When is Late to Market Really Too Late to Market?
I recently had the chance to host a group of mentors for office hours @StartupRiot in Seattle – Thanks to Jimmy Kwan at Turnstone for providing the furniture, it was the best the Bar at Showbox Soho has ever looked!
We accepted applications from over 41 companies that requested office hours for Founder Institute Mentors. 19 were B2B, 22 B2C. That’s a bit of a shift from what we’ve been seeing over the last 24 months in program applicants, where we’ve seen a bias toward B2C startups.
New Daily Deal Startup, Really?
What surprised me most was the number of companies that were looking to startup a new and improved daily deal site. Or similarly, a company that wants to build out a sales team to sell to local merchants. So rather than tell them they just had their head (in the sand), I wanted to offer some research factors to consider that anyone should look at before picking the idea they are going to take to market:
- Lessons learned from competition – specifically business model
- State of Funding in the Market
Timeline for Groupon:
- 2007 Groupon raises $1M in Angel investment
- 2009 Revenue $14.5M
- Nov 2010 Google offers $6B for the company
- 2011 Revenue $312.9M
- 2012 Revenue $1.6B
- Goes public at $20/share and $10B valuation
- Closes the day at $26.11
- Today is at $6.65 or $4.29B market cap
- Go here for a great infographic from VentureBeat
Why the tumble in price? Well, if you read the media (vs. those that were just envious or jealous), there are a number of reasons. Here are a couple of headlines, blogs and analysts:
- Associated Press “Groupon’s Fall to Earth Swifter Than Its Rise”
- NYTimes “Is Groupon’s Business Model Sustainable?”
- Nick Huzar from OfferUp.com wrote a great blog post on the topic prior to the IPO
- Investing Daily “Groupon IPO: Worst Internet IPO of the Year”
- and GeekWire “Groupon IPO: Is this the next Amazon.com or Pets.com?“
Some of the major competitors include:
- Living social
- Amazon Local
- Gilt City
A lot of investor dollars have flowed into this market already. And has made 30+ acquisitions already in mobile and products like GrouponNow. Like it or not Andrew Mason has created the fastest company to reach sales of a Billion Dollars ever.
2. Lessons learned & Risk Factors
What can you learn from public company data and other business model observations? One place to look is the S1 Risk Factors in the S1 or the Form 10Q. By the way, don’t let the number of pages of Risk Factors surprise you, it’s very similar for every public company to defend against shareholder lawsuits.
- “Subscriber Acquisition Costs”: from Groupon S1 Filing
Over time, we believe we will reach the conclusion that the resources presently being devoted to online marketing initiatives are not yielding sufficiently attractive investment returns due to a variety of factors such as changes in subscriber economics, achievement of subscriber saturation levels in various markets or a determination that subscriber growth objectives can be satisfied though alternative means. As a result of such factors, we anticipate significantly decreasing the amount of such investments. We do not believe that this decrease in our online marketing initiatives will adversely impact our ongoing business with existing customers or subscribers as the related expenses are not designed to drive transactions with such customers and subscribers. [Emphasis ours.]
- Or, a recent article on Business Week on The Education of Groupon CEO Andrew Mason which points out “Groupon has gone from “Fastest Growing Company Ever,” as Forbes magazine once called it, to “Wall Street whipping boy.” The article also outlines how the Daily Deal model is moving to the “Operating System for local commerce”. I think this is a good vision, but they have to establish trust and scale with the merchants first. This is a significant pivot of their business model. They are going from serving their primary consumer to now serving the business as an operating system.
3. State of funding in you vertical
Is your startup going into a market that has been over-invested? Investors are generally pattern matchers – this deal looks like that deal – that deal was good so this deal might be good as well. Some invest in specific vertical markets or investments at certain stages. Most investors tend not to invest in markets where they have lost money before – does anyone remember nano technology? One reason is that Institutional Investors have Limited Partners. It’s tough to sell a limited partner on why they are re-investing in a market in which they have already lost money or where it’s difficult to see a return based on the amount of competition.
1. If the market is crowded with large incumbents (with cash) and 2)your business model shares the same challenges with that incumbent and 3) there isn’t likely any investment dollars available for your startup, should you start a daily deal site?
As for me, I unsubscribed to a number of daily deal sites today… the emails were going to folders that I didn’t look at and I’m tired of getting a notice for a manicure on my iPhone.
Great point Joe – it’s a page right out of “The Innovators Dilema” book for the big companies. There are always niche’s that are just too small for big companies to enter until someone else proofs it can be big. Microsoft is a great example of established companies. They need a $200M (maybe $1B) market opportunity to really see any impact on the business.
And I think both investors and entrepreneurs have a similar herd mentality about trends, either investing or starting.
Joe Wallin (@joewallin)
Dave, great post. Couple of reactions:
1) I agree with you that looking for a profitable niche that hasn’t been totally worked by hundreds of competitors is smart. But you know, that impulse sine people have, to do something that is being done–but do it better! I think in many, many places in the world of business there is plenty of room even in crowded spaces.
2) Many times public company risk factors are written from the point of view of–the sky may fall any minute, and we may die!–so, just something to keep in mind when you read those. Plus, what a great way to scare off competition if you are a public company. “This business is tough! Beware all of those who enter here!”