Dec 2, 2010
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Groupon's success inspires copycats

Dec 2, 2010

Dec 1 - When Todd Rideman first heard about Groupon, he figured he could do it, too. After all, what's so hard about putting up a Website, offering a few deals each day from local merchants -- like $20 worth of cupcakes for $10 -- and then watching the cash roll in?


So Rideman poured $100,000 of his hard-earned money into his own daily deal site and, at the beginning of the year, launched WowWhatSavings, targeting the Boston area. He quickly learned, however, that building a profitable Groupon clone isn't as easy it looks.

"I was able to get the local merchants, but getting people to come to the site was costing a fortune," said Rideman. After six months, he had just a few thousand people on his distribution list. He has since morphed his business into a deal site for restaurants only, and has seen sales perk up.

WowWhatSavings is one of more than 130 Websites that offer daily deals like Groupon, according to Yipit, which aggregates the deals. Now, with the New York Times reporting that Google is negotiating to buy Groupon for up to $6 billion, the space is likely to grow even more crowded.

Groupon competitors include well-funded, VC-backed companies like LivingSocial and BuyWithMe, as well as boot-strapped start-ups like CoupMe and ScoopCoups. AOL has launched a Groupon clone, as has Wal-Mart and Cox Media. Facebook has started offering local deals, and there's talk of Yahoo and Twitter wanting in.

There has already been one acquisition in the space. Woot, which offers a single deal per day, was purchased by Amazon for $110 million in June.

"The Internet giants are starting to pay attention to this space because it's an important new driver of revenue," said Jeremy Liew, a partner at Lightspeed Venture Partners, an investor in LivingSocial. "There will be lots of jockeying in the next 18 months, but any acquisition will have to be a major strategic thrust because it will not come cheap."

The jockeying is understandable. This is a market estimated to be in the tens of billions of dollars per year. That's the amount small businesses spend on advertising with local media like newspapers, television and the yellow pages. Sites like Groupon are disrupting this market, siphoning off an ever-expanding chunk of that revenue.


In the Groupon model, local businesses agree to discount their product or service by 50 percent, and then split the revenue 50/50 with Groupon. Deals become valid once a specific number of consumers agree to a purchase. This encourages users to spread the deal via social media, thus the group buying aspect.

"I'm not at all surprised by the number of Groupon clones out there," said Kevin Efrusy of Accel Partners, which took part in a $135 million round for Groupon in June. "I think anytime you have a company on the Web that grows as quickly and makes as much money as Groupon does, you attract a lot of entrants."

Groupon's closest competitor is LivingSocial, which has raised a total of $49 million from Grotech Ventures, Lightspeed, Steve Case's Revolution fund, and U.S. Venture Partners.

"You need tens of millions of dollars to be a player in this space," said Liew, who spearheaded a $14 million Series C round for LivingSocial last April. "We told LivingSocial that they needed a sufficient war chest to run fast and catch up with Groupon."

Groupon, for its part, has raised a total of $169.8 million since 2008 from Accel, Battery Ventures, Digital Sky Technologies and New Enterprise Associates. The money is primarily used to enter new cities across the globe.

Liew contends that Groupon and LivingSocial control the vast majority of the market. But that hasn't stopped new competitors from springing and attracting venture capital.

In the last few months alone, several new companies have landed venture funding. One-year-old Bloomspot, which is applying the Groupon model to luxury purchases like spa getaways, raised a $9 million Series A in September from Menlo Ventures (which led the round), Harrison Metal Capital and True Ventures.

Meanwhile Google Ventures invested an undisclosed amount in October in newcomer Signpost, a community-powered deals site that raised $1 million from Spark Capital just seven months earlier.

There are even aggregators like 2-year-old Yipit, which raised $1.3 million in Series A funding in June from DFJ Gotham Ventures, IA Ventures, RRE Ventures, Ron Conway's SV Angel and a host of other angel investors.

Perhaps the biggest threat to Groupon is not the influx of competitors, but the sustainability of its business model. The company has come under fire from some small businesses who complain that they have been overwhelmed by coupon-wielding customers. One cafe owner in Portland said her Groupon offering cost her business $8,000, after swarms of people descended on her shop with half-off coupons.

In fact, a new study from the Jesse H. Jones Graduate School of Business at Rice University found that one-third of businesses don't make money from promotions on Groupon and that 40 percent of businesses said they wouldn't do a social promotion again. "An industry in which 2 in 5 customers are hesitant after a first purchase ... may need to modify its overall strategy," wrote Utpal Dholakia, author of the study.

Sucharita Mulpuru, an analyst with Forrester Research, isn't convinced that Groupon will remain the dominant player.

"Just because one company gets 50 million people on its list one year, that doesn't mean that next year someone else could not grow as rapidly," Mulpuru said. "Has Groupon fundamentally attracted customers that nobody else can attract? No, because they ask so little of their consumers -- simply subscribe to a list. But by the nature of asking so little, someone else can come in and do the same thing."

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