The fast rise, slow demise of a daily deals business
The pride of D.C.’s tech scene sold off for $0
LivingSocial, the Washington start-up that rode the daily deals craze to markets across the globe, has died as a stand-alone company. It was nearly 10 years old.
Groupon, its chief rival, revealed last week that it acquired LivingSocial’s remains for $0.
LivingSocial, which rose to prominence with staggering speed, became the face of the District’s burgeoning tech economy.
For a time, LivingSocial was hiring dozens of workers each month, breaking into cities across the globe and collecting hundreds of millions of dollars from investors to bankroll it all.
But almost as soon as LivingSocial reached the other side of the world, consumer interest stalled. Once an exciting social phenomenon, the daily emails offering discounts to local merchants started to feel like clutter. The letup seemed to prove what some had long speculated: Daily deals were not a sustainable business.
As LivingSocial set out to chart another lucrative path, a cyberbreach would deliver an insurmountable shock to its finances.
“Ultimately you have an industry that doesn’t really exist,” said John Bax, a former chief financial officer. “It did exist, and now it doesn’t exist.”
Before it was known to the masses as LivingSocial, the company was just a group of friends in a small Georgetown office operating under the name Hungry Machine. They were building apps for Facebook — still a novel platform back in 2007 — and eventually bought a three-person operation called Buy Your Friend A Drink, where brands like Heineken and Belvedere Vodka would pick up part of your bar tab.
Around the same time, a small Chicago firm called Groupon was giving rise to the concept of the daily deal — a discount to a local merchant that was only available for 24 hours and had to be bought in advance. As the country sank into an economic recession, the daily deal promised to save consumers money while generating foot traffic for restaurants, nail salons and boutiques.
To the LivingSocial founders, the idea wasn’t much different from their bar business — using the desire to save a buck as motivation for an online audience to actually visit a brick-and-mortar location. In July 2009, LivingSocial offered its first deal, for the sushi restaurant Zengo (also now dead). It sold a couple hundred of them.
The company rushed into the promising new business — and would sell millions of deals.
In July 2010, a year after that first deal, the company “lit up” 25 cities in a single day. It was a bold move that many executives believe solidified LivingSocial as the No. 2 player in the market. Another 25 cities were launched before that summer ended. Inside the company, executives describe a period of controlled chaos.
The pace of expansion was meteoric. Sales and marketing candidates were flown to Washington for cattle-call interviews and hired in bulk. Later, the company set its course abroad and bid against Groupon for copycat businesses in places like France, Lebanon and Indonesia.
“We were maniacally focused early on, and our team created many of the innovations in the space,” said Aaron Batalion, cofounder and former chief technology officer. “But later we mistakenly diluted all initiatives by taking on too much.”
Even at the height of the company’s trajectory, LivingSocial was dogged by skepticism. There were critics who believed daily deals were simply glorified coupons and a fad that would pass. Others asserted they were bad for business owners, an argument compounded by reports of merchants who were overrun with customers and losing gobs of money.
Though the accusations had elements of truth, LivingSocial rebuffed them. Executives spouted an almost-altruistic message of redefining local commerce, fundamentally changing the way shoppers and shopkeepers interact. LivingSocial, they said, would be as revolutionary as Amazon.com.
The hyperbole seemed to be proving true in December 2010 when Amazon invested $175 million in the company. (Amazon.com founder Jeffrey P. Bezos owns The Washington Post.)
“When you’re in the middle of a fad, you don’t always know you’re in the middle of a fad,” Bax said. “There were all kinds of haters out there with revisionist memories, but there was a two-year span where everything the haters wrote just didn’t happen.”
It was in the sweep of this growth that David Zipper, then the director of business development and strategy in the D.C. mayor’s office, first met LivingSocial co-founder Tim O’Shaughnessy at a Georgetown University event.
LivingSocial would become a cornerstone of the District’s efforts to court and grow a start-up culture, branching beyond the federal agencies, lobby shops and law firms that had long dominated the city’s economy.
“For those who look at the economic course of the city, LivingSocial will always be incredibly important in a number of ways, including waking up many parts of the city to the power of the technology sector,” Zipper said.
In late 2011, when LivingSocial began looking for a space large enough to house its local staff — then numbering 1,000 and scattered across six buildings — the company was entertaining offers to move outside the District. The following year, the City Council extended a $32.5 million tax credit to LivingSocial on the condition that it remain in the District and keep hiring workers.
