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Why Lightspeed invested in Living Social April 29, 2010

Posted by jeremyliew in Ecommerce, growth, local.
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Well, I’ve been busy since the beginning of the year! Earlier this week Lightspeed’s investment in ShoeDazzle was announced, and today our investment in Living Social was announced.

Both companies reflect our belief in entertainment commerce, or push commerce.  The traditional model of ecommerce treated buying things like a chore, crossing things off of a list. Some of the newer commerce models, the ones that are quickly growing to millions in monthly revenue, help users discover great deals and great items that they were not explicitly looking for. By manufacturing serendipity, they help create demand, rather than just fulfilling demand. Living Social falls into this category.

Living Social sends a local deal each day via email (see some examples here) to residents in 18 cities across the US. The deals are usually 50-80% off on a local restaurant, spa, bakery or similar merchant. If the deal appeals to you, you buy it directly from Living Social. Living Social makes money by keeping a cut of the revenue, and sends the rest on to the merchant.

The leader in this category by far is Groupon. Groupon has seen tremendous growth, from $100k in revenue in January 2009 to $10M in revenue in January 2010. Living Social got started 6-9 months after Groupon, but is seeing similar growth. According to Hitwise, traffic in the group buying category is up 72x since last year, with Groupon and Living Social neck and neck for traffic at around 49% each (click through to see the full graph):

Sadly they are not neck and neck for revenue, at least not yet!

There are many entrants into the local deal space, with Techcrunch reporting earlier this month:

When Yipit launched a little over a month and a half ago (!), the startup could already identify 30 daily-deal Web services. Today, the company tracks deals from no less than 66 Groupon-like websites across the United States, more than double the number it counted less than two months ago.

As you can see from the chart above (click through to see the full graph), the 66 companies are delivering 176 daily deals. Since 50+ of these deals are from Groupon, the other companies are averaging 2 cities each. This is an easy category to enter, but I believe that it will be a difficult category in which to scale. Success will depend on building the email subscriber base, which is challenging on a single city basis. The more targeted you want to be, the harder it is, whether you are relying on viral growth or buying advertising. National growth is easier, but requires a national footprint of deals to take advantage of it. That is hard to do, and expensive to do. It is an execution game which will require great management and significant capital.

I suspect some of the other 64 companies will be able to reach viable scale to join Groupon and Living Social. Both companies are well funded, and with very impressive management teams. Anyone hoping to make it to scale will need to bring the same assets to the table.

We’re excited to help Living Social continue in its growth.

Comments»

1. Herman Chiang - April 29, 2010

Congrats on the funding, as you got of one of the whales. :) Agree, both LivingSocial and Groupon provide tons of value to consumers ($ savings on fun things to do and eat), with a bit of entertainment. I am a user of both.

With so many copycats and low barrier to entry, will be interesting to see how deal saturation impacts redemption rates for these deals and revenue growth for later entrants. Moreover, I suspect that the early, big guys like LivingSocial and Groupon have entrenched themselves by locking up the best inventory (i.e. juiciest deals) and it’s a matter of keeping those customers happy while adding new ones.

The issue of scaling locally is a tough one. It seems pretty ops intensive – deal creation/management, customer management, billing, customer service, et al. I think being super efficient there is going to be a big advantage.

2. LivingSocial Raises $14M to Expand Social Group Deals Service - April 29, 2010

[…] This latest $14 million in funding comes from a Series C round of funding led by Lightspeed Venture Partners, in addition to U.S. Venture Partners, Grotech Ventures and Steve Case’s Revolution, LLC, money that will aid LivingSocial in expanding deals to dozens more U.S. cities this year. The back-to-back rounds of funding have happened as a competitor, Groupon, just raised a massive $135 million round of funding — the group coupon business has obviously gotten hot lately. For more on the market, check out this post by Lightspeed’s Jeremy Liew. […]

3. aryan - April 29, 2010

@jeremy

What do you think are the underlying changes in the consumer ecosystem that have led to success of business models like Groupon, Livingsocial ? The business model of demand-aggregation / collective-buying in itself is not new and there were at least a few companies that attempted this 10 years back (for ex. BuyItTogether.com from Singapore) but weren’t huge successes. Is it social media that has helped grow the user-base at an exponential rate and with minimal acquisition ? What about recession contributing from the supply-side (the merchants being more desperate for business and groupon like businesses providing a no-cost sales channel ) ? Any other ecosystem factors that you think have contributed ?

jeremyliew - April 29, 2010

@aryan, you’ve listed a number of factors, all of which apply. But probably the most important is that Living Social and Groupon are applying the model primarily to local businesses with very high gross margins, which can therefore afford to give a big discount. For restaurants the variable cost of a meal is the food. For a spa the variable cost of a pedicure is the nail polish. In both cases the employees are there and getting paid whether there are 3 customers or 30. In many of the first instantiations of the model, the products being bought were consumer electronics that didn’t have much margin to give, and therefor the deals were not as good.

