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“Anyone can start a Groupon!” and other startup myths

There’s been some excellent Groupon analysis
Since the S-1 has come out, there’s been some incredible analysis done – two of my favorites are Rakesh Agrawal’s Quora answer on “What are some notable aspects of the Groupon S-1?” and also Yipit’s analysis on the deterioration of fundamentals in Groupon’s oldest markets. I would highly encourage everyone doing anything in daily deals or the (misnamed) “social commerce” space to check those out. Additionally, please comment if there are some other great blog posts that I’m missing.

“There’s no tech! Anyone can do it!”
One of funny things that you used to hear about Groupon is how easy it is to start a clone, and how any startup could do it. A lot of people, especially developers, also say the same thing about product like Twitter, which are easy to code v1.0s for. That’s often a critique of consumer internet companies because what they do seems deceptively simple- there’s often no tech and no “barriers to entry” that a lot of the more B2B/enterprise investors like to see.

After all, let’s look at something like Groupon:

  • Technology: Trivial, it’s just a mailing list and a landing page
  • Market: Trivial to enter, because it’s huge and fragmented
  • Sales: Trivial, you need 1 sales guy/gal initially who can sell some local deals

Seems like there ought to be tons of successful local daily deal sites right? And yet Groupon and Livingsocial control the vast majority of the market, and I have no idea who the #3 is? In fact, the most interesting competition ends up being other huge companies with big established userbases, like Yelp, Google, Facebook, Amazon, etc.

Email subscriber costs
The real reason is that there was a temporary arbitrage in buying tons of demographically targeted ad inventory that no longer exists. The Yipit blog post referenced earlier has this handy diagram:

That’s a huge increase from 2010 to 2011.

So if you think about it, this is one of the key bottlenecks to getting a Groupon clone actually started- if you want to build a list of 100,000 users, that’s actually going to cost you $3M right off the bat.

The backend is scary too
Furthermore, to even be able to monetize to break even, you start to need to contort the backend of your business to get there. This means that you have to be comfortable with things like:

  • Extended time periods before your LTV catches up to your CAC (for example, 12 month breakeven on your LTV)
  • Large # of deals per week at high margin
  • To support the # of quality deals, a high-quality sales team

If you need 5 deals per week, every week, for 12 months to break even, then you’ll need a great sales team for that. Then you’ll need someone to optimize your ad spend, a bunch of customer support people, and all of a sudden it doesn’t look so easy.

Getting to scale, let’s say to 1M or 10M email subs, costs gobs of money that very few people in the world would be able to raise in venture capital. That’s why I imagine the most successful Groupon “clones” start in other geography where the arbitrage still looks like <$5 and not $30, or where it’s a high-end niche with some built-in distribution to get the first 10k-100k on board.

The same is true for viral products too
I wrote this post originally about Groupon, but it’s important to note that the same is true for viral marketing channels as well. As with other marketing vehicles, users get “inoculated” over time to the same approaches. Getting an “invite” was a big deal in 2003, so addressbook importers were super effective. Banner ads used to get 10% clickthrough rates, and now they’re 0.1%. Over time, marketing channels naturally become saturated and that creates a built-in defense against new entrants in the market.

Thus, even if something looks easy to build, you better do it quick otherwise you may never be able to catch up. A corollary to this is that if you discover a new marketing channel or some new viral mechanics, you’ll have a huge advantage early on since your response rates will be great.

Send me any other interesting analyses of their S-1 or others!
As all of these S-1s are coming out, I’ll try to stay on top of any interesting analyses, but feel free to email any that I might be missing. Just shoot me a note or comment on this post.

UPDATE: A post drilling down into how Groupon defines “customer” and ratios in their oldest markets (via Dru Wynings). Also, Yipit did a great followup post called “Reports of Groupon’s Death are Greatly Exaggerated“.

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