BloGiza

Groupon Takes Over the World

It seems that we are now well in the middle of the Third Great Wave of Internet development, with companies expanding on the Internet world that was created before them and tying it in to the “real” world: social applications (esp. games), location awareness, and real world commerce.

In other words, Zynga, Foursquare, and Groupon, the companies that currently look to be the ones on the verge of mass adoption and the ones that are defining the parameters of how the Internet will be evolving.

 From my little VC bubble it feels that of the three, Groupon lately has been defining more than anything else. We here often operate according to Auric Goldfinger’s dictum that, “Once is happenstance, twice is a coincidence, three times is enemy action.” Except replace “a trend” for “enemy action.”

And with these rules in mind it seems like half the startups that I’ve seen in the last couple of weeks have displayed some kind of social group buying component in their model.

Which makes sense if you look at Groupon’s phenomenal growth. The service has grown more than 1000% in the last year, has expanded into more than 200 markets in about 30 countries, and is reportedly doing $50M in revenues each month with a 50% margin. This is pretty much the closest thing I’ve seen to a startup whose model is actually printing money.

Two interesting thing to mention here: As big as Groupon is getting and as fast as it’s growing, it has barely managed to scratch the demand of businesses to utilize the service. And all this for a company that has almost zero real technology in a field where the barrier to entry doesn’t exist.

For example, in our teeny tiny little local market alone I know of at least 6 separate Groupon clones, which is pretty remarkable.

 Groupon is aware of this and is looking to expand its model with a self service solution that they are currently piloting. The idea here is to eventually let any business that wants to participate in the party, basically to turn the model into a distributed rather than a centralized one. This will help overcome the main limitation of the Groupon model, which is scale and the high cost of direct sales to get new businesses on board.

While this is a logical development from Groupon’s point of view, expanding and distributing the social group buying model opens up a number of interesting problems:

• Fraud and security issues – From the end-user perspective: once the process of recruiting new businesses leaves the control of Groupon’s sales staff, who monitors that the deals are legit and will actually be honored? From the retailer perspective – how do we control the problem of fake coupons?

• Types of businesses – Currently, Groupon and its clones appear to focus on specific types of businesses, mainly restaurants and spas. Some smaller retailers (in particular those with unique or artisanal products) have gotten into the act as well, but at the moment it is seems less useful for larger retailers, not to mention national ones who often run their promotions top-down. Nor has anyone figured out how to utilize this tool effectively for e-commerce sites and local service providers.

• Transitioning social shopping from a marketing tool to a CRM tool – This is tied into the previous post. Currently the classic use case for a Groupon solution is with a local business which is willing to take a loss on the coupon in order to bring people into their establishment physically in the hopes that a certain percentage convert into regular customers. This means that the Groupon solution is more geared to getting new customers than to retaining existing ones (since you can’t keep offering loss-leader deals to regulars). What other tools will a Groupon solution be able to offer a business to build and maintain relationships in the long run?

I predict that in the next year we will see a lot of activity around not only these issues but a host of other things that will be built on top of the Groupon platform. This will include everything from secondary coupon markets to systems that will allow for increased targeting and matching coupons to users.

 

Israel's Internet Scene Comes of Age

It’s been an interesting month here for Israeli Internet startups, at least when it comes to exits. After years of very few exits in the space, we’ve seen three in the past four weeks. 
In mid-September, Google made its second acquisition here in the Holy Land, snapping up Quiksee for a reported $10M. 

At the end of September, AOL announced it was buying 5min Media for a reported $50-65M.  And just last week we woke up to the news that Yahoo had bought Dapper for an undisclosed price (assumed to be in the several tens of millions). 

On the face of it, the acquisitions don’t have too much in common. Quiksee, a veteran company by local Internet standards, developed technology to create 3D video tours of places. This technology will be used to bolster Google’s Street View application, which might finally make its way here to Israel although I’m not necessarily counting on it.

5min has an extensive library of how-to videos and technology to match these videos to textual content on a website, thus increasing the amount of content available. The value here is both in the library of videos and the distribution network that 5min was able to put in place.

Dapper, meanwhile, has developed technology that can dynamically change display banners based on context and user targeting. Yahoo will use this technology to expand its advertising offerings. It appears that Yahoo wants to try and become a strong player again in the advertising game after having stepped back since it conceded all its search advertising to Microsoft last year. 

But I think what all these acquisitions have in common is that they show a certain maturing of the Israeli Internet scene. When I joined Giza a little over five years ago, Internet startups were still suffering from the aftereffects of the 2000 bubble. Most local VCs did not have anyone dedicated to Internet, and a lot of the partners I talked to at the time were utterly dismissive of the space in general.

Slowly, things started to change. Around the middle of 2006 we started seeing a crop of new Internet companies which flowered up into a full-fledged startup scene a year later. Dapper and 5min were both early entrants in this second wave of Israeli Internet startups. Of course, both started off with completely different concepts than what they ended up with. Dapper was originally a Yahoo Pipes-like technology to allow people to easily create mashups of different Web services; 5min originally wanted to create a destination site and produce their own how-to videos. They later changed their concepts around into what they are today.

So, what are the takeaways here? I can think of a couple:

• The local Internet scene is definitely maturing – One of the key signs that this has become a stable industry is these mid-size exits. Up till now the exits tended to be on the smaller end of the scale. The fact that they might be creeping upwards indicates that there is enough “meat” for larger companies in the world to take an interest.

• Technology rules the day, except when it doesn’t – One of the mantras that a lot of VCs here still subscribe to is that companies in the Internet space only have potential if they are tackling the more technological aspects of the industry. Otherwise, the feeling goes, companies in the Valley have a major advantage over the ones here. While there may be some truth to this idea, the recent round of exits doesn’t provide any clear results. 
  
  Dapper was certainly bought for its technology, but also the fact that it was a growing business. Quiksee was a technology exit, but a relatively small one. On the other hand, 5min was a classic business development exit, bought for the strength of its content agreements and distribution networks.

• Consumer plays are still a question mark. The big question mark as far as the Internet scene is concerned here remains B2C. We haven’t seen a major consumer-focused Internet company exit in the last four or five years. And there is a growing feeling that companies based in Israel cannot compete with their counterparts who are plugged into the Internet ecosystem in the Valley or the East Coast. The jury is still very much out on this question. I’d like to see this assumption proved wrong, although my feeling is that it will be difficult to do so.

And so, congratulations to the guys at Quiksee, Dapper, and 5min. Good work!