LIVINGSOCIAL'S CEO TIM O'SHAUGHNESSY TALKS CANDIDLY ABOUT THE COMPANY'S FAST GROWTH AND COMPETITOR GROUPON

LivingSocial Inc. Chief Executive Tim O'Shaughnessy's duties once included occasionally emptying the office garbage. Now the 29-year-old is managing a 3,500-person Web company with a soaring valuation that faces dozens of competitors.

Tim O'Shaughnessy, pictured in December, says LivingSocial has worked diligently on its hiring process.

The two-year-old business, which says it expects $1 billion in revenue this year, trails market leader Groupon Inc. in the exploding daily-deals business, selling online discount vouchers at local businesses. In April, investors valued LivingSocial at around $3 billion, people familiar with the matter have said. The company has hired bankers for a possible initial public offering.

Still, the daily-deals business has its skeptics. Barriers to entry are low, spurring copycat sites that are pressuring industry margins. And while LivingSocial has gone on an advertising blitz on TV and elsewhere, its brand remains less well known than Groupon, which recently filed for an IPO that is expected to value the company at $20 billion on its debut.

LivingSocial's first office, above a Washington, D.C., antique store, included a tub where employees dumped waste after the trash can filled up and which Mr. O'Shaughnessy, the company's founder, cleared every week.

In an interview at LivingSocial's new, much larger Washington, D.C., headquarters, Mr. O'Shaughnessy declined to comment on a possible IPO, but spoke about LivingSocial's fast growth, its rivalry with Groupon and the future of the daily-deal industry.

Edited excerpts:

WSJ: When analysts talk about the daily-deal industry, one word that comes up often is "bubble." Does that bother you?

Mr. O'Shaughnessy: We just operate our business. If I took what pundits said as gospel, we'd be in a very different place than where we're at right now.

WSJ: Are they right to be skeptical?

Mr. O'Shaughnessy: You know, we think it's strong. We think that we see great growth in things. We have over a million people that have bought from us three times or more. We are increasing our merchant base, our footprint [and] the number of merchants that are working with us again. So we think there's a lot of strength in what we're doing, and the business continues to grow.

WSJ: But hundreds of daily-deal copycats have popped up in the past couple of years.

Mr. O'Shaughnessy:There have also been hundreds that have left. So there's some cycling through as people realize, this business is much harder to scale than maybe we realized. So I think you've started to see maybe some of the new entrants started to slow down a bit, or there are some sort of retreats occurring.

WSJ: What's the hardest part about managing such a fast-growing company?

Mr. O'Shaughnessy: Well, beyond just the fact that you used to know everybody and now you don't, there have been a lot of things that have occurred that you don't normally have in growth situations. We've had four different offices in the last year and a half. So how do you manage that disruption and deal with those things?

One of the hardest things, and something that we've really worked very diligently about, is how do we keep your hiring process in the good spot to make sure you're getting the right types of people who come in, and how do they actually go and live your company's core culture and values?

WSJ: It would seem as if quality control would slip when you hire six people a day.

Mr. O'Shaughnessy: We try not to [let it slip]. We've done a lot of things on the values front, for example ... they're written on the walls throughout the office. We make sure everybody understands that and give very tangible examples about, this is why we believe this, and recognize people when they do live those values.

The second thing from a hiring perspective is really making sure we set up a system that works. Right now, for example, the hiring manager obviously is going to interview people, as well as people on that team. But somebody from one of the groups that [the] team works with will interview and have veto power. And somebody will actually interview them for a cultural fit, from a cultural perspective, that may be totally unrelated, and they also have veto power. So if you can actually set up those systems in the right way, then you can hopefully more effectively scale.

WSJ: How would you describe the culture here?

Mr. O'Shaughnessy: People definitely work hard.... One of the things I pretty firmly believe is that Monday morning until Friday afternoon is LivingSocial time. You're going to have to work late some nights, you're going to have to press on things, but Saturdays and Sundays, everybody has to recharge.

WSJ:  In two years, you expanded from five markets to about 200. You're moving into smaller markets such as Worcester, Mass., and Monterey, Calif. Is there a market too small for LivingSocial?

Mr. O'Shaughnessy: I think as we continue to evolve, we think we'll be able to have solutions for any type of local business. But right now, you're probably not going to see us go into somewhere that has the population of 1,726 just because we don't have a good model that supports that.

WSJ: What was the most interesting thing you found when Groupon filed to go public?

Mr. O'Shaughnessy: When you go about in the business and there's some opacity in how people are operating, you make guesses, and some of those guesses are right and some of them are wrong. I'm a data-oriented guy, and fundamentally it's interesting to see, OK, what do your numbers actually look like? What do your growth rates actually look like? Those types of things, because you make conjecture and guesses on that. But you're actually able to match up and see how good were our guesses.

