Daily deals business Groupon has had a tough past few months, with CEO Andrew Mason being sacked in late February. But on the bright side, the company’s just-released Q1 2013 earnings beat expectations, shooting the company’s stock up 10 percent in after-hours trading.

The company reported $601.4 million in revenue compared to $559.3 million in the year-ago quarter. Wall Street expected Groupon would report $588.92 million revenue for quarter. Its earnings per share came in at $0.03.

Another important metric is the number of active customers using Groupon. The company said that last quarter, 41.7 million used the service. That’s a 13 percent increase year-over-year, but just a hair over the 41 million customers reported last quarter.

Groupon chairman and co-CEO Eric Lefkofsky said on today’s earnings call that the company had suffered “growing pains” but it had “vast” opportunities in front of it.

“We’re still a toddler, despite our size and scale,” Lefkofsky said. “With unprecedented growth comes unprecedented volatility.”

Co-CEO Ted Leonsis said the company is still looking for a chief executive to fill Mason’s old role. “The board has started the process,” Leonsis said. “We don’t expect this to be a simple search.”

As of this writing, Groupon’s stock is trading at $6.14 per share, nearly 10 percent over its closing price of $5.59 per share.

Smart child via Shutterstock

The startup launched today with the mission of “streamlining and simplifying” e-commerce. On the site, you find a range of products and categories. If you see something you like, such as an LED light pillow, a soft-service ice cream maker, or J. Crew silk blouse, you hit the “tiks” button to save the item for later. You can also create alerts for future deals, share items with friends, or go directly to the original sale site. In addition to products, it also deals on experiences and services like yoga classes or house cleaning.

“Most online shoppers spend too much time browsing different online shops in search of a product they are looking for,” said founder Raffi Keuhnelian in an email. “By combining flash sales, product search, and daily deals, users can actually find what they are looking for.” 

Rather than the daily deals email model, which many consumers have grown tired of, TikTatkTo’s approach is to put all the deals on one page that updates in real-time based on the users’ location. The technology also learns from the users behavior to recommend products, and the “popular,” “new arrivals,” and “best sellers” sections help with product discovery.

E-commerce is an increasingly crowded space as companies big and small attempt to create the ultimate online shopping experience. Some sites like Amazon offer vast inventories and low prices, while companies like Polyvore and Wanelo take more curated, social approaches. Groupon and Living Social inspired a dozens of fellow daily deal startups, and then there are web extensions like Honey that crawl the web for coupon codes and tries them for you automatically.

TikTakTo is the latest startup to join the fray by taking bits and pieces of all these approaches to provide aggregation, curation, social feeds, and discounts all in one.

The company is based in Montreal, Canada and currently has 10 employees.

Photo credit: eilowny/Flickr

A new chapter in Groupon history began last week with the ouster of Groupon CEO Andrew Mason. After a devastating earnings report on Wednesday, Mason was ousted by the board on Thursday.

As Groupon’s most vocal critic (disclosure: I’m short Groupon), I wanted to take a look at what changes we might see and the state of the business today. Unlike many of my previous posts, this will contain little advice for the company.

The biggest change I expect to see — and one that Mason’s departure from the company signifies — is the elimination of the wide disconnect between reality and management’s claims about the state of the business. While Groupon’s stock was tanking 26% in after-hours trading, Mason was telling investors and analysts on the earnings call, “We’re quite proud of these numbers.” At the beginning of the call, he said “Q4 provided the best evidence yet that customers love Groupons.”

I felt like Megyn Kelly of Fox News when she was talking to Karl Rove giving optimistic projections for Romney on Election Night. “Is this just math that you do as a Republican to make yourself feel better, or is this real?,” she asked Rove. I’ve always wondered if Groupon management genuinely believed the crazy optimistic messages they spouted or if they understood the deep, deep trouble the company is in.

Mason’s departure memo to employees seems to acknowledge the latter. He wrote to his former employees:

If you’re wondering why… you haven’t been paying attention. From controversial metrics in our S1 to our material weakness to two quarters of missing our own expectations and a stock price that’s hovering around one quarter of our listing price, the events of the last year and a half speak for themselves.

Those rushing to lionize Mason for the transparency of his departure memo should note one thing he left out: He’s walking away from the company with more than $200 million. Not bad for a performance that saw 75% of the IPO value disintegrate in less than a year and that hurt many, many small businesses. Even those that didn’t run Groupons are struggling because of the discount pressure that Groupon has created in the marketplace. I’ll happily be your fall guy for $200 million.

The other big change I expect at Groupon is that the editorial team will be decimated. This was a change I called for in the fall. Groupon and Mason made the mistake many people do: They assumed correlation was causation. Because Groupon started off with an editorial team that wrote whimsical (some would say absurd) descriptions of businesses, they assumed it was a necessary part of the business and hired rapidly. At the time of the IPO, they employed 1,259 editorial employees. That’s a team that would dwarf most newsrooms around the world. As of December, the New York Times employed 1,100 people in the newsroom. (Groupon hasn’t published updated numbers since the IPO.)

Most of those people could be fired without adverse impact to the business. If Groupon still has 1,200 editorial employees, I estimate that it could add $6-$8 million to its quarterly income with this change. According to several sources within Groupon, Mason (himself a music major) was the primary protector of the editorial team.

Beyond those two changes, I view Mason’s departure as largely symbolic. The core structural challenges that face Groupon still exist. As I’ve said from the beginning, daily deals were a faddish business model. Revenue from the daily deals business that investors paid a hefty premium for declined 14% in Q412 compared with the quarter a year earlier. That decline was more than offset (the way Groupon accounts for it) by growth in the Groupon Goods business.

The problem for investors is that the Goods business is a low-margin business. Daily deals provided high double digit margins. Even under Groupon’s best-case scenarios claimed by management, high single-digit margins are expected for Goods. (The actual results in Q4 were materially worse.) The declining high-margin business is being replaced by a low-margin business. It’s not a bad business; it’s just not what investors signed up for.

Consider some of the other things that Groupon has claimed that have turned out not to be true:

We’ll never have to pay for marketing again. This was a refrain heard often from Mason during the lead up to the IPO. It was OK to spend hundreds of millions on marketing, because once Groupon had someone’s email address, they could keep marketing to them for free. Anyone who has ever run a subscription business knows how ludicrous that claim is. As Groupon stated on its conference call, purchases from emails are a declining share of purchases.

Consumers want to be “shocked” by ultra-low prices into buying things they hadn’t considered. Groupon instead is now touting its Dealbank, a database of evergreen deals. You can come to Groupon any time and find these deals. This reduces dramatically the urgency to purchase that the deal-a-day service promoted. I believe it’s also bad for small businesses because it destroys their pricing power if deals are omnipresent. Because Groupon also needs to get customers to check out these deals, it will have to spend on search engine marketing. If you still believe in this space, you might as well invest in Google — they’ll make money on it regardless. (Disclosure: I’m long Google.)

Customers love Groupon and will be with us for life. Groupon had significant customer deactivations.

Small businesses will keep giving us a big cut of their revenue for marketing. On the call, Groupon admitted that it has been adjusting its take rate downward to get better quality merchants on board. If the daily deals business model were compelling, Groupon should have been able to increase its take rate as hundreds of its competitors went out of business.

We can get high margins without having to deal with messy inventory. In the daily deals space, Groupon was able to be a broker and take a steep cut just to refer business. With Goods, it is processing inventory and having to deal with fulfillment. And the cut it gets is razor thin.

Groupon Scheduler, Groupon Now, and Groupon Payments are important parts of the merchant “operating system.” It seems every few months Groupon would trot out a new line of business and claim it would be the next big thing to help its flagging stock price. When Groupon publicly announced payments, its stock shot up. But payments is an incredibly difficult business with low margins. And Groupon’s success in it is somewhat dependent on its success in the daily deals business, which is in decline. Groupon has all but stopped talking about the other two.

Groupon Goods presents another challenge for Groupon. Because consumers can easily compare prices online, it has to be ultra-competitive and it has to beat Amazon. (Which is known for thin margins.)

So even though Goods will grow in volume, it won’t have great margins.

There’s only one man that Wall Street lets get away with razor-thin margins. But I don’t see Jeff Bezos lining up to be CEO of Groupon.

Rocky Agrawal is an analyst focused on the intersection of local, social and mobile. He is a principal analyst at reDesign mobile. Previously, he launched local and mobile products for Microsoft and AOL. He blogs at http://blog.agrawals.org; and tweets at @rakeshlobster.

Andrew Mason photo via DEMO/Flickr

The founders of German coupon and deals site DailyDeal have purchased their company back from Google about 17 months after the original sale.

Google acquired that Groupon-like site back in September 2011 as a way to get some daily deals traction in Europe. But as you probably know, the daily deals space has fizzled in the past year. Google laid off staff in September 2012, and reportedly planned to shutter DailyDeal entirely.

So Fabian and Ferry Heilemann, the founders of DailyDeal, stepped in to save the company from being completely shut down by making Google an offer to buy it back. Today the two posted an announcement on the DailyDeal site.

The announcement reads:

We are pleased to inform you today that we as founders and managing directors have bought the company DailyDeal back from Google and will now continue to lead it on our own. DailyDeal will of course continue to offer the same service and exciting offers –- exactly as we have done in the past.

In addition, we will expand the business in the coming months. In the name of the DailyDeal team we thank all of our users, business partners and colleagues for their loyalty and support over the last three years. We are very much looking forward to what lies ahead of us!

So what will the company do to expand? The company told Silicon Allee:

In the future, we will continue pursuing couponing as a business model and expanding our strong market position. With 31,000 deals and 4.6 million coupons sold summing up to a total value of 260 million euros, DailyDeal has evolved to a leading couponing portal in D-A-CH in the last three years. Within the last year we have grown by 25 percent compared to 2011.

Building on the existing assets (such as employees, customer base, merchant pool), we will also develop other sustainable business models. The latter will be presented to you within the next few weeks.

This is certainly an interesting turn of events for a company that was happy to sell to Google back in 2011. But even Google didn’t have an answer for the extremely problematic daily deals model.

Businessman counting pennies via igor.stevanovic/Shutterstock

Think the group-coupon craze is nearing the end of its life cycle? Tell that to LivingSocial’s investors, who just sunk another $110 million into the online deals service.

The funding news comes from an email that was first obtained by the Washington Business Journal today, which indicates that the new round came from existing investors and was one of many options the startup had for getting additional funding.

The new round will “build our reserves, solidify our long-term plans and execute against our vision for the future,” wrote LivingSocial CEO Tim O’Shaughnessy in the message. “This investment is a tremendous vote of confidence in our business from the people who know us best, our current board members and investors.”

