• ENTREPRENEURSSERIAL STARTUPS
The NextWeb PhenomANDREW MASON figured out how to inject hysteria into the process of bargain hunting on theWeb. The result is an overnight successstory called Groupon. By Christopher Steiner
AT LEAST MARK ZUCKERBERG
wrote a few lines of computercode at Harvard before he left
to launch Facebook Now An
drew Mason, a relaxed and
lanky 29-year-old music major fromNorthwestern, has managed to build the
fastest-growing company in Web history.
Groupon represents what the dot -com boom
was supposed to be all about: huge sales, easy
profits and solid connection between bricksand-mortar retailers and online consumers.
Groupon, a name that blends "group" and
"coupon:' presents an online audience with
deep discounts on a product or service. Act
now, says the pitch: You have only so many
hours before this offer expires. That's a
fumiliar come-on, but it'scoupled with a novel
element Youget the deal only ifa certain num
ber of fellow citizens buy the same thing on
the same day. It's a cents-off coupon married
to a Friday-after-Thanksgiving shopping frenzy.
What's in it for the vendor-which might
be a museum, a yoga studio or an ice cream
shop? Exposure. Since the resulting revenue
is not only discounted but shared (typically,
SO/SO)with Groupon, the vendor may scarcelybreak even on the incremental sales.But it now
has customers who might never have thought
of patronizing the business. Groupon gets its
offers in front of eyeballs by buying ad space
through Google and Facebook and via theword of mouth of its 13 million subscribers.
Unlike so many dot-com rockets,
Groupon is a real business. Occupying 85,000
square feet inside a rehabbed eight -story for-
58 FOR B E 5 AUGUST 30,2010
mer Montgomery Ward warehouse in
Chicagos River North neighborhood, the
company is on track to pass $500 million in
revenue this year, according to a report Mor
gan Stanley put together to win some under
writing business. No technology stalwart
including Ebay;Amawn.com, Yahoo, AOL and
Google-grew that big that fast. At just 17
months old this April Groupon boasted a$1.35 billion valuation when it raised $135 mil
lion, the biggest chunk of it from Digital Sky
Technologies, the curious Moscow investment
fund behind Facebook and Zynga. (Mason
will not disclose his stake, which he says is less
than 50%.) The only company to reach a$1 billion valuation faster was YouTube (now
part of Google), fOunded in 2005 and stillwait
ing to turn its first profit. Groupon broke into
the black just seven months after inception.Mason's model is transfonning the way
companies-especially smaller ones with
limited marketing budgets-snag sales.In May
Groupon sold 6,561 tickets to a King Tut ex
hibit in New York's Times Square for $18
apiece, little more than half the list price. The
campaign brought in $120,000 at virtually no
marginal cost to the exhibit; Groupon pock
eted about 50% for a day's effort. The most
popular item so far: a $25 ticket for a Chicago'
architectural boat tour sold for $12. In May
Groupon moved 19,822 tickets in eight hours
and split the $238,000 with the tour operator.
Groupon has charged into 88 U.S. cities
and 22 countries, including Turkey and Chile.
Hundreds of rivals, some with deep pockets,
are springing up. With turf wars brewing from
New York to Brazil, Mason has armed him
selfwith 250 salespeople and 70 writers, many
plucked from the Chicago improv scene, to
concoct witty pitches for deals. "We want todo for local e-commerce what Amawn did for
nonnal consumer goods:' he boasts.
Mason's no Silicon Valley geek He grew
up in suburban Pittsburgh, where his fatherhawked diamonds and his mom worked as a
photographer. Music, not computers, was his
passion, starting with piano lessons at age 6.At Northwestern Mason helmed a rock band
that he describes as equal parts punk, the Bea
tles and Cat Stevens. "I thought I was goingto be a rock musician until I was 25 or so:' he
says. "But it wasn't about being a rock star; it
was about being part of a counterculture:'
Mason's entrepreneurial instincts were al
ready stirring. At age 15 he delivered fresh
bagels purchased from a bakery to his neigh
bors' front porches on Saturday mornings.
(Candy bars, bought at Costco, proved a bet
ter seller.) After college Mason, a self-taught
computer programmer, landed a coding gig at
InnerWorkings, a Chicago firm that funns out
companies' printing jobs to the lowest bidder.There he hatched an idea for a website that
would examine thorny topics, such as the Iraq
war and health care, by unveiling the hidden
agendas of the authors behind popular articles.
Mason found support in 2006 at the Univer
sity of Chicago, which granted him a scholar
ship toward a master's degree in public policy.
A few months later Eric LefkofSky;InnerWork
ings' founder, caught whiff ofMasods plans and
offered him $1 million of angel capital to crank
_ ENTREPRENEURS
... and the most lucrative.