WSJ: How did it match up?

Mr. O'Shaughnessy: We were pretty accurate on things. We follow the space, obviously, very closely, so we had an understanding of what people were doing. One of the things that—and many people have talked about this—is just that they [Groupon] have become much more increasingly international and I think that went from a very small piece of their business to the majority of their business in a very short period of time. A lot of people have said, boy, that's interesting.

COMMENTARY:    LivingSocial was founded as Hungry Machine in 2007 by four employees from Revolution Health. The company first gained notoriety for their Visual Bookshelf application on Facebook which allowed users to catalog and share their favorite books with friends.  Later, the company released PickYourFive and other Polls applications, making LivingSocial the number one application developer on Facebook as measured by page views.  After acquiring BuyYourFriendADrink.com in 2009, LivingSocial launched a daily deals business, which since has become its highest grossing venture to date.  The company released its first daily deal on July 27, 2009, for the restaurant Zengo in DC’s Chinatown, and since that point has grown to over 40 million members.

Most recently, LivingSocial completed a $400 million round of funding. Investors said the latest round values LivingSocial at $3 billion.  The company is currently booking $1 million a day and is projected to book in excess of $500 million in revenue in 2011 and nearly double its market presence.

PRODUCTS

• Daily Deals - Daily Deals are handpicked experiences that can be shared with friends. “Consumers find hometown deals they like on the sites, sign up, persuade others to do so, then get a cut-rate dinner, haircut, yoga class or other product or service.”
• Instant - On March 7, 2011 Living Social launched Instant Deals in Washington DC as a test market for future expansions. Since then, LivingSocial Instant has been expanded to New York City and San Francisco. LivingSocial Instant is a mobile feature that lets consumers find deals within a half-mile radius with the iPhone App.
• Escapes - LivingSocial Escapes is a travel site offering savings on curated adventures. Just as LivingSocial lets people discover new services, experiences and attractions at deep discounts in their hometown or places they visit, LivingSocial Escapes will help people find one-of-a-kind day trips, packaged nearcations, quick escapes that don't require air travel, or weekend excursions they might not typically pursue. LivingSocial Escapes Deals last seven days; the margins and the pricing are not the same as the daily deal structure, but discounts (value) are significant.
• Adventures - After LivingSocial's acquisition of UrbanEscapes in October 2010, the company launched LivingSocial Adventures, the division of LivingSocial that "creates and produces full-curated social events." LivingSocial Adventures includes deals like “Zen Escape Yoga Hike” and “Boulder and Brew Tours”. 
• Families - On January 11, 2011, LivingSocial introduced LivingSocial Families, which is now live in 135 markets worldwide. Family Edition deals offer the same discounts but for family-oriented activities like zoos, museums, day trips, aquariums, art classes, and more.  As of Tim O'Shaughnessy, CEO and co-founder of LivingSocial, said "We're excited to bring these family-centric deals to more of our members just in time for summer outings to the local zoo, museum, craft fair or kid-friendly restaurant."

FUNDING

The company received everal rounds of venture capital:  

• 2008 - $5 million in Series A funding.  
• January 2010 - $5 million in Series B funding from Grotech Ventures and AOL Founder Steve Case. 
• March 11, 2010 - $25 million round led by U.S. Venture Partners, Grotech and Case. 
• April 29, 2010 - $14 million Series C round from Lightspeed Venture Partners with U.S. Venture, Grotech and Case contributing. 
• August 2, 2010 - $10.23 million from US Venture Partners and Grotech. 
• December 2, 2010 - $175 million  from Amazon.com.
• December 8, 2010 - $8 million from Lightspeed Venture Partners. 
• April 4, 2011 - $400 million from Amazon and Lightspeed Venture Partners, and several new ones including T. Rowe Price and Institutional Venture Partners. 

As of early April 2011, LivingSocial is valued at more than $3 billion.