The new round is a bit surprising considering that the consumer demand for online-coupon services has somewhat dropped off in the last several months, not to mention the dismal earnings reported by rival coupon service Groupon. Additionally, LivingSocial saw a $650 million loss in 2012, and a $558 million loss in 2011. Back in November the company axed 10 percent of its workforce in an effort to address the slowed growth of its business.

LivingSocial declined to comment about the new funding.

VentureBeat obtained a copy of the full email message sent out today, which we’ve pasted below:

LivingSocialites -

We’ve got some great news to announce today, as many of our current investors have reinforced their support for the company through a new round of financing that will give us an additional $110 million to build our reserves, solidify our long-term plans, and execute against our vision for the future.

This investment is a tremendous vote of confidence in our business from the people who know us best, our current board members and investors. They have reviewed our plans for 2013, and they are enthusiastic enough to want to commit additional financial resources through this round. This round also follows a competitive process in which we were fortunate enough to have multiple options for funding.

As you know from our all-hands last month, we have an aggressive roadmap for profitability and expansion this year, and those plans include increased investment in areas like marketing, technologies, and mobile. This new investment round will allow us to dedicate the resources we need, while also building a significant cash reserve against unanticipated events or bumps in the road.

This new investment does not change our plans to reach profitability, and we believe that a cash-flow positive and growing company will give us even deeper resources to take advantage of new opportunities, extend our promising lines of business, and expand a robust funnel of new customers. We will be sharing regular updates on our results and progress against goals as we move forward.

We’ve had a solid start to the year, and I am excited about the opportunity to solidify our path to success over the next couple months. Thank you again for your hard work and dedication.

- Tim

To celebrate, the stock market sent the company to another all-time low on Friday. Groupon, best known for connecting consumers with 50%-off local deals, has hardly been a good deal for investors. If you invested in the company at its 52 week high, you’ve lost 88% of your money. If you got in on the first day close, you’re down 85%. If you got in at the IPO offer price of $20, you’re down 81%. The company is down 58% from the $6 billion that Google supposedly offered for it. Any of the institutional investors who bought Groupon in its last private round and held are down more than 50% of their investment — the stock was at an adjusted $7.90 then and closed Friday at $3.83. (Disclosure: I’m short Groupon.)

Over the last year, the fundamental economics of the business have settled in after the hype died down. We’ve seen deals get less interesting for consumers for months now. Deals that were once truly 50% off come loaded with restrictions that make them hard to use. The “free money” deals for things like restaurants that people care about are fewer and further between.

I’ve significantly shifted my energy away from covering the company. I suppose that’s good news and bad news for the company: On the up side, they no longer have someone picking apart their every move. On the down side, that makes me one more person who doesn’t care much about their company anymore.

But I thought it might be helpful to look at some possibilities for what lies ahead in the deals landscape.

Firing the editorial team. At the time of Groupon’s IPO, the company employed more than 1,000 people in its editorial staff. Groupon’s hiring spree has been a safety valve for otherwise unemployable journalism, music, and theater grads from Chicago-area schools, but it’s an idiotic strategy. Most of this team adds zero value to the company. They write descriptions of businesses they’ve never visited. According to several Groupon salespeople I’ve talked to, they can cause tension because business owners are often befuddled by how their businesses are described. The editorial team apparently wasn’t able to stop Groupon from tackily promoting a deal for dining in the dark in New York right after hurricane Sandy, as Bloomberg’s Ryan Sutton found. By my estimates, Groupon would add between $8 million and $10 million to its bottom line each quarter just by eliminating the editorial team. (Some sources inside Groupon say CEO Andrew Mason, himself a music major, is highly protective of the team.)

Accounting. After market close on Friday, Groupon revealed that the SEC has been continuing to ask questions about Groupon’s accounting. I’ve been harping on the company’s accounting sketchiness since the day the company filed its original S-1. I believe the company still has significant accounting issues that haven’t been thoroughly probed. If the past is any guide, Groupon will continue to try to invent new accounting for each new product it launches.

Troubles at LivingSocial. As troubled as Groupon has been, its top competitor, LivingSocial has had it worse. Based on public filings by Amazon (which owns roughly a 30% stake in LivingSocial), we can see that LivingSocial has lost more than $750 million in the last nine months. Much of this has been due to being forced to write down valuations of companies it acquired. But I estimate that LivingSocial had cash losses of about $100 million during those nine months. The company continues to do nonsensical deals like giving away Starbucks gift cards for less than it pays for them. The only positive sign I’ve seen is that, according to an email LivingSocial’s CEO sent to employees, the company took in more cash than went out in September. I wouldn’t be surprised if LivingSocial is gone or acquired by this time next year.

Year-over-year declines start. In the second quarter, Groupon had a sequential decline in its gross billings. (The amount that consumers spend on Groupons.) Executives have said this is nothing to worry about. Look at our year-over-year growth! I expect that we’ll soon see year-over-year declines in the business. If you back out Groupon’s Goods business from the gross billings, this is virtually guaranteed. I think that’s a fair calculation to make because it’s a fundamentally different business with lower margins than the daily deals business. Groupon’s year-over-year comparisons are also helped by the fact that it runs many more deals simultaneously and keeps deals open for much longer than a day. That’s not bad from a business standpoint — it’s the right thing to do to amortize the cost of sales. But it hides exactly how quickly the core deals business has deteriorated.

Acquisition. I am frequently asked whether Groupon will be acquired. I don’t see a logical acquirer, at least not among the Internet companies I follow. Google was interested back when Groupon was white hot. Now that it has effectively proven that its model doesn’t work, I don’t see what value Google would get from Groupon. Any potential acquirer is essentially buying four things: a large database of consumers to spam, a giant sales organization, a merchant base, and a brand. Companies with the money to acquire Groupon like Google and Amazon already have large consumer bases. The sales organization has a lot of bodies that do very different things than most tech companies are used to. (Google is already suffering quite a bit of indigestion from swallowing Motorola Mobility; I doubt it’s ready for another major headcount acquisition.) Groupon’s merchant base is too concentrated in certain verticals. (Often things that involve lasers — think hair removal and lasik.) The brand has seen much better days. Both Facebook and Google have the assets to build the right experience that delivers results for small businesses cost effectively; acquiring Groupon would send them in the wrong direction.

The biggest red flag for me remains the management team, which has not acknowledged how bad things are at the company. Every time I hear them talk, they are using the same lines from the company’s original roadshow last year. It’s a multitrillion dollar opportunity! Trust us!

Maybe they don’t realize it. Or maybe they do and they’re just afraid of spooking Wall Street by announcing bold changes.

If that’s the case, I have one piece of advice for Groupon: Don’t worry, Wall Street has already left you for dead.

[Top image credit: Aletia/Shutterstock]

Dear Andrew,

After more than a year on the Groupon beat, I’m retiring. Pop the champagne!

I’m almost done. I have one more story to write, and then I’m done writing about Groupon. (It’s a story that I’ve been working on for the last few months.)

It’s not because there isn’t more I can say. Trust me, it’s taking every ounce of restraint I have not to do a point-by-point rebuttal of your interview with Julia Boorstin on CNBC. Groupon Payments? No, I won’t write a full analysis of that, either. It’s actually a pretty good product, but it won’t come close to offsetting all of the massive revenue growth you promised investors that didn’t materialize. By my math, you can make more money running one daily deal for a a couple of days then you can processing all of a Groupon Payments customer’s transactions for five years.

My primary goal in writing about Groupon was to help small businesses understand the complexity of what they were actually signing up for when deciding to run a Groupon. When I first started writing, there wasn’t a lot of information that a business could tap, aside from the information provided by Groupon sales reps. Today, a lot of information is available just by Googling. As for investors, if they had believed me when I said Groupon stock would go to zero when I was on CNBC in April, they would have made a lot of money by now.

I haven’t been paid anything for all of my writing about Groupon or any of my TV appearances. I did it because I believed that helping small businesses was the right thing to do. Through my interactions with hundreds of small business owners while researching Groupon, I’ve sharpened my understanding of what doesn’t work for small businesses. I think I’ve figured out how to crack local in a way that truly will work for small businesses in the long run and help them better connect with customers. So I’m going to focus the energy I’ve spent on Groupon on that and some angel investing.

But enough about me. Before retiring, I wanted to give you one more opportunity to have a Q&A. Given what’s happened to Groupon’s stock during the last nine months, it’s clear that Wall Street has lost all confidence in the abilities of Groupon’s management team. (Today’s bump notwithstanding.)

I can’t think of a better way to rebuild confidence in your company than to go head-to-head with your biggest critic.

I figure we can chat for 30 to 60 minutes on video. I’m happy to present the entire unedited conversation to my audience. I can even talk to some folks I know in the TV business and see if they’d be willing to feature it. (I can’t guarantee that will happen, but I do have a decent track record in talking about Groupon on TV.)

I won’t tell you the questions ahead of time and I won’t agree to any restrictions on the questions I will ask. But you probably have a very good idea already. It would be a good way to rebuild credibility with Wall Street. Maybe we could even do it in front of students at our alma mater, Northwestern. It’s been a while since I’ve been back on campus.

I’ve always been impressed at the number of small business you have activated. There are ways to correct the imbalance in the value proposition you have.

I hope that we’ll have the opportunity to finally meet. If not, best of luck in turning around your company.

Rocky

Google’s takeover of portal deals site DailyDeal about a year ago for $114 million was one of the great success stories of the German startup scene – and a very tidy outcome for founders Fabian and Ferry Heilemann (pictured above).

Now, according to our sources, Google has laid off a larger number of staff – some of them in senior positions — mainly in the areas of sales and marketing. A Google spokesman confirmed news that it will reduce the DailyDeal team and not renew certain contracts.

The deals site team, led by Graham Law and Matthew Scott Sucherman, will in future focus more on the integration of the platform with other Google products, in particular Android, Maps, Adwords, and Adwords Express. No further specific details were given, including the number of layoffs.

Daily deals – a difficult business model

Recent months have shown the daily deals and coupon industry is not a simple one to nail. In Germany, earlier this year, Marcus Seidel still achieved reasonable success with his exit of  Gutscheine.de to the RTL group. In contrast, market leader Groupon’s share price has slumped, despite promising revenue results in Q1 2012, major financier Kinnevik recently bowed out of the company, and senior executives Daniel Glasner and Phillip Magin have left for reasons unknown. The company also attracted media attention for questionable working conditions and other standards earlier this year.

