Curious George ponders groupon

June 8, 2010

For consumers, the deal is simple. Sign up for free, and get an email every day or so with a “groupon” – an offer for a deep discount on a local purchase, good only if some minimum number of people participate. Discounts cover a broad array of products and services, including restaurants, gyms, spas, supermarket shopping sprees, etc. Most customers are well-educated, single (49%) women (77%) under the age of 35 (68%).

For providers of goods and services, groupons generate significant one-time revenue, and the chance to attract potential repeat customers. As an example, a NYC day spa recently ran a groupon for hot stone massages. They reduced their retail price by 59%, from $120 to $49. In return, they sold 2,267 massages, generating over $110,000 in revenue (time to hire more masseuses!).

For groupon itself, the business model is highly attractive. They take a 50% cut of groupon purchases, and are supposedly on track to generate $350 million gross / $175 million net revenue in 2010. Better yet, groupon is highly viral. Since consumers only get their discount if others purchase, they eagerly spread the word via email, twitter, Facebook, etc. That’s enabled groupon to attract millions of customers with little to no marketing expenses.

How’s it working? Groupon launched late in 2008, sold a million groupons in their first year, and have sold three million to date. They reached break-even in just six months, and the business supposedly throws off $1 million per week in profits. Originally in Chicago, groupon has since rolled out to 40 cities. And investors have noticed. Groupon has raised over $130 million, most recently at a valuation in the range of $1.35 billion. 60+ other companies have copied the Groupon approach, including GroupSwoop, ScoopSt, SocialBuy, BuyWithMe, SwoopOff, MyDailyThread and LivingSocial. And at least two companies have created aggregators that scour the web for the best offers each day.

How much room is there for growth? It’s anybody’s guess, but the evolution of the email newsletter business may hold some clues. In that space, a few major players dominate big categories (e.g. Daily Candy for 20-something women, Thrillist for 20-something men) and a long tail of niche companies concentrate on particular market segments and product / service categories – with varying degrees of success.


Bo Peabody interview: Business models

May 19, 2010

Bo Peabody is co-founder and Managing General Partner of Village Ventures, an early-stage venture capital firm. Previously, Bo founded / co-founded a string of startups, including: Tripod (one of the first social networks, later acquired by Lycos), Waterfront Media, VoodooVox, FullTurn Media, and UplayMe. He’s also an owner of Mezze, Inc, which consists of three award-winning restaurants. Bo wrote a book for entrepreneurs called Lucky or Smart? published by Random House. He is a graduate of Williams College.

UpStart:  What advice do you have for entrepreneurs pitching investors about their business models?

Bo Peabody:  “Entrepreneurs have the counterintuitive task of having to think big and act small. For any business that is going to attract venture investors, a big vision is important. But that’s the easy part. The much harder job is figuring out how to distill that vision into an actionable plan that has clear, incremental levels of success. Entrepreneurship is like a video game…you need to know what the levels are and then reach each one before going on to the next.”

UpStart:  Are there particular business models that you prefer to invest in?

Bo Peabody: “At Village Ventures, we prefer to invest in business models that are tackling mature markets. We’d rather bet on our ability to back the right team that can knock off existing competition than bet on our ability to see around corners. For instance, this is why we invest in vertical publishers in the interactive media space, rather than social media companies.