The fast rise, slow demise of a daily deals busi­ness

The pride of D.C.’s tech scene sold off for $0

The Washington Post Sunday - - BUSINESS - LIV­ING SO­CIAL 2007-2017 BY STEVEN OVERLY

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.”

2011 PHOTO BY ASTRID RIECKEN FOR THE WASH­ING­TON POST

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.

BILL O’LEARY/THE WASH­ING­TON POST

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.

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