Tim O'Shaughnessy and Eddie Frederick, Founders of LivingSocial

With the acquisition of a little company called Buy a Friend a Drink, the online-bargain site LivingSocial came together in its present form.

The online daily coupon industry may not be the sexiest space on the Web, but it sure has venture capitalists licking their chops. First, Chicago-based Groupon raised a whopping $135 million from Russian investment firm DST in April. And before you could say "discount," LivingSocial had raised two consecutive rounds totaling approximately $40 million from U.S. Venture Partners and Lightspeed Venture Partners. Tim O'Shaughnessy, LivingSocial's co-founder and CEO, estimates that, together, the two companies own 98 percent of the market. Both companies partner with businesses such as restaurants and spas to offer subscribers deep discounts on goods and services via a daily e-mail coupon. Right now, for instance, I could buy a LivingSocial coupon for a watercolor painting class for $47 – a discount of 69 percent off the regular price.

O'Shaughnessy started LivingSocial in 2008 with three colleagues – Eddie Frederick, Aaron Batalion, and Valeriy Aleksenko – who worked at Revolution Health, a consumer health care site founded by AOL's Steve Case. Back then, their fledgling company cut its teeth on developing apps for Facebook and made a name for itself with popular apps such as Visual Bookshelf and Pick Your Five. Early success landed the company $5 million in Series A financing from Grotech; Case also invested in his former employees.

LivingSocial began to shift direction early last year with the acquisition of a little company called Buy a Friend a Drink. "We worked with beer, wine, and spirits companies and partnered with restaurants to give people coupons for free drinks," says O'Shaughnessy.  Last summer, the partners leveraged their relationships with restaurants to morph LivingSocial into its current form.  The value proposition to vendors is pretty attractive: they have the opportunity to wow new, pre-paid customers and to convert them into full-price patrons. LivingSocial pockets approximately 30 percent of the fee.

Unlike its larger competitor, Groupon, LivingSocial does not require a minimum number of subscribers to buy the coupons before the deal kicks in. But it does offer an incentive for its 85 million users to spread the word.  "When you buy the coupon, we sent you a custom link and if three people buy off your link, then your purchase is free," explains O'Shaughnessy.  While many of LivingSocial's coupons come from restaurants and spas, there are also an increasing number of experiential deals. "We sold a lot of tickets for the Spy Museum in Washington," says O'Shaughnessy, "and we've also worked with an indoor skydiving company. They turn on a jet engine fan that shoots you through a vertical tube."

The company is now active in 52 markets across the U.S. and it opened a London office earlier this month. O'Shaughnessy hints that we'll see LivingSocial quickly penetrate more international markets this summer. It seems that he's hot on the heels of his much larger competitor, Groupon.  "They keep us on our toes and vice versa," says O'Shaughnessy.

Donna Fenn is the author of Upstarts! How Gen Y Entrepreneurs are Rocking the World of Business and 8 Ways You Can Profit From Their Success (McGraw-Hill, 2009), about ways Gen Y is changing the entrepreneurial landscape. @donnafenn