Groupon Seeks More Cash So It Can Scale

Groupon, the social-buying phenomenon that has been growing faster than almost any other tech startup in recent memory — and has already raised more than $165 million in financing in the past year — is looking for another round of funding that could give the company a market value as high as $3 billion, according to a report by Bloomberg. The report, which quotes several sources “familiar with the matter,” says that the Chicago-based company needs the cash to continue its aggressive expansion into new markets, as it tries to become the global leader in group-buying discounts and fend off well-funded challengers such as Facebook. Om also recently reported that Groupon was looking for new funding.

Groupon said recently that it expects to end the year with more than 25 million subscribers and close to $500 million in sales. The service — which offers users discounts from restaurants, retailers and other merchants that are based on a certain number of subscribers accepting the offer within a given time period — now operates in over 230 cities in the U.S. and several other countries. In addition to internal expansion, Groupon has also acquired several competitors, including group-buying operators in Japan and Russia, and in the company’s last round of funding, it got $135 million from Russian holding company (formerly known as Digital Sky Technologies). As Om noted, Groupon is one of a handful of startups whose valuations appear to be defying gravity.

One reason why Groupon is likely looking for more cash is the group-buying space continues to grow more competitive, as others try to replicate the company’s success. In addition to LivingSocial, which is the number two player in some major U.S. markets and has also been expanding aggressively, Groupon got a new — and much larger — competitor last week, when Facebook launched its Deals feature, which provides discounts at major retailers when users “check in” via the social network’s Places service. The combination of location and group-buying could make the Facebook offering a powerful draw for consumers, and poses a clear threat to Groupon’s dominance.

The new funding (if it actually occurs) would allow Groupon to hire more advertising sales and support staff to handle all the new businesses that it is signing up, one of the things that makes group buying a lot more resource-intensive than many other web-based businesses. That kind of infrastructure, along with the brand name and relationships it is developing with retailers and advertisers, are the main weapons that Groupon holds as it fights to remain the dominant player in one of the hottest retail markets around. But can the company continue to grow quickly enough — and cheaply enough — to justify its huge valuation?

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