That’s plainly false. For an early stage business with an unproven business model, revenue is no indication of whether or not of the business is creating value. GroupingSocial had long waiting lists of merchants who were willing to experiment with this new model for customer acquisition. Revenue growth could easily be “bought” through the juicy deal discounts (who doesn’t like 50% off?) and through high-priced acquisitions of smaller deal sites; revenue isn’t proof a business is creating value on a sustainable basis — the dot-com bubble of the late 1990s provided numerous counter-examples.
If you’re looking for evidence of value creation, a much better metric — which neither Groupon nor LivingSocial make public — is the rate of repeat business from merchants.
Going “all in” on growth
Nevertheless, GroupingSocial made a strategic choice to focus on growth through user acquisition. They did this for two reasons, in my opinion. First, it was easier for the young entrepreneurs at the helm of these businesses to identify with their users, who are typically young, digitally active, and ready to pounce on a good value — particularly when it comes to treating oneself or experiencing something new.
Second, creating user interest and mobilizing demand online was something both organizations knew how to do and the founders found the process tremendously exciting — much more so than trying to pin down the formula that would produce a “win-win-win” for all three parties to a deal.
The choice to focus on users wasn’t completely without merit. “It’s a chicken-or-the egg problem, because if you don’t have the consumers, then the merchants aren’t interested, so they focused really heavily on ‘How do you create a great customer experience?'” Mulpuru explains. Furthermore, achieving scale gave the deal sites greater leverage over businesses — all the more so when the group-buying concept was brand new and merchants were signing up to do their first deal.
Betting the farm — twice
At LivingSocial, the quest for growth was integral to the company’s identity — it trumped everything else, including permanence of the business model. In fact, the company’s four co-founders effectively reinvented their company twice in the pursuit of growth, in order to arrive at the group-buying model.
In 2007, four young, bright and ambitious IT workers — Tim O’Shaughnessy, Aaron Batalion, Eddie Frederick, and Val Aleksenko — started a consulting company that would ultimately become LivingSocial. The company, called Hungry Machine (a name that broadcast its insatiable appetite for growth), had two activities: Major IT consulting projects for big-name companies such as ESPN and creating applications for Facebook.
The latter, which began as tinkering with ways to exploit and monetize the Facebook platform, eventually cannibalized their more conventional activity. Indeed, the popularity they achieved on Facebook with products like Visual Bookshelf, which enabled users to share their reading lists, convinced them to jettison their consulting gig. That practice was already successful, so it was a bold decision — some might say reckless. However, they believed that the social web could produce explosive growth and profitability that would eclipse anything they could achieve in consulting, and they had the confidence to put that belief to the test.
