LivingSocial, Inc.

Growth: LivingSocial and Groupon

LivingSocial is increasing its local presence in the largest U.S. cities (New York City and Washington, D.C. in particular), offering "hyperlocal" and family packages. To contrast, Groupon is embracing a blanket growth model, using up more of its limited cash on hand.

LivingSocial launched their Hyperlocal deals in Washington, D.C. and New York City neighborhoods in September 2010 in a directed attempt to increase their on-the-ground footprint in the largest cities in the U.S. These Hyperlocal deals are very exact, even targeting specific neighborhoods within the large cities as opposed to Groupon's more "blanket growth" strategy where they simply open a site in any large city. This provides LivingSocial with a more natural competitive advantage locally as the local deals will be more catered towards locals who are more likely to buy and revisit venders who use LivingSocial rather than Groupon's deal seekers.

International Expansion: LivingSocial relies on international operations for a smaller portion of its business than Groupon

LivingSocial has a more focused and direct growth model compared to Groupon, concentrating on growing their footprint in their core market (U.S.) rather than expanding into international markets. Emerging markets in particular pose a challenge for deals sites as consumer buying habits vary dramatically and deals tend to be smaller and less profitable. Groupon found this out the hard way in August 2011 when lack of working capital forced Groupon to lay off over 400 Groupon China employees and close many of its offices in China.

Product and Customer Mix

Compared to Groupon, LivingSocial generates a greater proportion of its revenue from travel and family package categories.

In November 2011, LivingSocial launched two full-priced food delivery services in Washington, D.C. The services take food directly to a customer's door. Room Service is Livingsocial's upmarket delivery service, delivering gourmet meals, candles, and table cloths. Instant Ordering, LivingSocial's more conventional delivery service, focuses on take-out from partnering restaurants.

Payment Terms

The payment terms offered by LivingSocial are more favorable to merchants than Groupon's terms. While Groupon initially asked for 50% of revenues, which fell below 40% due to the competition created by the likes of LivingSocial and Google Offers, LivingSocial's cut is closer to 35%.

LivingSocial's accounts payable turnover is also more appealing to merchants. The deals site offers 30-day turnover for merchants as compared to Groupon's 2-month turnover. Both rates do not compare to Google's 4-day turnover. Google's scale allows it to offer faster cash payment. Both deal fee percentages and payment turnover are essential competitive factors for daily deals sites. The key to a sustainable business model is a balance between keeping merchants happy with payment terms, maintaining enough cash on hand to continue robust operations, and keeping the margins on deals at a healthy premium.

Venture Capital Funding

Although Groupon had raised (prior to its IPO) $300 million more in VC funding than LivingSocial ($1.1 billion compared to LivingSocial's over $900 million), the vast majority of this money was used to cash out early investors and founders. $940 million of the $1.1 billion raised pre-IPO was used to cash out early investors and founders, leaving a meager $170 million net funding for Groupon's operations. This puts Groupon in a worse position with less cash-on-hand. (Groupon's IPO improved its cash position to a year end 2011 PrivCo estimate of approximately $900 million.)

Capital Resources: IPO Plans

Although Groupon appears to have the upper hand in the amount of cash-on-hand, the uses of the funds tell a much different story. In contrast to Groupon's cashouts of early investors, the $800 million raised by LivingSocial is more or less intact in the company. PrivCo estimates that by November 2011, LivingSocial held over $800 million in cash on hand (including short term float from local merchants), over double Groupon's pre-IPO cash of just $240 million. Even after Groupon's IPO, netting an additional $500 million+ after expenses left Groupon with approximately $750 million at the end of 2011.

LivingSocial's marketing and advertising are also more directed and cost much less per acquisition than Groupon. LivingSocial had a short 3-month television advertising stint that has been drastically scaled back. As such, LivingSocial has much more working capital and a much lower burn rate than Groupon, giving them more room to expand into key core markets (such as Washington, D.C. and New York).

Amazon Link

LivingSocial's partnership with Amazon helps them acquire new members and vendors while spending less on sales and marketing. Amazon's robust investment in LivingSocial has been a key source of financing for the company. In a January 2011 promotion, LivingSocial sold over 1 million $20 Amazon giftcards for $10 dollars, underscoring the symbiotic relationship that has developed between the two Internet companies. Many speculate that Amazon aims to acquire the deals site outright, in spite of its plans to IPO. The latest postponement of LivingSocial's initial public offering (in conjunction with another capital infusion from Amazon) makes the acquisition likely.

