As Batalion, who was known to be particularly hard-charging, later explained: “We decided, in essence, to cut our wins and try something else. It was a hard decision, but consulting doesn’t have a growth curve that’s interesting.”
In March 2009, LivingSocial scored a huge hit with its Facebook app Pick Your Five, which had users selecting their favorite books, bands, drinks, etc. Within 30 days of its launch, the app had attracted 80 million users. But even though they had the hottest app on Facebook, the associated revenue from advertising and Amazon.com, Inc. (NASDAQ:AMZN) referrals amounted to crumbs. The trouble was that commercial activity associated with Pick Your Five was “pull demand” — entirely at the user’s initiative.
From crumbs to cake
During the month that followed Pick Your Five’s launch, LivingSocial acquired BuyYourFriendaDrink.com, and the Internet and social media could enable them to generate demand, not just facilitate it. Or as Don Rainey of Grotech Ventures, LivingSocial’s first VC investor, put it to the Washingtonian at the end of 2010: “That was a light bulb — that you could drive 20, 30, 50 people to show up at a place with online media.” Generating demand would enable LivingSocial to command a bigger slice of the transaction pie, rather than just feeding on crumbs.
Three-and-a-half months later, on July 27, 2009, the company launched its first group coupon, for sushi restaurant Zengo in D.C.’s Chinatown neighborhood. LivingSocial 3.0, the third iteration in terms of business model, was born.
Nearly four years on, LivingSocial and Groupon provide a critical lesson for individual investors who like to look at growth-oriented IPOs, particularly those that tout disruptive business models. When an untested model appears hugely successful, investors shouldn’t conflate hypergrowth with sustainable growth and long-term value creation. One may follow the other, but, more often than not, the business never makes the transition from one state to the other, or not sufficiently to justify a frothy valuation, in any case. For every Google Inc (NASDAQ:GOOG), there are hundreds of Ask.coms (or, worse, Pets.coms.)
Where does LivingSocial stand today?
On Feb. 20, a research firm called PrivCo released a breathless report on the financing round LivingSocial had completed the previous day, suggesting that the financing was not estimating the probable company valuation at $330 million — a 93% decline relative to the prior financing of December 2011. Privco also predicted the company would file for Chapter 11 bankruptcy by the year’s end.
LivingSocial CEO Tim O’Shaughnessy immediately rebutted the report in an internal memo on the financing that highlighted some inaccuracies. For example, the memo revealed enough information to deduce the valuation, $1.5 billion (a two-thirds decline from the prior financing round.)
However, the memo, while almost certainly accurate, is incomplete and, I believe, misleading. For example, in discussing the terms of the financing, it refers to the possibility of an IPO. This is entirely legitimate in the context of a theoretical discussion, but mentioning it in a memo that went out to employees looks disingenuous, as O’Shaughnessy and LivingSocial’s board must surely be aware that an IPO is no longer a realistic prospect at this stage.
