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5 Business Lessons From LivingSocial's Tale of Woe

As the founder prepares to leave, it's time to ask: What went wrong at LivingSocial? And what can you learn from its troubles?
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Like so many business disasters, it began with a lot of promise. LivingSocial, started by a team of highly successful Facebook developers, brought a new set of daily deals to the Web. Unlike Groupon, it would focus on discounts in local markets.

The service grew to more than 50 million registered users and was once valued at $3 billion. It was named as a possible IPO to watch by market pundits. Founder Tim O'Shaughnessy was named to Inc.'s 30 under 30 list in 2010.

That was then. Early last year, the company received $110 million in funding from large investors, primarily Amazon, which had already sunk more than $100 million into LivingSocial and now owns 31 percent of the startup. Investment research firm PrivCo reported that the funding amounted to an emergency bailout, and LivingSocial would have faced "imminent financial ruin" without it.

Neither Amazon nor LivingSocial has confirmed that the funding was an emergency bailout, but it certainly looks that way, given that the deal stripped most of the value from the stakes held by LivingSocial's founders and employees. "The company was basically handed over to the funders," says Adriana S. de Lozada, senior analyst at PrivCo. "The stock options of employees and stock of the founders are practically worthless." The reason is that if LivingSocial is liquidated, the funders have protections that will return as much of their investment as possible, she explains. That will likely leave those who actually work at the company with little or nothing. With his stock worth little and relations with Amazon perhaps souring, O'Shaughnessy announced recently that he would be stepping down as CEO of LivingSocial as soon as the company can find a replacement, which it hopes to do within the next six months.

What went wrong? Market forces are certainly working against LivingSocial, founded right before the economic downturn, and buoyed--temporarily--by the daily deal fad. But the company's done plenty to create its own troubles. Consider these missteps--and make sure to avoid them in your own business:

1. We don't know who we are.

I first met O'Shaughnessy on his way in to an Inc. 30 Under 30 party. At the time I hadn't heard of LivingSocial, so when he introduced himself, I asked what the company did. The only way he could explain it was by comparing LivingSocial to its larger and better-known competitor.

Think about those two names. If you'd never heard of Groupon, you might guess from its name that the company offers coupons to groups of people, which is pretty close to right. What would you guess from the name LivingSocial? Social media aggregator? In-person networking events?

Lesson: Choose a name for your company that says what it does.

2. We're big, international, and... local.

Rather than send masses of national coupons to a national audience, LivingSocial focused on building local markets. But that model seems to embrace the worst of both worlds, de Lozada explains. "Size translates into a barrier to entry for other competitors," she says. "Groupon has that advantage, and LivingSocial has it to an extent. But because it's local-focused, it faces a lot of local competition. To build up a local business takes a lot of local knowledge, and that's expensive."

Lesson: Trying to run a deeply local business everywhere at once is inviting trouble. You can be community based, or you can try to conquer the world. Pick one or the other.

3. We're not sure what makes us special.

The daily deal business model has certainly taken a lot of criticism lately. With giant Groupon still not profitable two years after going public, LivingSocial is likely wise to look for alternatives. And indeed, O'Shaughnessy has been at pains to explain to anyone who will listen that the two companies are completely different.

Fair enough: But he has yet to offer a convincing vision of how the new LivingSocial will succeed. In a recent interview he stressed that LivingSocial is "a marketing platform, connecting consumers and merchants, usually with a promotional offer." But can't those merchants use a local newspaper or coupon book to reach consumers in the same way?

In the same interview, O'Shaughnessy was asked how LivingSocial is different from Groupon. "We have developed a differentiated approach on live events," he answered, adding that Groupon seems to be "invested a lot more in becoming a direct distributor of physical goods." The irony is that less than two weeks before that interview, LivingSocial completed its sale of Korean ticket seller TicketMonster to Groupon.

I'm still not sure I understand what LivingSocial's business is all about. I'm wondering: Does anyone?

Lesson: Every business needs a unique value proposition. If you can't clearly articulate why the marketplace needs your company, maybe it doesn't.

4. We can't stop the bad news.

Since November 2012, LivingSocial has announced layoffs of more than 400 people; apologized profusely to the Jewish community for decorating the "Greed Room" at its Seven Deadly Sins Halloween party with dreidels; suffered a site outage lasting nearly 48 hours, and--oh yeah, had that emergency round of funding to stave off bankruptcy.

At some point, even the most stalwart company supporter will start wondering if anything can go right.

Lesson: It's easy to get rattled when things go wrong. Instead, buckle down. Cut out the distractions and make sure you keep your core business running right.

5. Maybe we just can't make money.

Though LivingSocial is private, Amazon's financial statements offer a look into its finances, which aren't pretty. Amazon's 2013 annual report isn't out yet, but for the nine months ending in September, it reported losses of $110 million on revenues of $384 million for LivingSocial. Granted, that's a lot better than its losses of $767 million for the first nine months of 2012 on revenues of $387 million. But those numbers still fall far short of profitability and the revenue decline suggests a company that is retrenching rather than growing.

De Lozada predicts that if a purchaser doesn't ride to the rescue, Amazon will either buy the rest of the company, or perhaps LivingSocial will seek Chapter 11 bankruptcy protection. "Most of their current liabilities are accounts payable to merchants--they owe merchants a lot of money," she notes, adding that Chapter 11 would allow the company to shed that debt.

Is it likely to do that? "It's more likely than an IPO," she says.

Lesson: Some business models don't work, or work only for a little while. If you've locked yourself into one of those models, sometimes the best thing to do is cut everyone's losses and start over from scratch.

IMAGE: Getty
Last updated: Jan 20, 2014

MINDA ZETLIN | Columnist | Co-author, 'The Geek Gap'

Minda Zetlin is a business technology writer and speaker, co-author of The Geek Gap, and former president of the American Society of Journalists and Authors. Like this post? Sign up here for a once-a-week email and you'll never miss her columns.

The opinions expressed here by Inc.com columnists are their own, not those of Inc.com.



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