One promising trend: Some of The Points
most effective campaigns banded consumers
together to gain buying power. Mason began
featuring a blog that offered readers a differ
ent deal from various vendors every day.
Having little to lose, his investors encouraged
him to pursue the strategy. Groupon-then
called Getyourgroupon.com-was born.
Mason's crew of seven people each made
100 calls a day hunting for campaigns. Some
days the deals would "tip"-meaning they'dmeet the minimum number of takers de
manded by the vendor-and some days they
wouldn't, meaning Groupon got zilch. (Today
98% of the deals tip.) Using a 5,OOO-name
mailing list, Groupon sold 100 $25 passes to
an experience involving one hour inside a
pitch-dark, soundproof tank containing skin
temperature salt water. At that point Mason
knew he was on to something: "Who would
think this many people would be interested
in a sensory deprivation chamber?" In the next
six months Groupon opened in Boston,
New York and Washington, D.c., giving each
city a Web page featuring its deal of the day.
More than half of visitors drop in on the page
because they've heard about it from friends.
Groupon's salespeople, most working in
Chicago, earn salary plus commission, based
on revenue and the ratio of refunds (usually
negligible). Writers earn entry-level salaries
commensurate with salaries of journalistS,
around $35,000 a year. Aaron With, now
GrouponS editor in chief,oversees enough copy
to fill a 190-page novel every day.
Landing a Groupon deal, even at a loss,
can put a small business on the map. In March
East Coast Aero Club, a flight school in Bed
ford, Mass., offered introductory helicopter fly
ing lessons, normally priced at $225, for $69.The deal had to be shut down at 11 a.m. after
subscribers signed up for 2,500 lessons; the
club had expected perhaps 200. "I knew we
had a problem when 1checked in right after
receiving the e-mail and 30 lessons had already
been sold:' recalls Philip Greenspun, the head
helicopter instructor. "We look at this as
incredibly effective advertising:'
So effective that Mason claims Groupon
now has 35,000 companies clamoring to be
on its roster. Only one in eight applicants
makes the cut. The winners must already be
getting kudos at online review sites like Yelp,
CitySearch and TripAdvisor, and the dealsmust offer a substantial discount from nor-
"I figured it was just a matter of time before
1had my $400 million company and got my
big payout:' quips Mason.
But ThePoint didn't attract enough eye
balls to live on advertising revenue. One of
Mason's lieutenants, Aaron With, proposed
paying for popular GoogIe search terms related to societal issues-such as "make weed '
legal:' Mason got traffic, just the wrong kind.Obnoxious fans of the band Insane Clown
Posse, known as JuggaloS, made ThePoint
their online playground. As losses mounted
in 2008, Mason trudged to With's house to lay
offhis friend. "If 1was a rational person, 1prob
ably would have quit right there:' says Mason.
ITEM: Two GO-Minute Jump Passes at Sky Zone (a trampoline-filled entertainment
center) in SI. LouisRETAIL VALUE: $25
GROUPON PRICE: $12
UNITS SOLD: 2,228
WISECRACK: "Though it prohibits us from bench-pressing cars, gravity is the best
thing for getting water out of the sky and the only thing keeping football stadiums
from floating away. Escape its omnipresence with today's Groupon."
ITEM: Five Yoga classes at Cityoga in IndianapolisRETAIL VALUE: $71.25
GROUPON PRICE: $25
UNIT5 SOLD: 544
WISECRACK: "Yoga is unique in that it is the only medieval physical-fitness art that
does not involve firing crossbows at a Grendel."
ITEM: Custom T-shirts at Little Shop of Crafts in ManhattanRETAIL VALUE: $30
GROUPON PRICE:$15
UNITS SOLD: 572
WISECRACK: "Drive mere mortals mad with the world's most obscure joke, which
science has proven to be Mr. Belvedere's head superimposed on the Mona Lisa with a
word balloon proclaiming, 'Everybody say, "YATTAI"'"
ITEM: One-hour photo session, including full-resolution photos on CD from Robert
Goold Photography in San DiegoRETAIL VALUE: $250
GROUPON PRICE: $59
UNITS SOLD: 898
WISECRACK: "Before photography, the only way people could preserve their most
treasured memories was by forcing everyone around them to stand completely still for
days at a time."
9O-minute hot stone massage $220$554,960$136,400
at SpellBound BodyWork in ChicagoTreetop adventure tour with North
89447,130156,860
Georgia Canopy Tours in AtlantaRound-trip ferry ticket from Seattle
125594,499132,720
to Victoria, B.C.from Clipper Vacations
CDesign Here
~
RETAIL GROUPON UNITS GROUPON'SITEM VALUE PRICE SOLD TAKE
Source: Groupon.
GROUPON'S GREATEST HITSThe best marketing pitches start with a breezy message. Here are some of the catchiest ...
up the hidden-agenda site.