It’s not just Groupon – the Global Daily Deal Association (GDDA) in June acknowledged a general “lack of merchant and consumer confidence” and is working on a code of conduct in a bid to help the industry recover.

DailyDeal – from portal to what?

DailyDeal itself has largely stayed out of the headlines since its takeover by Google. The current restructuring, however, suggests it too may be failing to perform under a business-as-usual approach. Success would seem to depend on how well Google can integrate the service into its other advertising products. It wouldn’t be the first time Google canceled a project that didn’t live up to its hype – Wave is just one example. For now, though, the company reassures that it is holding onto the daily-deal model.

This story originally appeared on VentureVillage, VentureBeat’s Germany-based syndication partner.

This is a guest post, written by analyst and frequent VentureBeat contributor Rocky Agrawal.

Desperate times call for desperate measures.

I’ve noticed an uptick in recent months of the emails I’m getting from small businesses claiming that Groupon is threatening to sue them. I’m now starting to get about one of these emails a week. The latest sums up a lot of Groupon’s current problems:

Hello.

I would like to share my experience with you as a groupon merchant.

My wife and I own a spa in Hallandale FL. We were contacted by a groupon rep who pitched the idea of us offering massage services for $35 vs the original $90 we charge our customers.
The rep told my wife we would sell around 400-500 vouchers. The deal only sold 215 but we were ok with that.
A few days later the rep calls again and says we want to rerun the same deal a few weeks from now but in the ft lauderdale area opposed to Miami. The second deal sold 322 vouchers.

Here is the problem. Its been 3 weeks since groupon was scheduled to pay us our first payment for the second deal. We have serviced 72 people free of charge! Groupon continues to give us the run around regarding payment. We got fed up and told the rep we will not continue to honor the deal without payment. His reply was to threaten us with a law suite. [sic] What should we do?

Thank you

(I’ve contacted Groupon PR for a response. I will update this post if I hear back.)

Let’s take a look at the problems.

1. The deal sold about half of what the sales rep estimated. It wasn’t long ago that deals were selling well beyond sales rep estimates. The lower sales volume is a positive for merchants because it means they don’t get inundated. But it’s bad for Groupon because the lower volumes mean higher cost of sales. It’s also bad because the best sales reps leave because Groupon is no longer a ticket to an easy six-figure compensation package.
2. Groupon is repeating the deal. Although this is economically the right thing to do (it’s good to amortize the cost of sales), investors should be aware that the year-over-year comparables are less meaningful. It used to be the case that Groupon ran a deal once for 24 hours. Increasingly, deals are run for three days or more. The same deal is run repeatedly. Dozens of deals are being run at once. Even with all of this, Groupon’s gross billings declined quarter over quarter. On a true apples-to-apples basis, Groupon is slowing much faster than its financials indicate.
3. It isn’t paying merchants on time. This is a frequent complaint I hear. Groupon has enough cash in the bank that I don’t think it is malevolence just incompetence that keeps it from paying its merchants. But at this stage, Groupon’s operations should be smooth enough that such things don’t happen. A more cynical view would be that Groupon is delaying payments because investors are closely watching its cash flow numbers.
4. It’s threatening lawsuits. I haven’t yet heard of an actual lawsuit being filed against a merchant. But filing a lawsuit would be suicidal for Groupon. Merchants won’t want to take that risk, and it will only increase Groupon’s adverse selection problems.

[Update:

In response to the original email, I suggested that the merchant consider refusing to honor the second deal, which hadn't been paid for. I received this followup email from the merchant:

It was a direct threat over the phone. said we would be in violation of our signed agreement. I actually told him on the phone exactly what you said. We would call the customers off the second deal and let them know we are not being paid. He responded by telling me he doesn't recommend I do that because they would have a defamation law suit against me and that I should just be patient and they are good for it.

I couldn't believe what I was hearing. I felt like I was talking to a buddy of mine that owed me money and was telling me to be patient. I have another 120 customers in the next 2 weeks already scheduled if I don't service them they will kill our reputation online. My wife is 5 months pregnant and we can't believe what they are putting us through. We put all we have into the spa we are just starting our lives out. We feel like we are being bullied.

Such a situation puts merchants in a bind. They are being asked to service Groupon's customers without payment. If they don't, it's the merchants whose reputation suffers online. Although this merchant doesn't currently have any Yelp reviews, an academic study found that reviews that mention use of a Groupon or daily deal are 10% lower than that of peers.]

I spoke with a former Groupon sales rep about these problems. “Dealing with the finance department was a huge pain in the ass, they mailed the checks so damn slow, it was terrible,” he said. “It was just a constant fight (it seemed) for a vendor to get a check on time.”

This rep said he left voluntarily for another sales job.

“This ship is sinking faster than I thought it would; impressive,” he said.

(Disclosure: I have various puts and wagers against Groupon.)

[Top image credit: ostill/Shutterstock]

Groupon stock fell to the lowest it has ever been today, under $5 a share. The daily deals company reported poor earnings last week, causing one financial advisory firm to downgrade its stock.

According to Bloomberg Businessweek, Evercore Partners Inc. downgraded the stock from “equal weight,” which essentially means the stock is alright and to hold it for better times, to “underweight,” or sell. If you need a reason why, the firm says to look at the company’s gross billing. Analysts fear the total amount of money Groupon makes from sales of its deals is on the decline. Indeed, in this year’s second quarter, Groupon reported gross billings were $1.29 billion, $60 million less than than the first quarter 2012. Then, it brought in $1.35 billion.

The stock price hit a record low today at $4.51 per share today. It closed at $4.75, down five percent for the day and down 88 percent from its 52-week high of $31.14.

Groupon’s stock also took a 20 percent dive in after-hours trading last week when the earnings were announced. This was due to missing Wall Street’s estimates, with revenue at $568.3 million. Wall Street wanted $573.13 million. At the time, Marketwatch made the good point that Groupon’s guidance for future earnings was also lower than expected. The daily deals company hopes for revenue between $580 million and $630 million, and between $45 million and $65 million in operating income for the third quarter of 2012.

The company blamed a majority of its performance on poor economic times in Europe.

VentureBeat contributor Rocky Agrawal wrote yesterday that there’s simply nothing positive to be said about the company and recently argued that what we’re now witnessing is Groupon in its death throes.

via Bloomberg Businessweek, Andrew Mason image via The DEMO Conference/Flickr

In Groupon’s earnings call this week, the daily deals site tried to put a positive spin on a lot of negative developments. I couldn’t resist sharing some of CEO Andrew Mason and CFO Jason Child’s semantic maneuvers on Twitter, along with a translation into plain English. For those of you who missed them, here’s that string of tweets:

Translating $grpn earnings call: andrew mason: we’re facing “negative demand elasticity” = people don’t want to buy our shit.

Translating $GRPN earnings: better balance merchant/consumer value = make deals less attractive for consumers, reducing purchase volumes.

Translating $grpn earnings: Allocating more space in email to Goods = people are tired of laser hair removal so we’re trying liquidation.

Translating $GRPN earnings: “freeing us from email’s natural shelf-space limitations” = remember that idea you bought into? it was a fad.

Translating $GRPN earnings: “direct revenues were material” = we’re now competing head on with $AMZN.

Translating $GRPN earnings: “our revenue recognition is the same as other major ecommerce companies” = Rocky busted us, we fixed it.

Translating $GRPN earnings: “We don’t have anything to announce on share buyback” = the company is still way overvalued.

Translating $GRPN earnings: “we haven’t been shy about using people” = we throw bodies at problems because we aren’t a tech company.

Translating $GRPN earnings: “our average customer on mobile spends 50% more” = the real cheapskates download our mobile app.

Translating $GRPN earnings: “for $15, you can make you own artisan yogurt” = Groupon Goods sells a lot of crap, fortunately, people buy it.

Translating $GRPN earnings: “we don’t have a very shoppable marketplace” = we’re not $AMZN, but we want to be.

Translating $GRPN earnings: “we’re not breaking that out” = our margins on goods are terrible and would make us look bad.

If you’d like to listen to the call, you can find it on Groupon’s investor relations site. The tweets are in the order that the comments appear in the conference call.

If, after listening to this, you’re still thinking of investing, consider this: I spent the first part of this week at Pacific Crest Securities’ Global Technology Summit. Last year at this conference, all of the professional money managers wanted my opinion on Groupon. This year, no one asked about the company. Square and Starbucks is what the money managers wanted to talk about.

(Disclosure: I have various puts and wagers against Groupon. Historically, these positions have been immaterial to my personal finances. Due to yesterday’s sharp price movement in Groupon’s stock and its derivatives, I now consider these positions to be material.)

By now, you’ve undoubtedly heard about Groupon’s terrible earnings call. The company finally reported a real, honest profit, but it also reported its first sequential decline in gross billings, the amount of money paid by consumers. Customer acquisition costs have skyrocketed. (If you haven’t heard it, the best summary of the bad news is Cory Johnson’s analysis on Bloomberg West.)

But analysts missed the biggest red flag in the earnings call: Groupon is taking its loan sharking business global.

(Disclosure: I have various puts and wagers against Groupon. Historically, these positions have been immaterial to my personal finances. Due to yesterday’s sharp price movement in Groupon’s stock and its derivatives, I now consider these positions to be material.)

Some context about how the company operates: Groupon has had two very different payment structures. In what I call the American model, merchants receive cash upfront for a deal. Once the deal is closed, Groupon tallies up how much it owes the merchant and sends them the money in installments, with the vast majority of the money delivered within 60 days. If a Groupon isn’t redeemed, the merchant gets to keep the money. (Known in the industry as “breakage.”)

Outside the U.S. and Canada, Groupon has used a different scheme. For simplicity, I will call that the European model. In this scheme, Groupon only pays merchants when a Groupon is redeemed; merchants do not get cash up front. If a Groupon isn’t redeemed, Groupon gets to keep the money. Breakage is considered to be 20-25% of Groupon purchases, so this amount is significant.

There are exceptions to the above. I know of one popular merchant in Europe that negotiated to get the American model. But this is largely how it works.

The American model has more credit and fraud risk for Groupon.

Buried in the earnings call’s discussion of striking a better balance between consumer and merchant value, Groupon said it will shift European merchants to the American model.

“Groupon is not an Internet marketing business so much as it is the equivalent of a loan sharking business,” I wrote in one of my early pieces on Groupon. Groupon gives you a big pile of money up front, in exchange for you taking 25 cents on the dollar for a year’s worth of receivables. This has the effect of making Groupon more enticing for more desperate businesses. Groupon salespeople dangle upfront cash to get merchants to sign up.

