Yesterday De La Rue, the world’s biggest printer of bank notes revealed a possible take-over approach thought to value the business at around £800m. De La Rue has been going through a rocky time of late. But it has a two hundred year history of valuable relationships with central banks and governments all over the world. And it made a profit last year of over £100m.
Meanwhile, over in Silicon Valley, Google has just offered to buy a business called Groupon. Groupon has been around for just two years. The most generous estimate of its revenues comes in at about £300m and nobody seems to have any idea how much profit, if any, it makes.
For this Google is apparently willing to pay close to £4bn. To anyone toiling away in manufacturing industry or doing some other Old World task such as running a hotel, the sight of a few computer nerds amassing such riches must be galling and scarcely credible. The valuation given to Groupon in particular must seem pretty astonishing.
But I don’t think it is. In fact I would much rather invest in Groupon than De La Rue. Here’s why.
How to find $4bn in discount vouchers
Groupon’s basic idea has the merit of simplicity and, by promising to save consumers money, is in tune with today’s straitened economic circumstances.
The company sends discount offers made by restaurants and retailers to consumers, alerting them to possible bargains. If you have ever been to the USA you will know that little booklets of discount vouchers are found everywhere, but what makes Groupon more than just a paperless version of this phenomenon is certain discounts will only be made available if a sufficient number of respondents agree to sign up.
A restaurant, for example, might offer a 30% discount, but only if one hundred people agree to dine there that evening. Years ago, Morgan Stanley came up with the phrase ‘Purchasing Power to the People’ and, by harnessing the buying power of otherwise insignificant individuals, Groupon seems to come closer than anything before to making that a reality. The public get discounts, while the businesses that supply them get customers and revenue.
The same, though, could be said of Tesco. But the supermarket giant did not attain a £4bn valuation within two years of starting up. It took years and years of hard slog and millions of pounds of capital investment, neither of which has been required by Groupon.
Why? Because it didn’t need to.
Why I’ve been roaming London’s Tech City
Ten years after the tech bust, the fact is that the internet is enabling new businesses like never before. A business like Lastminute.com and devices like the iPad would not exist without the internet. Groupon, too, is only possible thanks to the internet and instant communications. The internet has changed the way we live our lives, opening up consumer choice and making many things cheaper.
Does that justify a £4bn valuation inside three years? Sure it could. This is not because of its business idea or the sweat and toil of its founders. It is due to two things.
First, unlike, for example, De La Rue’s printing works, an internet company requires very little in the way of capital investment that must be repaid over time.
Second, the internet allows customers to be signed up at an unprecedented speed. For most ‘Old World’ businesses it takes years just to develop a national presence. The internet delivers not only a national, but an international presence, almost instantaneously. Customers can look at the product from their own home and sign up at the touch of a button. If a company can offer something worthwhile it does not have to laboriously build its customer base through expensive marketing. Viral marketing takes over and the customers come in their droves.
The idea of spotting a business like this is what attracts me to the world of penny shares. And last month I went down to East London Tech City to meet an internet start-up that has many of the qualities described above.