Thoughts on Daily Deals From a Startup Perspective

With OpenTable announcing that they’re shuttering their daily deals leg, we tally another casualty. Facebook has formally withdrawn from the Deals Wars, BuyWithMe had a horrendous execution of laying off half of its workforce to be an acquisition target for Gilt, and everyone watched a general industry shakeout.

I failed to mention there was a company called Groupon…is that still IPOing? As a Partner at Munch on Me fighting within this fierce sector, I hope to lay out some personal observations. These are obviously my own opinions, and do not reflect Munch on Me’s organization beliefs whatsoever.

Owner Relationships. Once you work with the restaurant business, it eerily becomes apparent that it’s a yacht club. I can’t even begin to tell you how much name-dropping is used, and for hundreds of years the restaurant business remains unchanged in building relationships to get the best seat in the house. The company that will win this Deals Wars is the one that is about building merchant retention and partnerships. Groupon may be realizing this, though how they are to shake off their stigma, only time will tell. Merchants > users.

–  The game now for us fledgling startups is to build an amazing member portfolio/sales staff, and pray that we get acquired. There is absolutely near-zero economic moat, and clones abound. Acquisition > IPO.

CPA = Win. The last piece is the biggest part. Groupon spent about $7.99 to acquire each subscriber who actually redeemed a daily deal in the Q1 2010, according to regulatory filings. By Q2 2011, it tripled to $23.46. Munch on Me, though I can’t disclose actual numbers, is killing that number. And by killing, it’s almost cents per customer. The scary thing is that Munch has been solely a word-of-mouth experience, though we did venture briefly into flyering and public transportation ads (maybe more on that later in the future).

– I believe the front runner on hyper-location is FourSquare. The 4.0 rollout of real-tie geolocation alerts along with their wretched gamification badging is a pretty lethal combination. Their CEO Dennis Crowley is already saying daily deal sites “are version 1.0 of great things you can build with the Internet that help local merchants drive foot traffic into the door. What we are doing with Foursquare is version 2.”

– ScoutMob has the best deals out of all the sites, Munch on Me included. Whoever is working within their organization knows San Francisco’s foodie landscape, at least. And it bugs me every day, because we know how they’re doing it. They’re just paying the baller merchants, so I can’t imagine how their CPA is looking. However, still jelly.

Bottom line, this industry has yet to fully mature. You hate it but face it, it’s the food stamps for the middle class. The daily deals space is on-pace to grow to $3.9 billion by 2015and some are already projecting $6 billion. And it looks like Amazon might’ve not been so dumb after all grabbing a $175 million share in Living Social. During their investor trade how, Groupon was making it very clear they weren’t afraid of their competitors, but that’s about to change soon.

Drew Houston founder of Dropbox said during Startup School, “You can’t be a billion dollar company without a billion dollar market.” Someone is going to get this right.

AUTHOR’S UPDATE: Wow, Amazon just wrote a net loss of $558 million on LivingSocial. The human capital-intense structure is broken in the current daily deals model.