I’ve long advocated that the best time to run a Groupon is when you’re about to go out of business. The cash infusion might give you a chance to succeed. If not, well, you were going out of business anyway. Groupon is also the world’s stupidest loan shark because it does little analysis of whether you’ll be able to make good on your end of the deal (serving Groupon’s customers).

This Groupon Hail Mary only worked for businesses based in the U.S. and Canada. Now Groupon will make it work worldwide.

Why would Groupon do this? Why would Groupon take on more risk to deliver better terms to merchants?

Because growth in Europe is slowing. Groupon blames macroeconomic conditions in Europe. Groupon needs to make its offer more attractive to European businesses. What’s more attractive to desperate businesses than the promise of cash upfront?

Groupon is desperate for more business, and a great way to get more business is to make it more attractive for more desperate businesses to sign up. Desperation chasing desperation.

There is a more charitable view: Groupon has really learned how to manage risk and can figure out which merchants should get the more generous payment terms and which should stick to the European model. If you know how to manage risk appropriately, you can make the American model work. Companies like PayPal and Square as well as every credit card company out there manage risk every day. (Even if risk weren’t a problem, this would still result in lower margins for Groupon.)

To those who would claim Groupon knows how to manage risk, I offer exhibit A: the waffle guy. Groupon gave a guy who wanted to start a waffle business money upfront and he soon went out of business. Groupon ended up offering refunds to customers who couldn’t redeem their Groupons. Although he blames Groupon for the business’s demise, from all of the evidence I’ve seen, Groupon did nothing bad to this guy; he was an idiot who should never have been in business. But Groupon gave him cash upfront, which nobody who understood risk management would do.

And then there’s exhibit B: the car detailers. They disappeared shortly after they would have received their final payment. On their voicemail, they left a message for prospective customers: “Sorry we ripped you off. Your best bet is to go to Groupon and get your money back. We’re too chicken shit to answer the phone, so you got this message anyway. Sorry for your problems. Better luck next time.”

My inbox has dozens more such examples. One off examples? Sure. But consider exhibit C: Groupon had to restate its earnings in the spring, its first earnings statement as a public company, because it underestimated the amount of money it would have to pay out in refunds. The restatement caused the stock to drop 17% in the next trading session. (Although today’s investors would relish the $15.28 price at close of market on April 2.)

At the time, I suggested that one way Groupon could mitigate the risk would be to change its payment terms and move American merchants to the European model.

Instead, Groupon is doing the opposite.

This should help improve European revenue numbers in the short term (or help to mask declines) because revenue from desperate businesses still counts as revenue. But it significantly increases Groupon’s risk exposure. Even if risk is at an acceptable level, it means decreased margins.

For investors, that’s a lose-lose.

Groupon has not responded to a request for comment.

[Top image credit: Julie Lucht/Shutterstock

Groupon must be feeling the strain. Today, the deals provider fell short of its Wall Street’s top-line estimate, and it’s facing rumors that its sales force, the backbone of the company, are fleeing in droves.

The Wall Street Journal reported today that the competitors are poaching the sales team at Groupon, and that reasons for the turnover include a lack of opportunity for promotions, and a struggle to keep up with increasing demands to add new business to the pipeline. By far the biggest challenge is that daily deals business is flooded with rivals in both North America and Europe, which has made it difficult for Groupon’s sales executives to meet commission goals.

Groupon may be the largest deal-a-day site, but it faces strong competition from Living Social and Gilt Groupe.

For all these daily deals sites, it’s become an increasingly tough sell. Many merchants won’t touch flash deals as they believe their loyal customers would have paid full price anyway. A Forrester study demonstrated that daily deals fanatics rarely turn into repeat customers.

Although most of the sales team doesn’t hold equity in the company, it may be demoralizing for them to hear reports of plummeting stock. The company was hit particularly hard in March, when it released its revised its fourth quarter earnings.

July 9-10, 2013
San Francisco, CA

Early Bird Tickets on Sale

Today in “Something we really didn’t need, but here it is anyway”: Auto powerhouse Ford and app maker Roximity have teamed up to bring location-aware deal alerts to consumers while they drive.

Roximity’s app for iOS promises relevant offers to deals around you based on location and user preferences. To take that location-awareness a step further, it does this in your car through Ford’s Sync AppLink, which brings info from your smartphone to your dashboard so you can better (and more safely) interact with it.

“While driving, users can simply say ‘lunch deals,’ and their favorite lunch options will be read out loud,” Roximity CEO and cofounder Danny Newman said in a statement. “Other deal services offer coupons for the entire metropolitan area or for things that are not relevant to you. Roximity is personalized and will provide you what you want, when you want it.”

Roximity was recently selected to be part of the Techstars program in Boulder, Colo., and has eight employees. Notably, Roximity is the first app to have Ford AppLink compatibility at launch.

In the glut of daily deal offers from Groupon, LivingSocial, and others, I appreciate the idea of using location to give me the best digital coupons, and it could be useful in some cases. But do I need it in my car while I hurriedly drive to work or to my friend’s house? No, not at all.

Check out the video below for more on Roximity’s integration with Ford’s Sync:

Photo credit: Roximity video screenshot

The key to this inflation is how Groupon is handling the revenues for Groupon Goods. Goods is Groupon’s liquidation business, where Groupon sells physical products. Today’s selection includes tank tops and a baby monitor.

Groupon is booking the entire amount paid by the consumer as revenue, instead of just the part that it gets to keep.

Groupon shifted from drop shipping to what’s called third-party logistics (3PL). In drop shipping, you send an order to a vendor and they send that order directly to the consumer. With 3PL, you hire an intermediary to take possession and fulfill the order.

Although gross vs. net accounting can be a mind-numbing subject filled with a lot of detail, generally speaking if you drop ship, you only get to count as revenue the amount that you get to keep. For example, if you sell a $100 iPod dock and get to keep $20, you can book $20 in revenue. If you actually take possession of the iPod dock and meet certain other criteria that define you as a principal, you get to book $100 in revenue and count the $80 as the cost of goods sold.

According to a source who used to work at Groupon Goods, the shift was made to inflate revenue. The source said the head of Groupon Goods would “wax poetic about how he will get around anything the SEC has to say.”

Asked for comment, Groupon spokesman Paul Taaffe responded, “You are so far off base you risk ridicule.”

Groupon hired Echo Global Logistics to handle its third-party logistics, according to Groupon’s quarterly filings. Echo is run by several of Groupon’s key leaders. “Three of the Company’s directors, Peter A. Barris, Eric P. Lefkofsky, and Bradley A. Keywell, are directors of Echo and have direct and/or indirect ownership interests in Echo,” according to Groupon’s quarterly filings.

Groupon Goods has been largely a liquidation model. If you’ve got pallets of junk to get rid of, do a deal with Groupon and they will blast an email to tens of millions of people and move it for you. It’s been a grab bag of cheap stuff. It has included items like dated electronics, small kitchen appliances, and health and beauty products. In the months that I’ve been following Goods, I’ve found very little of interest. I finally broke down and bought a pair of microSD cards so that I could test the Goods fulfillment experience. For me, Goods is a much less interesting version of Woot, an electronics liquidator that Amazon bought in 2010 for just north of $100 million.

LivingSocial’s Shop product has a different approach.

“We’re taking a curated approach to merchandise that reinforces our brand — fun, unique, social — while building our collections around social experiences and local themes, rather than offering a random assortment of discounted goods,” said LivingSocial spokesman Andrew Weinstein.

The current theme is beach. Even on the first day, I see several items that I would consider buying. (I consider Shop to be a slightly less interesting but more mass-market friendly version of Fab.)

That doesn’t necessarily make Groupon Goods a bad business or LivingSocial Shop a good one.

Of the buckets of spaghetti that Groupon has thrown against the wall in the last year, Goods is the one product that I think has a chance of really being a meaningful business for the company. It solves a need for merchants — moving merchandise — and solves it quickly. Although Goods often has a lower margin than Groupon’s average of around 40% for local deals, it’s a viable product. Consumers have a big appetite for buying cheap junk.

What I’ve heard from Goods merchants is that Groupon has a history of putting the screws to merchants when it comes to deal terms, its commission, and returns.

Given LivingSocial’s smaller email list size and curation model, I expect that it will do lower volumes than Goods.

But there’s no fundamental innovation in either. They’re selling stuff online, just different stuff. There’s another big company that’s been selling stuff online: Amazon. If Goods or Shop is meaningful, expect Amazon to create a similar offering. Amazon already has a local product, AmazonLocal, which competes with Groupon’s and LivingSocial’s core daily deals business. (Amazon owns 29% of LivingSocial.)

Consumers need to be careful with Goods and Shop. Although some of the deals can be good, often the claimed savings listed are based on prices that few people ever pay. It’s best to shop around once you find an item you like. Also, be sure to read the return policies because they can vary on an item-by-item basis. (The “Groupon Promise” doesn’t seem to apply to Goods purchases, despite being plastered on every page.)

One of my long-time criticisms of Groupon has been that it delivers unqualified customers. Customers who are willing to drive 25 miles to save 50% are unlikely to return at full price, resulting in a loss for the business. The Gogo deal just makes this problem worse. (LivingSocial also advertises its deals on Gogo.)

The Gogo move reflects the two-sides of Groupon: On the one hand, it tells merchants that they should be extremely aggressive with low pricing in their deals because these are valuable customers who will come back often. On the other hand, it sells the deal to anyone who will buy it, without doing any sort of qualification.

The screenshot above shows what I saw on my flight: Ads from Groupon, Gilt, StubHub, and OpenTable.

“What merchant is going to turn down an incremental customer, even if they’re from out of town?,” Groupon spokeswoman Julie Mossler said. “Customers spend beyond the value of the Groupon when they come in. There’s value there. This has no effect on a merchant’s ability to attract local customers — rather, it’s a bonus for them.”

One of the deals advertised on my flight was $29 for a chiropractic and massage package. (Listed at a $600 value.) That’s exactly the kind of deal that’s designed for local customers who will become repeat visitors. It includes a 50-minute massage. There’s no way I would sell that for $29 to an out-of-towner.

There’s nothing wrong with advertising services to visitors, but price levels need to be higher in order to make up for the fact that they are much less likely to become repeat visitors.

The same Gogo screen shows other ads that make a lot of sense to visitors — and the businesses doing the advertising.

StubHub shows events that are scheduled for the next few days. Not only is this a great marketing opportunity, it’s also great content that can help to complete a trip. These tickets are sold at market rates; no discount required.

The OpenTable ad allows people to book restaurant reservations, again at full price. That ad isn’t the most compelling — I would prefer that it have a list of top restaurants that are available tonight or other contextual information instead of a generic banner.