Second Mover Advantage: Being second to market has helped LivingSocial

Groupon has stronger brand recognition than LivingSocial due to its first-mover advantage and IPO coverage. However, the online daily deal market appears to favor first movers less than other markets. Also, although Groupon has name recognition, its reputation took a substantial hit due to shady SEC filings and disgruntled vendors.

In particular, as the first big name in the market, Groupon has spent huge amounts on marketing and advertising in a largely inefficient manner. The same holds true for Groupon's costly acquisitions. Both Groupon's marketing spending and acquisitions have been based on optimistic assumptions. These assumptions include an average monthly spend per subscriber and deal-share much higher than in reality. LivingSocial had the benefit of learning from Groupon's missteps. As it grew, LivingSocial could adjust hiring, marketing spend, and the price it has been willing to pay for acquisition targets according to more accurate projections of market demand for deals.

LivingSocial vs. Groupon: PrivCo Conclusions

Although LivingSocial and Groupon are often painted as very similarly structured and that the success of one should be directly correlated with the success of the other, further analysis reveals the companies are vastly different not only in structure, but in methodology and intent. With the money left after cashing out founders, Groupon focused on less profitable international expansion. To contrast, LivingSocial is focusing more on the core US market and increasing the depth and quality of their deals.

LivingSocial's partial ownership by Amazon.com allows for easy capital raises and access to Amazon's vast customer list. This translates to an enormous competitive advantage for LivingSocial.

Finally, LivingSocial has a local presence in its major markets, which it refers to as a "boots-on-the-ground" approach. Groupon on the other hand uses telemarketing based primarily from its Chicago headquarters to expand. Though LivingSocial's person approach is more costly and slow, having employees present generally provides LivingSocial with localized knowledge and stronger relationships with local merchants.

Competitive Landscape

Besides Groupon, a number of other group buying sites directly compete with LivingSocial. These sites compete primarily on deal prices and offering differentiation. In order to gain market share, companies in the group buying industry expand their merchant relationships through telemarketing or direct contact. Other strategies include international expansion, search and social media advertising, and customer loyalty programs. Continued competition may force sites to offer merchants higher return on investment and lower deal prices across the industry.

Group buying sites also compete with traditional, offline coupon providers such as newspapers, magazines, and traditional media. Other competitors include sites that focus on certain product deals and particular merchants. Living Social's food ordering service also places it in competition with restaurants and other online food ordering sites like Grubhub and Seamless.

Risk Factors

Rapid employee growth and revenue expansion opens the possibility for mismanagement of growth at LivingSocial. In order to effectively manage growth, LivingSocial must meet growing merchant, partner, and customer demand. This means managing thousands of relationships and contacts as well as third party operators. Continued management requires heavy investment in effective infrastructure and information flows.

Continued expansion also raises operating expenses for LivingSocial as they hire more employees, expand the number of deals, expand the types of deals, and add new business areas. Thus, increases in revenue will correlate with increased operating expenses; for example, between the start of 2010 and summer of 2011, LivingSocial moved its corporate headquarters to larger offices four times in just 18 months. If the revenue and operating expenses do not grow in unison, there is a possibility for profitability to suffer.

Much of LivingSocial's success depends on retaining and attracting new merchant partners. This means offering effective deals that increase merchants' return on investment. A problem in the group buying industry is that customers only seek deals and do not increase recurring revenue for merchants. As a result, merchants may choose to stop using deal sites like Groupon and LivingSocial. This possibility can hurt the entire industry including LivingSocial.

LivingSocial operates in an industry with relatively low barriers to entry. Although the scale and size of LivingSocial may be difficult to achieve, smaller sites can pose as significant competitors if taken as a whole. Thus the entire industry is highly competitive and fast-moving.

LivingSocial Plus Beta Test

In an effort to get boost daily deal user retention and the amount that customers spend per month, LivingSocial launched a new subscription service called LivingSocial Plus in December 2011. For $20 a month, members of LivingSocial Plus receive $25 in "Deal Bucks" (credits that are automatically applied to their next purchase) as well as access to closed deals and additional discounts off purchases. While the $20 that buyers actually paid for with Plus are good for 5 years, the $5 in bonus bucks expire at the end of each monthly billing period, creating an additional, time-sensitive incentive for LivingSocial Plus members to buy deals before each month's end to receive the additional $5 off.

