From Unicorn to Unicorpse: How LivingSocial Imploded

We have seen several unicorns with artificially bloated valuations and questionable business models. LivingSocial is one such company. In late 2012, LivingSocial was valued at $6 billion and venture capitalists had poured in about $800 million. They were lured by the daily deals market which was expected to reach $4 billion by 2015. Today, LivingSocial is a unicorpse* having burnt money on marketing and expanding its user base, rather than focusing on its monetization. It was last valued at $48.4 million. There is a lot to be learnt here—about what not to do in navigating your entrepreneurial journey.

LivingSocial was founded in 2007 by Aaron Batalion, Tim O’Shaughnessy, Eddie Frederick, and Val Aleksenko, who had worked together at a health care startup. It started off as a social discovery and cataloging network for reviewing and sharing common interests. By late 2010, it had evolved into a social commerce engine offering local deals to a subscriber base of about 20 million people in more than 120 markets in 11 countries. At this time, LivingSocial’s business model of revenue sharing with merchants did have some strength and potential. It charged merchants 35% of the deal value. It was estimated to be earning more than $1 million a day and its valuation skyrocketed to over $1 billion after Amazon invested $175 million for a 17.5% stake.

Within a year, more investors like T. Rowe Price also rushed in and Amazon had increased its stake to 31%. With a total $800 million in funding, LivingSocial was following a growth-at-all-costs strategy. It was burning money on acquiring customers and marketing opportunities. It went on hiring and acquiring sprees and its losses ballooned.

It was toying with the idea of going public but put it off due to a volatile market and the disappointing IPO of Groupon in November 2011. The market was not anymore smitten by the daily deals business model and was skeptical about the margins, churn, etc.

In 2012, Amazon reported results of its 31% stake in LivingSocial and it added to the skepticism about their outlandish valuation. The results revealed that in 2011, LivingSocial earned $245 million in revenues and lost $558 million. It began experimenting with diverse services and business models. But rather than monetize its big customer base of over 60 million, it started selling full-priced vouchers for events and acquired a physical building where its local merchants could host events. If that strikes you as a stupid idea, it was.

It ended 2012 with a whopping loss of $650 million and laid off 10% of its workforce and Amazon valued its stake at a paltry $48.4 million. Today, New York Times reports that its work force has shrunk to around 800 employees from 4,500 at its peak in 2011. It has shut offices in several cities, including New York and Seattle. It has sold its acquisitions South Korea-based Ticket Monster, Spanish startup LetsBonus, and shut down its Australia and New Zealand operations. It is now focusing on its operations in the United States and Canada.

But it is too late now. The daily deals fad has passed. Groupon is trading 85% below its IPO price and Amazon will discontinue selling daily deals through its “Local” service. T. Rowe Price has written down its stake in LivingSocial to nearly zero. LivingSocial now plans to rely less on deals and focus on cash-back discounts on credit cards.

Moral of the Story 

Every single entrepreneur who has gotten carried away by over eager investors’ willingness to fund growth at all costs without paying attention to business model and profitability concerns should take note. Your fate will be very similar to that of Aaron Batalion, Tim O’Shaughnessy, Eddie Frederick, and Val Aleksenko. You will be putting in years of work. You will create no personal wealth. And you will face public humiliation as your overvalued venture implodes spectacularly.

Please do not fall into this trap.

* The term Unicorpse was first coined in a TechCrunch article by Aileen Lee of Cowboy Ventures.

This segment is a part in the series : From Unicorn to Unicorpse