4. aryan - April 29, 2010

Makes sense. I guess back in late 90s – early 2000’s, the focus was on partnerships with large brands (consumer electronics was definitely the top category) as local businesses had minimal online presence but in the last 3-4 years (perhaps due to Yelp – correct me if you think otherwise) local businesses have gained an online presence, an online brand and a much larger reach (to their potential customers). 5-10 years back, local businesses pretty much relied on offline word-of-mouth, local print advertising etc to reach their target market but now online is a very dominant channel to acquire new customers.

On a related note, I think Yelp was, and continues to be, in a good position to enter groupon/living social’s market as they can easily leverage their existing relationship with the local businesses (the one’s who do advertise on Yelp, and hence, Yelp has an on-going relationship / account management) and add this new revenue stream/model and not focus on coupons alone.

5. SEO is a Zero Sum Game « Mon Beau Lapin - May 11, 2010

[…] are that you miss some organic start up opportunities because you are not growing the pie. You miss the transformational business models. You won’t create a Paypal or a Skype or a Google with an SEO oriented strategy. And even if […]

6. SEO is a Zero Sum Game « lcs - May 13, 2010

[…] are that you miss some organic start up opportunities because you are not growing the pie. You miss the transformational business models. You won't create a Paypal or a Skype or a Google with an SEO oriented strategy. And even if it is […]

7. andrew - May 16, 2010

@jeremy

Thanks, this is a really interesting article and it is great to hear from the perspective of an investor. I’m sure this is something that you discussed in meetings, but what is your opinion on the smaller companies going after markets before livingsocial/groupon. If they are offering the same service will they be able to create a strong businss there? and what happens when groupon/livingsocial enter their market? do they get crushed or will they be okay?

8. Congrats to Living Social for launching 25 new cities today! « Lightspeed Venture Partners Blog - July 13, 2010

[…] trackback The local deals market continues to grow rapidly. I’ve posted before about why we invested in Living Social.  Today Living Social launched 25 cities, going from 27 cities to 52. Here is a snapshot of our […]

9. M.Carter - October 1, 2010

I have worked with Living Social in the UK and found them unprofessional, deceitful, and time wasting liars. Don’t do it! Research the Market and go with Groupon or someone else. Bigger, better, more experience.

10. Groupdeal watcher - October 5, 2010

Really looking forward to see a 3rd player rising in the US market, till now we haven’t really seen big parties joining the scene. Only websites like socialbuy & eversave moving up slowly.

11. RT - November 6, 2010

Newcomer HomeRun.Com is poised to battle for the number 3 spot.

12. Amazon <3 Living Social « Lightspeed Venture Partners Blog - December 2, 2010

[…] our investment into the company, putting in an additional $8M. I posted earlier this year on why Lightspeed invested in Living Social, and our enthusiasm continues unabated to this […]

13. katy - December 4, 2010

coupon-bliss.com plans on starting its deals in its home state of oklahoma and then plans to branch out. i am excited to see what awesome daily deals coupon-bliss will have.

14. Why Lightspeed invested in Bonobos « Lightspeed Venture Partners Blog - December 16, 2010

[…] this year Lightspeed invested in Living Social and in Shoedazzle. Both investments were premised on the idea that making shopping fun is […]

15. Why Lightspeed Invested in Bonobos | PR Blog - December 16, 2010

[…] this year Lightspeed invested in Living Social and in Shoedazzle. Both investments were premised on the idea that making shopping fun is driving […]

16. peHUB » Lightspeed Begins Raising New Fund, Considers Chinese Spinoff, Sources Say - October 6, 2011

[…] wins also include an investment in the daily deals site LivingSocial, where it led a $14 million Series C investment in April 2010 and added capital in December. The firm’s earlier Lightspeed Venture Partners VII […]


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