Dec 1 - If Google buys the popular daily deal Website, it
could fuel the creation of even more clones.
Tom Stein of Venture Capital Journal reports:
* Report: Google in talks to buy Groupon for up to $6 bln
* Yipit.com aggregates 130-plus Groupon competitor deals
* Bloomspot applying Groupon model to luxury purchases
WALTHAM, Mass. - 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.
HOW IT WORKS
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
"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
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
"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
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
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
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."
(Venture Capital Journal is a Thomson Reuters publication.
Contact editor in chief Lawrence Aragon at