The Groupon Clipper

Andrew Mason says he’s had better ideas than Groupon. “To me, as somebody who likes to come up with ideas, it’s kind of stupid,” he explains. “Like, I’ve had way better ideas, way cooler ideas.”

Maybe, but Groupon has attracted, like, stupid money. So have rivals such as LivingSocial, as investors rush in like a school of tuna hitting a chum slick to get a piece of the Web segment known as social commerce. It’s a segment that has grown wildly in the past year: some 200%, according to Needham & Co., an investment-banking firm. Groupon, the category leader, offers its subscribers—who number more than 50 million and are growing at a clip of 3 million a month—discounts on goods and services, but only if a critical mass of people agree to buy the deals that are e-mailed to them each day. The discount could be up to 90% off on a car wash, a restaurant meal, a cooking class, dental work or just about any product or service available in the 500 cities and 35 countries where Groupon operates.

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Social commerce, the Web’s next big honeypot, has a three-way payoff: you get a better price, the merchant gets a guaranteed slug of added business and potential new customers, and Groupon takes a cut. “Groupon has cracked the code on a model for local advertising and local commerce,” says James Slavet, a partner at Greylock Partners, a venture-capital firm in Silicon Valley and a Groupon investor. “Long term, this is a business that will do for retail what Google’s done to search and search advertising.”

A company with Google-like potential? No wonder Google felt compelled to buy Groupon, making an astonishing offer of $6 billion for it last December. Equally astonishing, Mason and his partners turned the Googleplexers down. “We have a lot of options,” says Mason. “Every decision we make starts from this core of an idea that there will be a company that transforms the way people buy from local business. We can be one of the great defining brands of the 21st century.”

Mason, 30, a musician, programmer, public-policy wonk and social activist (hey, who isn’t?) is as much provocateur as Web entrepreneur. At the company’s Chicago headquarters, he displays magazine covers that feature famous Web flameouts — Friendster, Napster, Pets.com—next to his own cover appearance in Forbes. “I think a lot about those companies and what went wrong. And the majority of the time, it’s those companies losing to themselves. It’s not competitors that beat them,” he says. “If you look at Myspace, Facebook was a better product. It’s as simple as that.”

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Mason knows all about getting it wrong. He majored in music at Northwestern and worked at a Chicago recording studio but found out that he was a better composer of computer codes, which paid the rent. By 2006 he had veered into the University of Chicago’s graduate school of public policy, dabbling in Internet start-ups along the way. Three months into the term, serial entrepreneur Eric Lefkofsky offered him $1 million in funding to develop an idea Mason had created called the Point. The point of the Point was to herd people into collective social action: marches, protests, stay-home-from-work days, etc. It didn’t take Mason and Lefkofsky long to realize that shopping was more profitable than social action. By late 2008, Groupon was launched. It worked—spectacularly, virally, to the point of overwhelming some merchants who were early participants: think of a flash mob that gets hungry for Greek food or decides to go bowling. Within a year, Groupon had 1 million adherents. Merchants across Chicago, and then in neighboring cities and states, lined up to get in.

The VCs got bug-eyed about Groupon’s financials. The business had gone from zero to $500 million in sales in 18 months. No start-up had grown as fast. More important, it’s extremely scalable, meaning Groupon can be replicated around the world using the same model. Today it’s in 35 countries—having recently added the Philippines, Singapore, Taiwan and Hong Kong. “Groupon hasn’t been like anything we’ve seen,” says Lefkofsky. “I’ve been involved with high-growth tech companies. I thought I had seen hypergrowth, but this is hypergrowth squared.”

It all plays to the beat of Mason’s slightly trippy leadership. His official bio reports that “Andrew graduated with a degree in music, the uselessness of which served as a chief inspiration to not be useless.” Silliness is almost a core value at Groupon. The place is overflowing with new hires—150 to 200 a month in Chicago alone—yet on one floor, Mason has constructed a space decorated like a schoolboy’s bedroom, which is reserved for an imaginary employee. One day, Mason decided to buy all his employees blue exercise balls to sit on, so the place looks like a romper room for 20-somethings.

