Kara Swisher recently published an article titled Latest Trend for VCs Is Overfunding Group-Buying Start-Ups: LivingSocial Nabs $25 Million. This LivingSocial investment comes a few months after Groupon raised $30 million which is amazing for a company that just launched its service about a year prior. So is Kara Swisher right? Are these discount group buying sites being overfunded? I would argue that they are far from being overfunded for the following reasons:
1. The Value Proposition is a Great One
The product that is being sold is offering consumers steep discounts to try the services of local merchants. These discounts are at least 50% off and are truly deals and as you know people love deals.
Even more importantly, merchants have found these type of promotions extremely successful in attracting a new customer base. They are bringing in new customers into their stores and are willing to give big discounts to do so in order to have the chance to keep them as loyal long term customers.
These companies are just enabling this Win-Win relationship to happen. With both parties greatly satisfied, you have a solid foundation for a great business.
2. The Potential Market is Huge!
The real interesting part of this business is that it is about connecting local merchants to local consumers via the Internet but the consumers are ultimately going offline locally to consume the service. Local businesses continue to struggle with the challenges of online marketing hence the need for businesses such as ReachLocal and Yodle. And offline retail is ALOT bigger than online retail. Offline retail is over a $2 trillion market and online retail is approximately $150 billion. What is interesting about that $2 trillion offline retail market is that by 2011 half of those purchases will be influenced by online research according to Forrester Research. What businesses like Groupon and LivingSocial are doing is taking a slice of that $1 trillion market by connecting consumers with deals offered by merchants. A slice of a $1 trillion offline retail market versus a slice of a $150 billion online retail market is a BIG difference. A 1% slice could mean a $10 billion market! Is a 1% slice possible? Getting back to point 1 – people love deals. So I say yes!
So how much capital should be invested in a market that may reach in the tens of billions of dollars? I would say a lot more than the $55MM that Groupon or LivingSocial have raised recently. These companies are far from being overfunded if they are really going after it!
Ah-ha 2.0 
As the director for the LivingSocial market in San Diego I have to say this is getting an incredible response from business owners. Anytime you can offer an opportunity to advertise to masses of people at no out of pocket expense and in return get butts in the door and a check in the mail…its not a hard sell.
Aaron – thanks for the comment. I spoke to some merchants and can definitely confirm your thoughts. This market is not going to be bound by merchant willingness. If offline retail is a $2 trillion market, what percent will be deals from merchants trying to get “butts in the door and a check in the mail”. Even if 1% of their sales comes from these type of promotions, this would be a $20 billion market. That is enormous! We are barely in inning 1 in merchants signing up to work in programs like this. I am curious, how many deals can an average sales person close in a month. And how has that been trending. My guess that is is becoming an easier sell as merchants are telling each other of the value.