ACQUISITIONS

• InfoEther - In March 2011, LivingSocial acquired InfoEther, a leading Ruby/Rails consultancy.  InfoEther is one of the leading technology consultancies specializing in the Ruby software development language and its related Web development framework, Ruby on Rails, which is the basis of the technology upon which LivingSocial is based. 
• Let's Bonus - In January 2011, LivingSocial acquired a majority stake in LetsBonus. The partnership bolsters LivingSocial’s rapid international expansion, making it now live in multiple countries with the addition of Let’s Bonus’ Spain, Italy, Portugal, Argentina and Mexico. 
• Jump On It - In November 2010, LivingSocial bought $5 million controlling stake in Australian social shopping site Jump On It. The acquisition makes LivingSocial the biggest social shopping player in Australia.
• Urban Escapes - In October 2010, LivingSocial announced acquisition of social adventure company Urban Escapes, which led to the launch of LivingSocial Escapes and LivingSocial Adventures.
• GoNabit - In June 2011, Dubai Based GoNabit, the Middle East's home-grown website for daily deals, has been acquired by LivingSocial, in a landmark deal for the region's fledgling digital industry. GoNabit operates in the UAE, Egypt, Lebanon and Jordan, and claims to have saved consumers more than $5m in the past year. 
• Ensogo - In June 2011, LivingSocial acquired DealKeren, which offers daily deals in Indonesia, and its parent company Ensogo, which offer daily deals in Thailand and the Philippines. Officially launched in June 2010, Ensogo is known as the No. 1 social shopping website in Thailand, Philippines, and Indonesia and currently serves more than 800,000 members. 
• TicketMonster - In August 2011, LivingSocial acquired TicketMonster, Inc., the leading social commerce website in South Korea. Founded in 2010, TicketMonster offers daily and instant deals, travel packages, and events to more than 2 million members in Korea and Malaysia.

In a blog article dated June 16, 2011, I pointed out the differences between No 1 Groupon and No 2 LivingSocial which are summarized below:

• Advertising - LivingSocial runs 73% of its display ads in the Top 5 internet sites. Groupon takes the opposite tack, running only 31% of its ads to the top publishers' site and spreading the bulk (69%) across mid-tier and long-tail sites.
• Audience - Groupon's user base skews toward the Midwest and Pacific regions, while LivingSocial is stronger in the East. That may, in part, reflect where each is based: Groupon is headquartered in Chicago, LivingSocial in Washington, D.C.
• Website Traffic - Among daily deal sites, the two enjoyed the most traffic, with Groupon and LivingSocial attracting 12 million and 11 million unique visitors, respectively, in May, according to comScore.  Traffic to both sites is still growing strongly --Groupon's online audience is up 250% in the last year versus 182% for LivingSocial.
• Subscribers - As of March 31, 2011, Groupon had about 83 million (matches their IPO filing) total subscribers compared to 26 million for LivingSocial. 
  
• Retail Focus - The two companies are also focusing on different retail categories when it comes to deals. More than half (56%) of Groupon's offers are for restaurants, while the biggest chunk of LivingSocial's deals (41%) are for books and magazines.

In a blog post dated July 12, 2011, I commented on foursquare's strategic partnership with both LivingSocial and Groupon to offer its 10+ million active users location-based deals.  foursquare gets a cut of the profits of deals sold through foursquare.  So far, no news on how wel that partnership is working.  

OnlineMBA created the below infographic that compares the top four social deals sites: Groupon, LivingSocial, Facebook Deals and Google Offers.   Don't count on either Groupon or LivingSocial reporting how well the foursquare strategic partnership has worked.  

Groupon filed for an IPO in June 2011, and their lack of profitability, working capital deficit, high sales and marketing costs, has called into question the company's business model and non-traditional financial metrics. Several social critics, including yours truly, have called Groupon's business model as unsustainable.  Several critics have called it a Ponzi scheme.  

I conducted a thorough of Groupon's S-1 filing and in a blog post dated June 3, 2011, and was shocked to discover that out of a total of $1.1 billion in venture capital raised to date,  Groupon CEO Andrew Mason and other key executives, early investors and several retiring board members had cashed out to the tune of $950 million.   This has left Groupon with a serious cash flow problem.   

In a blog posted dated August 25, 2011, I reported on Groupon's poor execution, incompetence and failure to penetrate the Chinese deals market.  This calls into question whether it's worth going international with deals, especially into highly competitive markets with hundreds of copycats. 

In spite of the key differences between Groupon and LivingSocial, the aforementioned problems seriously calls into the question the business model for all deal sits and whether it is possible for any group buying or deals startup to generate a profit.   The high merchant attrition rate of deals sites (30% to 40%) is really worrisome, and the key reason why many social experts believe the business model for deals sites may not be sustainable over the longterm.  Groupon has already captured most of its U.S.  market potential, so it must grow internationally, and it is having a difficult time of it.  

LivingSocial is also expanding internationally, but since it does not make its financials public, it is difficult to ascertain whether it too is susceptible to the same business model weaknesses and working capital difficulties. 

Courtesy of an article dated August 29, 2011 appearing in The Wall Street Journal Boss Talk, an article dated May 3, 2011 appearing in OnlineMBA, and WikiPedia

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