But that’s still better than what Groupon is doing. For the sake of its merchants, Groupon should ground its ad campaign.

But today marks the first day that Groupon dropped below the split-adjusted $7.90 paid by late-stage private investors in early 2011. (Disclosure: I have a variety of puts and several wagers against Groupon.) That round included funding from Andreessen Horowitz, Kleiner Perkins, Greylock Partners, and Technology Crossover Ventures, as well as Fidelity and T. Rowe Price. If any of them are still holding Groupon shares, they’re doing so at a loss.

In that round of close to $1 billion, Groupon insiders pocketed nearly 90% of the proceeds.

In May, I asked Benchmark VC Bill Gurley if he would ever invest in a round where insiders took so much cash.

“Probably not,” Gurley said with a laugh. “I can imagine a situation where I would. But it would raise a lot of questions and it would be a 2% likelihood situation. … I would have a lot of questions about the go-forward intent of the team.”

Recently, Groupon chairman Eric Lefkofsky, who along with his affiliated entities took nearly $400 million of that round, said that he was going to focus more of his time on his venture capital firm.

Gurley said Benchmark never took a serious look at Groupon.

“A 42% rake is really a lot,” Gurley said, referring to the portion of a merchant deal that Groupon takes. “There’s no way that value proposition can hold at 42 if someone else is doing it for 10. It can’t last. Or, everything I’ve learned about finance and business could be wrong. One of those two things.”

At today’s valuation of about $5 billion, Groupon is worth a cool billion less than Google offered for the company in 2011.

[Top image credit:  Norebbo/Shutterstock]

July 9-10, 2013
San Francisco, CA

Early Bird Tickets on Sale

Tourists who find themselves stranded in London without a hotel room will have a new friend in last-minute stay startup HotelTonight, which has made its mobile hotel-booking apps for iPhone, iPad, and Android available in the UK today.

“Ultimately, we want to be the mobile travel brand that means ‘I want a hotel room right now,’” HotelTonight CEO Sam Shank told VentureBeat. “That’s a universal problem for consumers, and … the solution we provide for hotels of helping them sell their perishable inventory … is a universal problem as well.”

So novel in concept that it just secured $23 million in new funding, HotelTonight is the mobile-only way to book a same-night hotel stay in 43 markets across the U.S., Canada, and now London. Each day at noon local time, app users are presented with three hotel deals available that night, each offered at a different price level. The company, which works directly with hotels to secure discounted pricing for empty rooms, has 1,000 hotel partners, and its apps have been downloaded 2.3 million times.

See VentureBeat contributor Rocky Agrawal’s recent review of the service.

HotelTonight iPad app for UK

With the Wednesday release of hotel listings in the London area — including inventory from top-of-the-line brands such as Thompson Hotels, Morgans Hotel Group, and Langham Hotels — one-year-old HotelTonight has officially kicked off its global expansion. In conjunction with the release, the startup has also opened a London office, to be managed by Jetsetter alum Heather Leisman, that will further support international growth.

Both announcements are, of course, timed perfectly to meet demand for the upcoming London Olympics, just 36 days away.

Today’s London launch has been in the making since HotelTonight’s debut, Shank said. “We knew we wanted to be overseas, so we architected the platform to allow us to do that,” he said, adding that the startup has been working on the logistical and bureaucratic pieces of the London release since earlier this year. “It’s been a lot of work for us. It’s been a fairly careful and measured approach to this launch … it’s a long-term investment in Europe.”

But just how realistic will it be to turn to HotelTonight when you really need a room during the Olympics? Very, Shank said, without disclosing total inventory for the city or the games. The average number of hotels per market, he said, is 20.

“If we weren’t able to get any inventory during the Olympics, we wouldn’t have launched before the Olympics,” he said. “We wanted to make sure we would have a consistent and seamless experience — and have deals every day at noon.”

HotelTonight has raised $35.85 million in funding to date and now has 55 employees. The London office has a small staff of three, but will make more hires up as the startup continues to expand to other U.K. cities, Shank said.

Photo credit: Langham Hotels

Design is determining the winners in everything mobile. The most successful players are focusing on one thing: How to make products, services, and devices as compelling and delightful as possible – visually, and experientially. MobileBeat 2012, July 10-11 in San Francisco , is assembling the most elite minds to debate how UI/UX is transforming every aspect of the mobile economy, and where the opportunities lie. Register here.

July 9-10, 2013
San Francisco, CA

Early Bird Tickets on Sale

Google has launched a new stand-alone iPhone app for its Offers daily deals service, the company announced today in a blog post.

While Google Offers may not have caught on as big as Groupon or LivingSocial, the service continues to churn out tons of deals in about 40 cities in the U.S. If you use Offers, you’ll now be able to see deals near you on the map and keep better track of those deals you’ve signed up for on your iPhone. The app can also send you notifications if new deals are available or if deals you’ve purchased are close to expiring.

The company notes the following features inside the well-designed app:

• Instant savings, just around the corner: Quickly discover offers near you in map view or search for deals by category to easily find the right deal for you.
• See & use the deals you want, when you want them: All of your purchased and saved offers are tracked in “My Offers,” for easy access from your iPhone or online.
• Savings made simple: Instantly redeem most offers with your iPhone, without having to print vouchers.
• Never miss a great deal: Get notifications when new deals are available or when a deal that you’ve purchased or saved is about to expire.

Let us know what you think in the comments.

Design is determining the winners in everything mobile. The most successful players are focusing on one thing: How to make products, services, and devices as compelling and delightful as possible – visually, and experientially. MobileBeat 2012, July 10-11 in San Francisco , is assembling the most elite minds to debate how UI/UX is transforming every aspect of the mobile economy, and where the opportunities lie. Register here.

Photo: Google

HotelTonight offers deals to last-minute travelers through iPad, iPhone, and Android apps. It’s an exercise in simplicity: Launch the app, select a city, and you see which hotels are available for the night and their prices.

HotelTonight offers a service that works for all three parties:

* Consumers win because they can quickly find and book inventory at discount prices.

* Hotels win because they can fill rooms that would otherwise go empty and generate some revenue instead of none.

* HotelTonight wins because they can collect a reasonable profit on each transaction. (Unlike daily deal companies, which try to take 50% of revenue, HotelTonight’s typical take is 20-30%.)

Each day, hotels enter their inventory for the night and the next few days for HotelTonight. At noon local time, these are released to the public.

Hotels are something I know quite a bit about. From June 2011 through January 2012, I was homeless and lived exclusively in hotels. During the past 10 years, I’ve probably spent at least four years living in hotel rooms.

Economically, HotelTonight’s model is a much better model than Groupon Getaways (Disclosure: I have puts against Groupon) and LivingSocial Escapes, which don’t reflect the realities of the hotel business in 2012. The key thing to know about the hotel industry is that the same hotel room can go for $125 one night and $525 another night. It all depends on demand. If there’s a big conference in town or if it’s Mardi Gras in New Orleans, rooms are going to be sparse and prices high. If it’s August in New Orleans, rooms will be cheap.

If you price daily, you can reflect the market conditions.

What Groupon and LivingSocial try to do is have one price that, in theory, is good for a period of months. But their deals are subject to what the industry calls “availability.” That’s not what most people think of as availability — it doesn’t mean that a room is available. It means that the hotel is empty enough that it’s willing to let a customer use a Groupon or LivingSocial voucher. This leads to arguments when customers think they should be able to use a voucher but they can’t. It’s a goofy model that shouldn’t exist in 2012. (It exists in part because Groupon and LivingSocial haven’t done the work of tying into hotel systems to do date-specific, inventory-based pricing.)

With HotelTonight, if you book, you’ve selected your dates and you’re guaranteed a room at that price. (Despite the name, HotelTonight offers multi-night stays. But the stays must start the night you book.)

“HotelTonight does not require any particular rates or discounts from hotels — hotels are incented to discount on our channel only to the extent of their particular need on a given day,” HotelTonight CEO Sam Shank told me. ”Ultimately, HotelTonight is much less expensive for hotels, so they can put that savings into greater discounts or keep it to boost their bottom line.”

According to a survey by TravelClick, 38% of hoteliers who had used deal sites like Groupon, “found it less successful than they had hoped and do not plan to use a flash sale site again.” 27% would run another deal.

I’ve checked HotelTonight rates on a variety of recent trips. One of my big concerns about HotelTonight was that, because it’s a small player, it wouldn’t have inventory during big events. But I’ve been pleasantly surprised. It had rooms during every day of JazzFest in New Orleans. I was in Boston this week and nearly every room in the city was sold out because of a conference. But HotelTonight still had rooms. Because the economic model works for hotels, they are able to make inventory available during periods of tight demand. These are times when letting a Groupon customer use a voucher would make no sense. The rooms weren’t cheap, and they did eventually sell out, but at least it was an option.

Beyond a better economic model, Shank believes that HotelTonight can bring a better quality customer to hotels than bargain-basement sites. Hotels are interested in people who will generate ancillary revenue on property, such as food and beverage, spas, and parking versus people who just want a cheap room.

The app itself is visually stunning, especially the iPad app. It includes detailed information about the hotels and their features.

In addition to the model and the app, I’m a big fan of Shank.

I’ve met him several times. HotelTonight reached out to me after I chastised the company in a tweet about a confusing aspect of its interface that implied prices were lower than they were for multiple night stays. They’ve since vastly improved the interface, and pricing is much clearer. Shank clearly knows every facet of the industry he is tackling.

HotelTonight is also well-positioned to do personalized pricing and help hotels attract influencers. Between selling a room for $200 to a nobody or selling a room for $149 to someone who will tweet about the property and influence visits by others, many hotels would prefer to sell that room to the influencer.

The concerns I have about HotelTonight are the size of the same-day travel market and fierce competition in the travel space.

Because stays always start on the same night, it limits the market. Many of my trips are booked several days in advance, and I like the certainty of knowing where I’ll be staying. Despite the $100 credit to try the service, it hasn’t yet fit with my travel plans.

“Historically, approximately 15% of reservations are same day,” Shank said. “We feel this number will grow as consumers turn to the convenience of last-minute, spontaneous bookings.”

HotelTonight is going up against Expedia, Travelocity, Orbitz, Hotwire, Priceline, and a whole host of smaller players in the travel space. (Disclosure: I have a bet with Reuters finance columnist Felix Salmon relating to the value of Priceline.) Many of them have significantly greater buying power. Developing a simplified app that focuses on same-day bookings under a different brand is something they could readily do. Priceline has already modified its booking app to feature same-day deals.