LivingSocial Instant

In 2011, LivingSocial launched LivingSocial Instant in an attempt to capitalize on consumers looking for immediate, nearby deals on their mobile phones?similar in nature to competitor Groupon's "Groupon Now" service. However, LivingSocial Instant failed to gain traction, and the company formally ended the service in March 2012 (at the same time it launched Takeout & Delivery, meant in part to replace the failed Instant offering).

LivingSocial 'Takeout & Delivery'

On March 28, 2012, LivingSocial unveiled an internet food-ordering service with 2,700 restaurants serving over 26 markets within the United States. The service slated to expand into LivingSocial's entire service network. LivingSocial opened this business line to compete with Seamless Web and Grubhub, catering to its established clientele of internet users. Participating restaurants can join LivingSocial's food ordering service for free; however, restaurants must pay an undisclosed cut of revenue generated through orders placed on LivingSocial to the site. The cut of revenue for LivingSocial per restaurant is negotiated on a per-restaurant basis. Users of 'Takeout & Delivery' can sign up for free and are able to opt out of LivingSocial's daily deals emails.

LivingSocial Co-Founder Steps Down from Leadership Position

On March 29, 2012, LivingSocial co-founder Eddie Frederick stepped down from his leadership positions at the company. Frederick served as a member of the Board of Directors and as a president at the company.

LivingSocial Acquires Onosys Online Ordering

On April 27, 2012, LivingSocial acquired Onosys for a PrivCo estimated $10.65MM, of which $6.5MM came from issuing common stock. This strategic acquisition furthers LivingSocial's initiative to move into the online take-out and delivery space. For LivingSocial, Onosys offers online ordering experience, expertise and a strong list of restaurant relationships including Panera Bread, Papa John's, and Applebee's.

LivingSocial Experiments With Physical Event Location

In May 2012, LivingSocial launched its latest experiment in local commerce: a new events space in downtown Washington, DC. Called 918 F, the space hosts a variety of events including cooking classes, zumba sessions, pop-up restaurants, and painting classes with wine.

LivingSocial 918 F is housed in a building built in 1890 for the National Union Insurance Company. LivingSocial bought the building in 2011 and completely renovated it. It features a classic cage elevator that was once manually operated (but has since been converted to push buttons). The new event space features multipurpose rooms, a bar, lounge, showroom, restaurant-grade kitchen, and a cooking classroom with cameras that automatically zoom in on what the instructor is doing at the moment.

The company partnered with a variety of local businesses to make the event space booked at its launch. By summer 2012, the space had featured pop-up restaurants from DC's culinary scene, including chef Mike Isabella, who tested the concept for Bandolero, a new local Mexican restaurant in the DC area.

LivingSocial Agreement with AEG

In the summer of 2012, LivingSocial teamed up with AEG, which owns and operates live entertainment venues. The agreement materially expands the discounted sports and entertainment offerings available to LivingSocial's users.

More Executive Turnover

In July 2012, LivingSocial parted ways with a dozen employees, including three executives as it seeks to reorganize as part of a growth plan laid out at the beginning of the year to decentralize its marketing and business development operations. These executives included Senior Vice President of Merchant Services, Dickson Chu; Vice President of Business Development, Holly Tennant; Vice President of Marketing, Camille Watson; and Maire Griffin,the company's first PR executive.

On March 29. 2013, LivingSocial's co-founder and CTOAaron Batalion announced his departure from the company.

LivingSocial's Designer Apparel Line with Isaac Mizrahi

In a shift away from its daily deals business, in August 2012 LivingSocial began turning toward e-commerce, announcing plans to offer an exclusive, high-fashion clothing line designed by Isaac Mizrahi and inspired by Chevrolet cars. The clothing line is part of a push to promote LivingSocial's new online store-front.

LivingSocial offered the ideal demographic for Mizrahi's line, as over 60% of LivingSocial subscribers were women in 2012 and, of LivingSocial's 60 million members, over 30% reported in 2012 that they earn an annual salary of more than $100,000.

Co-Founder and CTO Resignation

In March 2013, LivingSocial co-founder and chief technology office Aaron Batalion announced that he is leaving the daily deals company today with an "urge to create." Batalion has been with the company since 2007 when LivingSocial had only four people employees.

1Q13 $50M Loss on $135M Revenue

In April 2013, Amazon--a part owner in LivingSocial, Inc.--published a quarterly report detailing that in the first quarter of 2013, LivingSocial posted a $50 million net loss on $135 million in revenues.  The report also showed that Amazon contributed half of LivingSocial's February 2013 funding round, and alluded to the company's struggling Washington, D.C. division.