The online-to-offline local small business advertising is experiencing investor frenzy. LivingSocial just announced a $175M investment round by Amazon. This announcement comes amidst Google’s offer to buy Groupon for roughly $6B. More after the jump.
Things just got difficult for group-buying clones as the two leaders known for providing hot local deals just became hot deals themselves. The small business advertising market has not yet fully matured online and although the group-buying model has been validated, spectators are questioning the gargantuan valuations these companies are seeing.
No details have been released about what percent of LivingSocial’s equity the world’s largest online retailer would own, but negotiations were said to have been for a 7% stake in LivingSocial, which would value the company as a whole at $2.5bn. Groupon’s valuation on the other hand has skyrocketed, with Google raising its offer from an initial $2.5B to nearly $6B today.
Light Speed Venture Partners who will be investing an additional $8M in LivingSocial, having already invested $14M in the past, said that this play will really be about growth as opposed to focusing on the competition.
“This is a scale players’ game,” Liew said. “That’s why these two players are doing the bulk (of business) in this space. With this financing as well as Groupon’s prior financing, this is really going to raise the bar for other competitors.”
LivingSocial has raised $49M to date from Grotech Ventures, LSVP, U.S. Venture Partners and Steve Case’s Revolution LLC. By July earlier this year, LivingSocial had expanded to 25 cities. Currently LivingSocial is widespread internationally with over 10 million subscribers across 120 markets. The company is currently averaging $1M in revenue a day and projected to do over $500M in revenue in 2011. LivingSocial has also recently acquired adventure company Urban Escapes and launched ancillary endeavors that will help increase its revenues in the long term.
The stability of this model and fluff released by company PR reps may, however, be questionable. According to an independent study by an associate professor of marketing at Rice University found that more than 40% of Groupon advertisers surveyed would not repeat, starkly contrasting with Groupon’s claim that 97% of SMB advertiser-users would happily run another promotion. 42 percent of restaurants mainly felt that the Groupon experience was unprofitable and the best experience was for salons and spas.
What else is interesting is the volunteering respondents complained about competing group-buying sites, claiming they were called non-stop by them to win their business yet never proved anywhere near the results that Groupon did. As a small business, it’s important to make the distinction between fluff and reality and by looking at independent studies can we better assess the reality behind any frenzy.