“HotelTonight’s hotel-facing tools are more responsive in real time,” Shank said. “Hotels are actually willing to give us much more inventory at the last second, knowing that if the environment changes, they can make adjustments on the fly. Ultimately volume matters, and hotels tell us that HotelTonight consistently produces more same-day bookings than the traditional online travel agencies.”

The big question that remains: Will HotelTonight offer tuck ins?

In the tuck-in deal, only available in Chicago, Groupon employee Ben Kobold will tuck you in for $100. Tuckees need to be at least 18 years old.

“Once your body temperature has fallen and your breathing has slowed, Ben and his legally required entourage of two or three companions will slip soundlessly out the front door and into the night,” says the deal’s copy. “He’ll return to his sleeping barracks, where he’ll tuck himself in and whisper his lullabies to himself.”

The deal terms go on to say that Kobold is “disease-free, physically.”

In the Q&A on the deal, one commenter asked, “This has to be a joke right?” Groupon representative Patrick S. responded, “This is the most serious deal that Groupon has ever seriously run in its serious history.”

Kobold’s LinkedIn profile identifies him as a writer at Groupon. However, the facial hair in his LinkedIn profile makes him look a bit more menacing than the guy that is in the picture on the deal page. BenKobold.com, a site presumably associated with Kobold based on a Google search, was not responding. A snippet from a cached version of Kobold’s portfolio says:

I walk with a mild limp because body hair grows only on my left side.
I wish I was a little bit taller.
Small children and the homeless fear me.
I was left-handed until age seven. My mom told me to knock it off.
Pants optional.

This deal represents two significant departures for Groupon: the services are being provided by Groupon employees as opposed to third parties, and it is being offered at full price. (The site shows a 0% discount.) Groupon did not respond to a request for comment asking what percentage of the deals proceeds, if any, Kobold receives.

If Groupon can command full price for the deal, it could be meaningful for investors.

Groupon has 11,000 employees. If they each worked in shifts of 3 and each team accomplished 4 tuck ins a night, that’s roughly $1.5 million in revenue a night. Because Groupon would be directly responsible for providing the service, under GAAP rules, it could count the entire $1.5 million as revenues. Assume that each team works 200 nights a year, and that’s about $300 million in revenue. Based on 1Q results, that would be a roughly 13% increase to revenue.

If there is significant demand for the service, I expect that it will outperform Groupon Rewards, Scheduler, and Payments for 2012 revenue impact.

As of this writing, 1 person had purchased the deal.

[Top image credit: Maridav/Shutterstock]

Zervas looked at deals in New York, Boston, San Francisco, and Seattle. The analysis was based on nearly 12,000 deals that ran from January 1, 2010 to March 31, 2012.

“The slope of the trend line is negative in all four cases; indicating Groupon deal quality is, on average, decreasing over time,” Zervas wrote. “In all four cases, the correlation between time and expected Yelp rating is negative, and statistically significant.”

The study also looked specifically at low-rated deals, defined as those with three or fewer stars on Yelp. “Low-rated deals appear to be increasing in frequency,” Zervas wrote.

Zervas’ study shows that this is happening; it doesn’t offer a conclusion as to why it is happening. The study cites the following possibilities:

1. The population of merchants willing to run a Groupon deal remains, more or less, constant over time, but as Groupon is expanding the number of deals it offers, it has to work with some lower-rated merchants;

2. The population of merchants is changing; better-rated are merchants dropping out of running Groupon deals, and Groupon has to substitute merchants with lower Yelp ratings who are offering the sames kinds of deals;

3. Yelp ratings are naturally eroding over time.
As a long-time observer of both Groupon and the local-business ratings space, my assessment is that Groupon is suffering from what economists call an adverse selection problem.

In some ways, this is a problem that affects all businesses going after the local market. The very best restaurants never have to advertise. They are fully booked based on word of mouth.

I was talking to Bill Gurley of Benchmark Capital on Friday. He related a story of a locksmith he found on Yelp. (30:16 in the audio recording.) “He had 46 positive reviews,” Gurley said. “I call him, he comes to my house at 7 p.m. and stays there for three hours and changes every lock. And, of course, then I go write this huge positive review. He doesn’t need any other form of marketing. … He’s got a little mini network effect going.”

Although the best businesses had no reason to do any form of marketing, the next group of businesses who had to do some marketing considered Groupon because it was perceived as the next big thing. In the earlier days of Groupon, the company was highly lauded in the press. The horror stories of businesses with bad experiences weren’t out there. So this group of merchants would have been more likely to run Groupon when the risks weren’t as well known. This leaves the least successful businesses.

As a marketing company, this would be a problem. But it’s an even bigger problem for Groupon because Groupon also acts a financier in the U.S. and Canada. It provides money to merchants before all services are delivered. Groupon is, in effect, insuring the services of small businesses.

In economic terms, Groupon is the equivalent of a health insurance company that only insures cancer patients. That’s not a business that is going to be profitable in the long term.

Disclosure: I have short interests in Groupon and Yelp.

[Image credit: Ronald Sumners/Shutterstock]

Disclaimer: Rocky Agrawal holds a variety of short positions in Groupon. You can find a full list of his disclosures here and in his author bio. 

In Andrew Mason’s recent letter to shareholders and in a press release touting 1.5 million Groupon Now deals sold, Groupon has been highlighting the product as an example of innovation and a potential positive for the beleaguered company.

Groupon shareholders should hope that the company has more interesting things up its sleeves, because Groupon Now isn’t going to save this company.

Groupon’s external enthusiasm for Groupon Now seems to conflict with some internal views.

“They moved a bunch of low performing sales people to Now! a few months before it launched and they hired a bunch of people too,” a former Groupon salesperson told me. “I believe as Now! proved to make no money, they moved back a bunch of people to regular Groupon (G1), laid off a bunch of people and kept a very small few on Groupon Now!”

LivingSocial, which pioneered the real-time offers space, recently abandoned it. On the whole, I consider LivingSocial’s management much sharper than Groupon’s. If they’re abandoning the space, it’s probably for good reason.

“We saw a better opportunity in takeout and delivery,” said LivingSocial spokesman Andrew Weinstein.

Here are some of the issues I have with the real-time deals space. Even two or three of these would be deadly for a business; Groupon Now has all nine.

Liquidity. When you intersect local and real-time, you need thousands or tens of thousands of offers in order for it to be meaningful. Even hundreds of offers in a market won’t provide enough data to generate enough real offers for a consumer.

Groupon’s app is not a destination. People use Facebook, Twitter, and Google Maps on a daily basis. Facebook has nearly 500 million mobile users. Groupon would be lucky to have 10% of that. People are already engaged on those apps. The lack of liquidity compounds this problem. If I look at Groupon’s app and don’t see any relevant offers, I might give it two or three more chances. I certainly am not going to keep looking if there’s nothing there. Products like Facebook, Twitter, and Google are the right place to insert offers because people are already there. Groupon will likely have to pay for continued advertising to reach users in those apps.

Poor user experience. Groupon Now requires that users purchase a voucher through their phone, then use that voucher to pay for their transaction. Then they have to use a separate payment method to cover any remaining balance. This is asking a lot of consumers and the merchants who have to handle the transactions.

Poor economics for the merchant. Like many Groupon products, the economics don’t work for merchants. When I look at the economics of Groupon Now for restaurants, I come to the conclusion that it is better for restaurants to leave tables empty than run Groupon Now. The service does make sense for businesses like museums that have no incremental cost for serving a new customer. It also makes sense if, for example, you’re a bakery and you’ve already made cupcakes. If you were going to throw them out anyway, by all means, run a Groupon Now.

Poor policing of offers. Merchants can enter Groupon Now offers directly. This means they don’t go through the same vetting process that Groupon’s daily deals do. Although I’ve heard many complaints about fictitious reference pricing in Groupon’s daily deals, at least there is some editorial oversight. In one case, I saw an offer for a $10 Indian buffet at Naan -N- Curry, a mediocre Indian restaurant in San Francisco. The “retail” price was $13. I called the restaurant directly. The walk-in price was $8. You paid more if you bought the Groupon Now. Experiences like this will hurt both the retailer and the Groupon brand in the long term.

Competition. Merchants can use Twitter and Facebook to run offers for free. Better marketers often offer deals or promotions through their Twitter feeds.

Self-serve hasn’t worked for small business. In general, merchants have not taken to self-serve. Groupon’s rocket rise in the daily deals business was fueled by high-pressure sales tactics and a boiler room operation with an army of thousands of people. With the low volumes in the Groupon Now business, Groupon can’t profitably deploy salespeople against it.

Category mix. Groupon overall has been drifting toward a mix heavy in services like laser hair removal, spa treatments, winery tours, and teeth whitening. These are not often impulse purchases.

Cheating. Merchants have an incentive to game the system. Because Groupon only gets paid when a customer clicks the buy button, merchants have an incentive to tell them not to buy it but just give them the offer directly. I would tell all of my repeat customers that they should just show me the Groupon Now offer and not bother to buy it through Groupon. This is also a better user experience. As a consumer, I don’t have to worry about pre-paying for something.

I agree with Groupon that yield management is something that is important for small businesses. But Groupon is trying to make something that’s relatively simple sound extremely technical and complicated to goose its valuation. Small businesses have been doing yield management for a long time. Happy hours are a form of yield management; get pints for $3 instead of $5 if you come in when no one comes in. One of my favorite local search apps is GoTime, which finds nearby happy hours. They list all of the happy hours for free.

Even Floyd’s Coffee, the coffee shop where I wrote my first analysis of Groupon’s S-1, is doing yield management. I stayed there until near closing time. They were offering 50% off pastries as they were closing. I bought an extra cookie on my way out. The guy next to me was a Floyd’s regular. They gave him his cookies for free.

So they understand loyalty, too.

[Image credit:  Petr Jilek/Shutterstock]

Disclaimer: Rocky Agrawal holds a variety of short positions in Groupon. You can find a full list of his disclosures here and in his author bio.

After an accounting restatement, a shuffling of its board of directors and Groupon’s stock falling to below 50 percent of its initial public offering price (and 66 percent off the high it reached on its first day of trading), Groupon CEO Andrew Mason wrote a letter to shareholders yesterday to try to swing the momentum back in the company’s favor. Although the stock jumped briefly, it dropped a little today.