The company would never deliver. As 2012 wore on, signs emerged that the daily deals business was slowing. Sales growth faded, then declined compared to the prior year. Smaller competitors that had cropped up across the country closed their doors. Consumer interest waned, and high-caliber merchants — the ones whose deals shoppers really wanted — moved on.
LivingSocial tried to recapture the magic with new lines of business. It began selling tickets to local events and creating social activities of its own, believing millennials would spend money on experiences. The company poured nearly $4 million into renovating a historic building at 918 F St. NW into an events venue.
It personalized deals based on users’ preferences and offered them for longer stretches of time, hoping more people would buy.
“It’s really hard to abandon what got you there,” Bax said. “Find me one company ever that reached a multibillion-dollar valuation … and walked away from the business they’re in at the peak of that business.”
“We went through a relatively large planning process: Where are we going to spend money? What’s our focus? What are the goals we to hit?” said a longtime manager, who declined to be named because his new company is fundraising. “There were a lot of people involved in proposing where things needed to go.”
But the ground beneath the company was softening more quickly than executives expected. They started laying off employees — first 400, then another 400, 200 more, 160 others — in a process that would drag on for years. Last week, the final 95 employees were told their jobs are going away, too.
Bit by bit, LivingSocial closed or sold off the international businesses, many for much lower prices than the premium they had paid to buy them. The one exception, its South Korean outfit. Groupon snapped it up for $260 million in 2013, a windfall that would prove essential to keeping LivingSocial afloat.
“The board and management understood that the daily deal rocket ship wasn’t going to keep going sharply up forever, but I think we underestimated how unstable that business actually was,” said one former executive, who declined to be named to speak candidly.
As executives reflect on LivingSocial’s fatal moment, all point to a security breach in April 2013. Hackers gained access to the account information of 50 million subscribers, and LivingSocial forced all of them to reset their passwords. About 20 percent never came back.
The sudden drop in revenue forced hard decisions inside the company: continue to invest its diminished resources in experimental business ventures that could shape its future or spend them on the core deals business that was, at least for now, generating millions in revenue.
LivingSocial circled its wagons around deals.
“At that time we chose to focus more on shoring up the core business and the problem with that decision was it was a business that was deteriorating pretty rapidly,” said the former executive said.
O’Shaughnessy, the company’s public face, announced plans to step down in January 2014. He declined to comment for this story.
It would be seven months bewant fore a search committee would find and name his replacement. Sometimes the guy who built a business isn’t the same one who can tear it up, executives said.
Gautam Thakar, an eBay executive with e-commerce chops, stepped into the role. Thakar said in October 2014 that LivingSocial wasn’t a complete turnaround job — it had a solid foundation and valuable assets, but needed more direction.
Thakar developed a program that linked deals directly to credit cards and attempted other new business ventures, executives and investors said, all while cutting staff and reducing expenses. Ultimately, the deals business he inherited didn’t stop shrinking.
“Gautam played a difficult hand well,” said Jeremy Liew, a partner at Lightspeed Venture Partners and one of LivingSocial’s early investors. His credit card idea “showed early success in pilots but ultimately wasn’t enough to maintain LivingSocial as a stand-alone entity.”
In October 2016, Groupon, the company’s longtime rival, absorbed LivingSocial. It paid nothing for a company that had raised nearly $1 billion from investors, according to Crunchbase, and was valued at nearly $6 billion at its height.
“Despite what may have been some operational tribulations for that company over time, they have an engaged customer base that we found attractive and really strong brand recognition,” said Bill Roberts, Groupon’s spokesman. Groupon picked up 1 million new subscribers in the deal.
As with other tech firms that went bust, LivingSocial is survived by a plethora of spinoff companies whose founders honed their business skills at the firm. Local companies Galley, a mealdelivery service, and Framebridge, a custom framing outfit, were started by LivingSocial alumni, among others.
Though the LivingSocial brand will live on as part of Groupon, executives expect that the former employees who go on to build their own businesses will be LivingSocial’s lasting impact.
As the longtime manager put it: “When I look at LivingSocial’s legacy, more than anything else, we basically gave a lot of people their MBAs in scaling a company very fast.”
During LivingSocial’s heyday, an army of young employees worked in the company’s headquarters in the Chinatown neighborhood in D.C., where they took to offering e-consumers daily deals.
Tim O’Shaughnessy, a co-founder of LivingSocial, struck a deal with the District to be a cornerstone of the city’s effort to build a start-up culture, but the firm never delivered on its end of the partnership.