Groupon Raises $950 Million — Now Comes the Hard Part

“You know what’s cooler than a million dollars? A billion dollars.” Fans of the movie The Social Network — especially those who live in Silicon Valley — like to recite that line a lot, and now Groupon gets to feel how cool that really is, thanks to a new round of funding. As expected, the group-buying startup announced today that it has completed a gigantic financing of $950-million from a group of high-profile funds, including Andreessen Horowitz, Kleiner Perkins and Russia’s In the company’s typical whimsical fashion, its press release was headlined: “Groupon Raises, Like, A Billion Dollars.” As light-hearted as its founder and copywriters may be, however, the company now has some serious work to do in order to justify its funding.

It’s not just that Groupon has to show why it is worth an investment of close to $1 billion from such a prestigious group of backers (less than a year ago the entire company was only worth $1 billion). The two-year-old startup also has to show why it was right to turn down a $6-billion acquisition offer from Google (s goog), which it did last month to the surprise of many. Not only was such a combination seen by some (including us) as a natural fit for both companies — since it would have married Google’s algorithmic expertise and reach with Groupon’s appeal to local merchants and advertisers — but the valuation it gave Groupon was also more than $1 billion higher than the $4.7-billion value the company reportedly has as a result of its latest financing round.

In its news release, Groupon notes that it has been called “the fastest growing company ever” by Forbes, and that it is now doing business in 500 individual markets (up from just 30 markets in 2009) in 35 countries. It also has more than 50 million subscribers, an increase of 2,500 percent from where it was a year ago, and revenues that are said to be in the $2-billion range annually — although the company doesn’t keep all of that money, since it shares revenue with the retailers whose offers it sends to subscribers.

Another thing that Groupon has, however, is competition — and potentially lots of it. Google, for example, is likely to be focusing its energies on building its own Groupon-style connections with local merchants in the wake of the company’s rejection of its takeover bid. Long-time Google executive Marissa Mayer has taken over responsibility for the company’s local efforts, among other things, and while the search giant may try build its own local powerhouse from Google Place Pages and Hotpot and so on, there is also a chance that it might acquire one of Groupon’s competitors as well.

On top of Google presenting a competitive threat, there is also Facebook, which has experimented with Groupon-style discounts via Facebook Places, and could quite easily leverage its 600-million-user reach to compete with the company if it wanted to. And then there are competitors such as LivingSocial, the second-largest group-buying player, which recently got a $175-million investment from Amazon — another company that has the deep pockets and the reach to compete with Groupon — and Tippr, which has a white-label platform that allows merchants and website publishers to run their own Groupon offers, with Tippr handling all of the back-end and support.

The money the company has raised definitely elevates co-founders Andrew Mason and Eric Lefkofsky into the startup stratosphere (a chunk of the funding was used to compensate executives and investors who got in earlier, according to a securities filing a little over a week ago, including the two founders and a board of directors that includes ex-AOL executive Ted Leonsis and 37signals founder Jason Fried). But it also increases the pressure on Groupon to prove that it can carve out a long-term business amid escalating competition, and that it isn’t just the flavor of the month.

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Post and thumbnail photo courtesy of Flickr user Groupon