Mason uses phrases like “reinvent the multi-trillion-dollar local commerce ecosystem” to paint a rosy picture of Groupon’s future. He’s wrong. The company faces a long, tough road ahead. Here is my analysis of Mason’s comments:

Mason claims that “Groupon is a marketing tool that connects consumers and merchants.” Actually, Groupon’s daily deals business tries to keep consumers from building relationships with merchants. Groupon (like other deal companies) does not provide consumer information to merchants. It’s in Groupon’s best interests to have merchants buy another Groupon rather than reach out to consumers directly through a free mechanism like email or Twitter.

Personalization. Mason cites deal personalization and targeting as something Groupon is doing right. I still get emails for laser hair removal and hair straightening on a regular basis. The fact is that Groupon does not have enough data to do targeting. Companies like Google, Facebook, Twitter, and American Express have substantially more data on users than Groupon does. I’m one of Groupon’s best customers (having purchased at least 20 Groupons), but that data is trivial compared to what Google has on me. The typical Groupon customer has only purchased one Groupon.

Mobile. Mason refers to mobile adoption as an important potential success for Groupon. Here, I partly agree with him. Local commerce will be driven by mobile. But it also gets at one of the biggest flaws I see in Groupon’s path to date: The company spent hundred of millions of dollars on the wrong land grab. It built a giant, very expensive email list; that money should have been spent getting app installs. Now it’s having to spend money again to get the app installs.

Groupon Now. Mason touts Groupon Now, but the numbers in his own letter disprove its success. Groupon Now has sold 1.5 million Groupons compared with 170 million overall in 2011, according to the letter. That is less than 1%. On a revenue basis, I would expect it to be even smaller because Groupon Now deals are frequently for restaurants, which have lower tickets. LivingSocial, which pioneered the real-time deals product that Groupon copied for Groupon Now, recently shut down its product to focus on better opportunities. There are many structural reasons why Groupon Now will not be a success in the near term. I’ll write about those in a future post.

Groupon Rewards. It’s too soon to say how Groupon Rewards will perform. But it is an incredibly crowded space, with companies like Facebook, Foursquare, American Express, and Google all having their own offerings. (There are at least a dozen more.) Regardless, Rewards will have much smaller take rates than the daily deals business.

Groupon Scheduler. It’s a competent, but not excellent product. (See my detailed review.) Getting merchants to adopt this service will be a challenge. Groupon will be competing with vertical players like OpenTable and MindBody that can provide a product that is much better suited to the needs of each type of merchant. Nearly two months after I called Groupon out on it, the company still hasn’t answered the question of who owns the data that merchants put into the system. If a merchant inputs all of its contacts and appointments, can Groupon use that data to sell competing services? Until Groupon answers that very basic question, I advise all merchants to stay away from this product. Yield management is a smart business strategy that small businesses should take advantage of; Groupon has yet to make a credible case that it is a trustworthy partner.

Groupon seems to be chasing everything that moves without thinking things through. This isn’t surprising given that the company shot up to 11,000 employees (more than three times the number of people Facebook employs) without ever proving its original business model. It needs to focus on 3 or 4 products that it thinks will work, instead of trying everything and hoping it sticks.

Its core business model is in trouble and the other opportunities it’s going after are hard businesses with lots of competitors. From Mason’s letter:

Though our transformation from daily deal provider to local commerce platform will not happen overnight, in the coming quarters, we will release the products that we believe complete the foundation for our ecosystem. We look forward to sharing them soon.

Local has always been an incredibly difficult problem. It doesn’t spin out overnight successes. The companies that have succeeded are relatively small. OpenTable is valued at $823 million. Constant Contact is valued at $679 million. Although the optics of the daily deals business and Groupon’s questionable accounting made it look like a huge success, Groupon will find that the new business lines it is trying to get into take a long time and are highly competitive.

I stand by my estimate from last August when I told Emily Chang on Bloomberg West that Groupon is a $1-$2 billion company.

Mason does have one ace in the hole: Given the company’s ownership structure, he doesn’t really have to care about what Wall Street thinks. He could choose to ignore the stock price and do the right things for the business. That might give the company a fighting chance.

Photo credit: Swanksalot/Flickr

Groupon is changing its payment terms with merchants, according to several sources familiar with Groupon’s business and contracts.

The company has traditionally used two different payment models. In the United States and Canada, merchants have been paid in three installments: 1/3 five days after a deal closes, 1/3 30 days after, and the balance 60 days later. In the rest of the world, merchants are paid when vouchers are redeemed. (There have been some variations, but this has been the standard model.)

The upfront cash, while an important selling point for some businesses, has been a significant business risk for Groupon, as seen by the company’s earnings restatement due to higher-than-anticipated refund costs.

Groupon seems to be working to address that. According to a contract I received from a Groupon merchant, the payment terms on the most recent deal the merchant ran changed to 25%, 25%, and 50% (click on image below to view). An earlier deal had the 1/3 terms. The new contract also includes a refund reserve that Groupon can use to cover refund losses.

According to a former Groupon salesperson, reps had the ability to adjust payment terms to 90% right away and 10% after 60 days. Earlier this year, those payment terms were banned for all “service” deals, such as house cleaning and car washes.

Asked for comment, Groupon spokesman Paul Taaffe responded, “Most payment terms are as they have always been.”

What do these changes mean?

They could mean that Groupon is finally waking up to the risks inherent in its model. As I’ve been saying for nearly a year, Groupon’s U.S. and Canadian business closely resembles a receivables factoring business. Except that companies that knowingly do receivables factoring know they are in a risk management business and do due diligence before writing large checks. Groupon has been writing big checks with little risk modeling.

By stretching out its payment terms, Groupon is reducing some of that risk, making Groupon campaigns less attractive to unstable businesses and scammers. Unfortunately for Groupon’s growth prospects, the least stable businesses have had the most reason to run Groupons.

Although this is a positive move for the company in the long term, I expect this will hurt the company’s U.S. and Canada revenue growth.

A less charitable interpretation would be that Groupon needs to hold onto money longer because it needs cash to keep paying the bills. As of the end of December, Groupon owed merchants more than $520 million. Because of its IPO proceeds, Groupon had more than enough money to pay all of its merchant liabilities.

But its business has always been dependent on continued growth. Groupon takes the cash that credit card companies give it for new deals and uses that cash to pay for ongoing expenses such as marketing and to pay merchants for old deals. As the cash cushion from the IPO dwindles, Groupon needs to hold onto money longer. (Given the stock’s recent performance, I expect that raising additional money from public markets would be quite challenging for Groupon.)

The fact that Groupon is able to change the terms and lengthen payment periods indicates that the company still has some leverage over merchants. But in some cases, the merchants are unaware this is happening. The merchant who forwarded me the contract didn’t notice until after the deal had run and the payments were smaller than expected.

Groupon can only go so far with payment terms: LivingSocial and Google Offers still offer terms that are much more generous. If Groupon tightens terms too much, it will lose out on running those deals.

[Top image credit: Jayson Ignacio/Flickr]

After a rocky showing in its first earnings report, Groupon CEO Andrew Mason revealed his grand ambitions for the company in a letter to stockholders today. It’s not just about daily deals anymore: Mason wants Groupon to become the “operating system for local commerce.”

“We are building an integrated suite of tools and services that we believe will profoundly change the way we shop locally,” Mason wrote. “Today, Groupon is a marketing tool that connects consumers and merchants. Tomorrow, we aim to move upstream and serve as the entry point for local transactions.”

In the letter, Mason reiterated the company’s progress in 2011, with more than 170 million Groupons sold to more than 33 million active customers. The company helped drive “well over” $2 billion to local businesses during the year (and yet, it only managed to earn $14.3 million in the fourth quarter). Mason wrote:

Why Groupon? Aren’t we a daily deals company? A glorified mailing list? What our competitors have learned is that success in local commerce requires an unusual combination of skills—a proficiency in both technology and people-driven operations. With a world-class engineering team — built quietly over the last several years in Chicago, Silicon Valley, and Berlin — and with thousands of salespeople who have cultivated relationships with hundreds of thousands of small-business owners, we believe that we are uniquely in possession of both sides of the equation.

Within just three-and-a-half years, Groupon blew up to have more than 11,000 employees in 48 countries. The company moved fast to capitalize the seemingly hot daily deals sector, but now that the daily deals hype is cooling off, Mason is making it clear to investors that there’s still room for the company to evolve. (Or so he hopes, at least.)

How will Groupon end up powering local commerce? Mason says the seeds have been planted for this move for some time. Its SmartDeals personalization algorithm, for example, has doubled in efficacy, and has led to 50 percent higher purchase rates in dense markets like Chicago.

Mobile is also becoming increasingly important for Groupon, with 30 percent of its North American transactions occurring on mobile devices in April (compared to 25 percent four months ago). Mason says Groupon’s mobile customers spend “well over 50 percent more” than those who’ve never purchased a deal on mobile devices. He also points to growth in Groupon Rewards, the company’s loyalty rewards program, and Groupon Scheduler, which will offer local businesses a bookings management system.

Of course, all of this assumes that local businesses continue to use and trust Groupon. The rise of mobile wallets and other payments platforms could allow retailers to offer their customers plenty of deals without the need for Groupon, which could put a dent in Mason’s vision.

Photo via Seth Anderson/Flickr

Disclaimer: Rocky Agrawal holds a variety of short positions in Groupon. You can find a full list of his disclosures here and in his author bio.

In the midst of all the turmoil of Groupon, which is now trading at a market cap below $8 billion and broke below the $12 mark in trading today, the company’s hometown newspaper had a sitdown with Groupon chairman Eric Lefkofsky. As a former journalist who once aspired to work at the Tribune, I’m embarrassed for them.

The interview took place after Groupon’s accounting restatement on March 30, which sent the company’s stock into freefall, but most of the interview is spent on Chicago’s venture capital scene. It’s as if they interviewed John Wilkes Booth after he assassinated Lincoln and asked him about his acting career.

Several of the most obvious and important questions for anyone who has been following Groupon and Lefkofsky were left unasked:

• Why shouldn’t Groupon investors worry that Groupon will turn out like previous companies you have run? Although the companies are mentioned in the interview, what’s not mentioned is that investors lost money while Lefkofsky profited handsomely.
• Why did you take so much money out of Groupon during its private financing?
• Do you regret telling Bloomberg West that you thought the company would be “wildly profitable” in light of what that did to the IPO process?
• Did you cost investors billions by repeatedly trying new accounting tricks? Wouldn’t it have been better to have been upfront about the business from the start?
• Do you regret not selling to Google? (Lefkofsky is personally better off that they didn’t; shareholders, not so much.)
• How do you explain all of the bad experiences that small businesses have with Groupon?
• If Chicago is such a technology hub, why is Groupon’s technology center in Palo Alto?
• What do Groupon’s woes mean for the city of Chicago and its tech community?

