The Groupon Clipper

Andrew Mason runs the hottest website in social commerce. Will it make investors rich?

  • Ryan Pfluger for TIME

    Groupon CEO Andrew Mason, in a room built for an imaginary employee. The company has been hiring more than 100 real employees each month

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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.

    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.

    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."

    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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