The idea soon morphed into
ThePointcom, an online platform for petition
ers to muster support for all sorts of causes.ThePoint launched in November 2007 and
drew national press attention for its users' zany
campaigns. One amassed 1,000 people com
mitted to donating millions of dollars toward
solving AfricaS AIDS epidemic-on the condition that U2 front man Bono would retire
from public life. Another corralled several
thousand supporters ofbuiIding a dome over
Chicago to keep the city warm all year. The
publicity helped lure $4.8 million in venture
capital from the likes of Sand Hill Roads NEA.
60 FOR B E 5 AUGUST 30,2010
SERIAL START-UPS!I\I
\
\
volved;' says Lefkofsky, Groupon's largest
shareholder. "We think we have a big lead:'
Being the first mover has its advantages.
"Groupon" is now part of the lexicon of on
line shopping. But Mason is protecting hisflanks. To take on more small business
clients, he just announced plans to feature
more than one deal per day in most markets.
An algorithm will mete out the offers by
weighing customers' past purchases and ge
ographic locations. A hockey fanatic from
Chicago's far North Side wouldn't receive a deal
for half-price yoga lessons in the city's South
ENTREPRENEURS
Groupon2008 •• 1II1II1II1II1II1
Priceline 1997 ••••••••••••••
Amazon 1994 •••••••••••••••••••••••••••••
Google 1998 •• 111111111111111111111111111111111111.
Office Depot 1986 .111111111111111111111111111111111111_
JetBlue Airways 1998 ••••••••••••••••••••••••••••••••••
Yahoo 1994 11111111111111111111111111111111111111111111_
Ebay 1995111 •••••••••••••••••
Apple 1976111 ••••••••••••••••••••
Dell 1984 .1" "".1 ,,,,., II,,,,., 11',., " 11',., ',11.' " ',1\., "".1 " ',1'.1 ,,,,., I0123456789
Years from inception to $1 billion in revenueSources: Capital 10. a Standard & Poor's business; Morgan Stanley; Thomson Reuters Fundamentals via FactSet ResearchSystems; Forbes.
THE GREAT RACEGroupon is on pace to pull in $1 billion in salesfaster than any company in history.This list excludes investment holding companies (which tend to be preassembledbefore formally launching) and those built mainly through mergers or acquisitions.
-Scott DeCarlo
mal prices and not be similar to other pro
motions regularly offered by the vendor.
One problem with the Groupon model:
Anyone can replicate it. More than 200 copy
cat sites have sprung up in the US., with an
other 500 overseas, including 100 in China.
The competition isn't bashful. Many sites
closely mimic Groupon's copy and graphics.
One Russian site, called BigLion, ripped off
Groupon right down to the fonts and colors.
(While he probably has grounds for a suit,
Mason says going after a startup in Russia isn't
worth the effort.) In China a copycat has
Forbes___ com
www.forbes.com/startupaddicts
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begun operating at www.groupon.cn.using
the same graphical interface. "Groupon is
looking at this as a winner-take-all situation,
but they may find it tough to sustain their po
sition in every market:' says Andrew Razeghi,
a marketing professor at Northwestern's
Kellogg School of Management.
LivingSocial, Groupon's closest rival in the
US., raised $40 million since launching its
service in July 2009. Chief Executive Timo
thy O'Shaughnessy thinks his Washington,
nc. outfit has a long-term edge because it puts
a full-time salesperson in each of the 50 cities
it's in. Groupon has people in about half its
markets. "You're dealing with a lot of small
merchants whose business is their life;' says
O'Shaughnessy, "For them being able to'
work with a real person is a big deal:'
Bigplayers lurk, too, including Twitter,nowwith over 80 million users and 70 million tweets
a day. In June Amazon.com bought Woot, a
site that offers one piece of discounted mer
chandise a day. "This space is bound to attract
somebody big; thereSjust too much money in-
Side Hyde Park neighborhood.
Mason's other strategy: consolidation. In
May he bought Berlin'sCitydeal, a group-buy
ing site with 600 employees serving 80
European cities (the price wasn't disclosed).
Mason says he may strike again overseas but
that "it's tough coming in from outside and
figuring out local consumer habits:'Mason has the capital to expand-prof
itably. He estimates that a metro area like
Chicago should yield 20 deals a day; that im
plies nearly 5,000 retailers per city per year,
up from the 250 in most cities now. Groupon
now posts 100 deals per day in the US. Mason
figures he can increase that. number by 50
every month to reach 400 come January.
Against that quadrupling of deals he plans to
boost his sales staffby 80% (200 people) and
his writing bullpen by 100% (70 people).
As for spending himself to perdition, as
did many dot-commers before him, Mason's
not sweating it "ThereS never been anything
radio, TV, newspaper, whatever-that could
generate small business sales so quicklY.' F
62 FOR B E 5 AUGUST 30,2010