Here are some of the most interesting interactions from the interview, along with my commentary:

“When you have an Internet startup, and you’re often raising money from venture capitalists, you have to be cognizant of the fact that eventually at some point down the road they’re going to want liquidity.” — Lefkofsky

And Lefkofsky and other insiders didn’t even wait for the IPO for liquidity. Lefkofsky and affiliated entities took out nearly $400 million before the IPO.

“Everybody around the table wants that document to be as clear as it can be. They want to tell the story as accurately as they can. They want to make sure whatever business you’re talking about, the investors get it.” — Lefkofsky

The Groupon S-1 was the most convoluted document I’ve ever read. In August, I wrote: “The depth of deception in this S-1, if gone unchanged, will give plaintiff’s lawyers a lot of ammunition. (As will the many news stories generated every time Groupon fudges metrics.)” Groupon has been sued many times in the last month by shareholders’ lawyers.

“Adjusted consolidated segment operating income (Adjusted CSOI) was a metric that everybody at the time thought would be a very clear way to explain to investors that we were making significant investments acquiring subscribers.” — Lefkofsky

And it was a metric that every competent financial journalist jumped on as soon as the S-1 hit the wires. Unfortunately, the new JOBS Act will mean that investors will lose insight into management’s thought processes and only see the SEC-approved version. For me, it’s material information that management thought ACSOI was a valid metric because it provides insight into the integrity and ethics of the team.

Q: Let’s say, I’m a mom in Naperville and I have a 14-year-old boy, who I’m already worried about his ability to get a job. What do you tell that mom? And then what do you say to the college senior who has a degree in history, who’s like where am I going to get a job? I’m asking because you’ve created 15,000 jobs.

This is in a section about technology jobs and the importance of coding skills. In fact, Groupon hires lots of liberal arts majors because most of its jobs have no technology component.

“I can’t pick up the paper, any paper, anywhere, without reading about Apple, and Google and Groupon, for good or for bad…. It’s just because, for whatever reason, our mind is captured by these technology companies that have in some way changed our daily lives.” — Lefkofsky

Again, Lefkofsky’s trying to paint Groupon as a technology company. Not only does Groupon not belong in the same breath as Apple and Google, it’s business is fundamentally different.

There are some things that Lefkofsky said that I agree with:

“So here’s what I would say to someone who’s 16 or 20. If you can, in your educational career, you should try to learn how to code. I think it will serve you well. It’s a great career path. In my lifetime, when I was young, if you wanted a stable career and you wanted to make money, you became a doctor or a lawyer or some profession like that. That’s what people had in mind. In the last 10 to 15 years or so, a lot of people have gone to business school. Some have tried to work at a bank or a consulting firm. But over the next 10 to 20 years, I can see software engineering as being a field where security is found and a lot of money is made.

You’ve got to invest in innovation, invest in training people, invest in your schools. You have to have a community that’s focused on helping people raise money and take risk. You’ve got to honor the entrepreneur even when he fails because you need people who are willing to put themselves out there.”

Lefkofsky also mentions several Chicago companies that might qualify for my list of interesting local businesses. Both Lightswitch and Belly have interesting concepts. Here’s one place where Lefkofsky and I are in vehement agreement:

“What motivates people to make a purchase decision is very different. Sometimes you want $5 off a cupcake, but sometimes you want to be in the back room making a cupcake and sometimes you want to have your name on a cupcake. You’ve gotta figure out what motivates a different constituency and customer, and then use technology to try to achieve that.”

I will be doing my own reporting on the ground from Chicago next week, talking to Groupon employees and other startups. (I’ve also asked Groupon and Andrew Mason for an interview.) If you’re involved in a Chicago startup that you think I might be interested in, email me at redesign@agrawals.org.

Craigslist may be on the smartphone already, but Fribi wants to kick the classified-ads space up a notch using the power of Facebook, coupons, and the cameras on our mobile-devices.

“Fribi is like a more personal twist to Craigslist, making the service more personal, relevant, safe and fun,” said chief executive officer and co-founder Morten Isachsen in an email to VentureBeat.

Fribi (pronounced free-bee) is a mobile, local-focused marketplace that allows you to sell and trade your unwanted items. So, yeah, Craigslist. But to set itself apart from the giant elephant in the room, Fribi hopes to offer a speeder listing process, social integration, and offers from businesses right within the app.

To list an item, you take a picture with your smartphone’s camera, assign a title, description, and a few other details, and upload. You can decide who can see the listing (only friends or public) as well as how long the listing will stay live. Like Craigslist, you can search specific neighborhoods and items, though Fribi lets you connect the app to Facebook and see friends who are posting items. If a friend interacts with an item through the social network, Fribi will automatically show the interaction in the app. Isachsen says Twitter integration will be coming soon.

Fribi has an opportunity to monetize as well, allowing local businesses to run deals and offers in the app.

Other services are doing similar things, however. Poshmark allows users to take photos of clothing they no longer want with their phones and upload a listing to the app. These are then sold through “Posh Parties,” or mini-mobile-trunk-shows. TradePal also lets you buy, sell or trade items with people around you, however this is done off the mobile phone and on a regular website. Inevitably, Craigslist will also be a big competitor for Fribi, given how many people already use and (mostly) trust the service.

Not to mention eBay, though it is on a much bigger, less localized scale than Fribi.

The company was founded in 2011 and is headquartered in Oslo, Norway. Isachsen does say the startup will be moving its operations to Palo Alto, Calif. So far Fribi has not taken on any funding.

[Update, the Sage Panel following the presentation assessed how Fribi came off on stage. Jolie O'Dell, a writer at VentureBeat and moderator of the panel, noted that the pursuit of a better shopping and selling site than Craig's List is a good idea. But Dana Stalder, a general partner at Matrix Partners (also on the Sage panel), said it will be very hard to overcome the "network effect" advantage that Craig's List has, even if its features aren't as good as another site's. He said he desperately wants to find entrepreneurs that can do that.

Jason Krikorian, general partner at DCM and another member of the Sage panel, said that the app was really well executed.]

Fribi is one of 80 companies chosen by VentureBeat to launch at the DEMO Spring 2012 event taking place this week in Silicon Valley. After we make our selections, the chosen companies pay a fee to present. Our coverage of them remains objective.

Disclaimer: Rocky Agrawal holds a variety of short positions in Groupon. You can find a full list of his disclosures here and in his author bio.

I’ve spent much of the last year talking about how the sites small businesses rely on to advertise and promote themselves — think Yelp and Groupon – are failing them. In fact, helping small businesses at the local level is extremely challenging for technology companies, for the following reasons:

• Scale. There are millions of small businesses in the country and trying to come up with a product and distribution strategy to reach them can be difficult.
• Lack of technology adoption. Many businesses still do things on pen and paper. Many don’t have Internet connectivity. Business owners are focused on running their business, not trying out Silicon Valley’s flavor of the week.
• Balancing value. Most local products need to create value for consumers, merchants, and the company providing the technology. Getting this balance right is very tricky. You can get massive consumer adoption by playing cash-flow games and spending hundreds of millions on marketing. But in order to build a sustainable business, you need to strike a good balance.

Here are some of my favorite companies in local:

1. Twitter. Most people don’t think of Twitter as a local company, but I think it (along with Facebook) has the most potential to do local right. Although Twitter hasn’t focused on local to date, its new partnership with American Express is a great sign. The massive scale of Twitter and its simplicity mean that small businesses like The Dosa Republic can advertise on the Internet cost effectively. (I’ve been pondering how to conjure dosas with Twitter since 2007.)

2. American Express. Although it’s not a startup, it’s definitely been acting like one. AmEx has had some of the most innovative local products over the last two years. The company has struck important partnerships with Facebook, Twitter and foursquare. Its Small Business Saturday promotion in the fall promotes the idea of shopping locally. Its social media team is on top of Twitter. I’ve met many of AmEx’s top execs, and they understand the future of commerce and online better than many startup execs I meet.

3. Square. Square has successfully credit-card enabled small businesses that were previously cash only. The pricing and product have simplified byzantine credit card rate structures into one easy-to-understand price. Square understands the whole consumer experience like no company other than Apple. Every detail of the experience is nearly perfect, including the packaging they use to ship the Square reader. Square’s Daniel Gatsby is one of the most talented designers I’ve met; I’d work with him on any project, any day.

4-5. Edo Interactive and Swipely. Card-linked offers are the right way to do promotions. Although American Express has made the biggest splash in the space, edo and Swipely are two other companies I like in the space. Edo is approaching the problem by partnering with financial institutions like Ally Bank (more banks are on the way). Swipely is working directly with merchants. Its San Francisco trial is worth checking out.

6. Constant Contact. The email marketing company lets small businesses keep in touch with local businesses. Wayne’s Chicago Red Hots, a Portland bar, had a disastrous experience with Groupon. They are using Constant Contact’s tools to engage with their own list of 1,300 customers. Constant Contact recently introduced a new deals product that is sustainable and makes sense for small businesses.

7-9. Eat24Hours, GrubHub, and Seamless. Ordering takeout and delivery has always been a chore. Menus aren’t readily available. You have to deal with a hurried order-taker who is taking orders in between cooking and serving in-house customers. Eat24Hours, GrubHub, and Seamless provide order-flow services and easy-to-use interfaces for consumers. Seamless’ iPad app is one of the most beautiful I’ve seen. The big challenge for these companies is keeping consumer acquisition costs below lifetime value. LivingSocial recently launched its own entry into the space.

10. Hotel Tonight. Deals can make a lot of sense when you have perishable inventory like a hotel does. Hotel Tonight’s concept is simple: matching last-minute travelers with that perishable inventory to create a win-win. Hotel Tonight also has a beautiful iPad app. CEO Sam Shank is brilliant.

11. OpenTable. The reservation site has been playing the long game in local. It’s my go-to example for success in a tough space. That it’s been around since 1998 is telling. It solves part of the inefficiency in restaurants and makes it easy for consumers to make and change restaurant reservations. In addition to reducing staffing costs and making operations more efficient, it provides an important distribution function. If a restaurant isn’t on OpenTable in San Francisco, it might as well not exist for me when I’m planning a nice meal.

12. Savored. The restaurant discount site lets you get 30% off your entire check at restaurants and is still profitable for restaurants. Because the discounts can be restricted to off-peak times, it reduces the risk of cannibalizing full-price traffic for discounted traffic. Interests between consumers and merchants are aligned: the more you spend, the more you save and the more the merchant makes. Contrast that with the daily deal model where consumers have an incentive to spend only up to the voucher value.

[Image of Square Register from Square]