His sense of humor can backfire. One of Groupon’s Super Bowl commercials starred actor Timothy Hutton archly mocking Tibet as a political cause before delivering the product message: “The people of Tibet are in trouble… but they still whip up an amazing fish curry. And since 200 of us bought at Groupon.com, we’re each getting $30 of Tibetan food for just $15.” Critics scorned its way-too-hip approach, but true to Mason’s activist instincts, Groupon is sponsoring a link on its website to the Tibet Fund, a charity that helps Tibetan exiles.

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Fortunately, Mason isn’t silly enough to think he can run Groupon solo. “If I told people that I knew what I was doing, nobody would believe me,” Mason says, “so why even try and fake it?” The company brought in former Yahoo! exec Rob Solomon as COO; Lefkofsky served as temporary CFO until the company hired Jason Child from Amazon for that role in December. One of their jobs will be to build on what is a deceptively simple business model. Groupon appears to be an online version of the coupons you get in the mail from local merchants or find in the Yellow Pages. Yet that’s a huge market in itself. About $100 billion is spent annually on local advertising in the U.S. alone. A lot of that money is wasted, because local commerce is highly segmented and inefficient. A small shop can’t acquire customers or advertise with the efficiency of a chain that has a number of locations in town.

Groupon is poised to fix that broken model, and that fix could be worth billions. Why? Because tactically speaking, says Slavet, social shopping is going to be a “winner takes most” business: one in which a single brand takes command of a piece of turf and it becomes increasingly difficult for rivals, no matter how good, to make inroads. Groupon has held the top spot with both first-mover advantage and extremely robust technology. Think about other winner-takes-most businesses, such as search (Google), social networking (Facebook) and operating systems (Microsoft). Google is worth $198 billion, or roughly $6.70 for each dollar of sales. Apple, a hugely successful but low-market-share company, is worth $327 billion (it has twice Google’s sales) but only $4.25 for each dollar of sales. Dominance pays.

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That’s clearly what Groupon’s funders are counting on. The company has accepted $950 million from a Who’s Who of VCs, including Andreessen Horowitz, Battery Ventures, Greylock Partners and Kleiner Perkins Caufield & Byers. (In typical Mason cheek, the headline of the press release read, “Groupon raises, like, a billion dollars.”) Still, the Google turndown has left some bankers shaking their heads. “Very few companies can emerge like Facebook has,” says Scott Munro, a partner at Pagemill Partners, a VC company that isn’t in the deal. “They must know something that I don’t know to turn down that amount of dough.”

In any case, Google is no longer a buyer—it’s a competitor. It has plans for its own social-commerce site, called Google Offers. Groupon’s biggest rival, LivingSocial, is taking the other tack; it recently got a $175 million infusion from Amazon. The linkup provides LivingSocial with a technology platform from which to expand its base of 10 million subscribers.

The need for speed is essential because hundreds of competing sites have cropped up globally. Mason doesn’t see much of a threat yet; the company is still gaining market share. But to hold off that herd, he is developing what he calls Groupon 2.0. The first phase of social commerce was connecting local merchants with the locals—shotgun blasts of discounts that were targeted generally. The next phase is hyper-local: knowing where subscribers live and what their interests are, curating their commercial experiences and sharing with friends. Think of yourself walking around with a locationally aware smart phone and Groupon knowing not just what you like but also what might pique your curiosity. “So you have this awareness stream of interesting deals as they’ve been introduced to people and popularized through Twitter and Facebook, and we think what we’re doing at Groupon lives at the intersection of those two,” says Mason.

(See “Group-Buying Sites for Beginners.”)

To get there will require the kind of data massaging that’s well beyond the average social-shopping site. In fact, Groupon’s investors believe its strength is in its data mining and not necessarily in its consumer interface, which is easily copied. These are the algorithms that conjure perfect deals at perfect times. Says Slavet: “The data is the defensibility of their model.”

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Groupon is going to get a test of that defensibility as it plants its flag around the globe. The company is trying to line up China, although that goofball Tibet ad isn’t going to help much. “One of the challenges of innovation is figuring out how to wipe your mind clean about what you should be doing at any given moment,” says Mason, “and not having a religious attachment to what’s gotten you there thus far.” His investors might quibble with the sentiment, but that’s how Mason’s mind works. It’s out there looking for, like, the next coolest idea.

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