• 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

SPONSORED BY

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