When I first saw deal-of-the-day website Groupon in San Francisco a year or so ago I thought this is going to be a hit! A company that can offer you major online discounts to restaurants and services in your home town, gives you Groupon “cash” to invite friends, uses Facebook / Twitter etc., has to be a winner unless they really screw up.
I started checking out this Chicago based company and liked their business model from the get go. I cannot truthfully say that I thought a year later they would have a valuation of $1.2 Billion or that imitators would be popping up but I knew they had a solid chance to succeed if they stuck to their strategy. As of the beginning of April they had over 3 million subscribers, are in approximately 40 markets and make money by getting a cut of the deal from the retailers (revenues expected to surpass 9 digits this year). CEO Andrew Mason seems to have a good strategy in place. But I’m curious how he plans to knock out the upcoming clone wars (my apologies for the bad pun – Mr. Lucas / Star Wars) which are already popping up in this space. With the war chest he has in place ($50 million in cash) he might just squash them like Microsoft would (market leadership premium) or just continue to grow faster?
As far as I can tell there are not any patents surrounding Groupon, therefore the barriers to entry are manageable. Silicon Valley Venture Capitalists always tell me they want something in “white space” but whenever you bring something like that to them they often have real trouble figuring out:
A. What is its value (nothing to compare it with)?
B. Are we brave enough to make the bet?
C. How quickly should we pull the trigger, or should we waffle and think about it?
The Groupon investors weren’t afraid of white space. Early investors Eric Lefkofsky and Brad Keywell used some of the recent $135 million from Digital Sky Technologies (see Zynga) and Battery Ventures, to start a new VC called Lightbank which is re-investing in new social networking business such as Where I’ve Been and Poggled. Both feel that the social commerce space has lots of room to grow and I’m betting their right.
Most importantly this new investment allows some of the early investors / employees to cash out now (atypical) while funding a global expansion. Most investors / employees are first in last out waiting for their payout when the company IPO’s or more often is acquired. Digital Sky seems to be on the forefront of this type of investment pattern (See Zynga, Facebook) and I expect it might be a welcome trend for entrepreneurs.
Notes: Previous to the $135 million “Series C” raise the Series B round of $30 million was by Accel Partners and New Enterprise Associates.
Failures in this space of note: Mercata – Paul Allen – Vulcan Ventures
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