since Sep 2010. So why did Groupon decline the offer?

I think there are several reasons behind it. First reason is Groupon’s growth. Getting to $2 billions in just 2 years is stunning. It clearly shows the market demands for such a service, and there is a great potential for more. Second reason is the utilization of local businesses. The internet, up to this point, was all about going “global”, and the “local” aspect was often forgotten. Foursquare, Facebook Places and now Groupon is a nice change. Third reason is the social approach. There is a lot of “getting together” on Groupon, and sharing the deals is very encouraged. However, Google can’t do social at all. Last but not least, Google is Groupon’s competition.

Google’s main revenue stream comes from the online ads. The model is very similar to Groupon’s. Advertisers pay for clicks on ads displayed on thousands of publishers, while publishers get paid for it. Google takes a percentage as an operational fee. However, with Groupon, local businesses, instead of advertising on AdWords, spend this money to subsidize their operation and offer heavily discounted prices. This not only drives them new customers, who may become regulars, but also creates very direct advertisement (because Groupon sends out email newsletters with targeted, localized deals, announces them on its website and its mobile apps).

It seems that Google focuses on the global online advertisement, while Groupon works on local one. Plus, there is a huge added value that Google can’t provide just with its ads – guaranteed new customers. The two companies could expand onto each other’s territory easily. Google could target its ads based on viewers location, since it has that data (ask Google Maps to pinpoint your location, it does this with amazing precision). Groupon could offer discounts for global brands (for example, 10,000 discounted cheeseburgers from McDonalds ;]).

My point being, maybe Groupon realized that it doesn’t need to sell to Google – it can grow to compete with it. If that was the case, and if they succeeded, the greatest fear of Eric Schmidt would finally come to life – “the next Google”.

*) $2 billion is the “run rate”, i.e. what would the company’s revenue be if we extrapolated the current trend. Unknown sources of Mashable say that this number is in fact $800 million. We will find out next year, which is more accurate, as Groupon is preparing for going public.