Groupon may be the ultimate goat right now, but mark my words: We'll see a Groupon 2.0

By Sarah Lacy , written on March 5, 2013

From The News Desk

It's never a good idea as a tech journalist to try to predict the future, particularly in the digital age where those predictions can hang out on the Web mocking you when they are wrong.

Nonetheless, I will tell you right now that within the next 10 years we will see another Groupon.

By "another Groupon," I don't mean a wildly irresponsible company that pockets private equity, juices the bottom line, and pushes off a stock prematurely on the public markets that can't retain its value. We will most definitely see that, but in a tech cycle that's infused with booms and busts and greed, that's like saying the sun will come up tomorrow.

No, I mean we will see another company that seeks to become a modern Web-based customer acquisition engine for small businesses, likely relying on discounts and coupons. It may look a lot like Groupon -- if it's close, it'll be met with wild derision. But at some point, someone doing this will succeed. And give it a few years, but people will try again. The need is just too big and Groupon's execution was too obviously flawed.

There will be a litany of comments on how stupid this post is. When something flames out as wildly as Groupon, everyone wants to say they saw it coming, and everyone wants to say the model made no sense and never could. And indeed, as implemented, it did not.

But the problem wasn't the idea or the market, like so many companies we saw during the dot com days. The problem wasn't even coupons. Small businesses have always relied on Penny Savers and ValPaks and specials to acquire new customers. And right now the bulk of small business advertising still goes to laughable anachronisms like local newspapers, local television, local radio, or the Yellow Pages that are only getting worse in terms of conversion. If you're like me the only time you've seen a Yellow Pages in the past five years is rain soaked on your front porch.

What failed Groupon was arrogance and lousy execution. It was lead by a chairman and investor with a pattern of fast growth, unsustainable businesses, and an inexperienced CEO. The former, Eric Lefkovsky is the one still in his job, we should note, while the latter Andrew Mason is gone. That hardly seems to solve the problem.

There were three huge mistakes that would have killed even the best business.

The first fatal mistake: They broke the cardinal rule of knowing your user base. They didn't ultimately provide a service that was good for users. Sure they gave us discounts, but you had to wade through a lot of bullshit to find relevant deals. How many men in San Francisco got weekly offers for bikini waxes in San Mateo? There was little to no tailoring of the deals by very basic parameters like gender and location. After a point, it was about as effective as Viagra spam. People I know simply stopped opening the emails -- which by the way were way too hard to opt out of.

One investor told me he couldn't imagine that when someone needed an oil change, they wouldn't search their inbox for a Groupon deal. That doesn't seem very modern. In an age of big data, shouldn't Groupon know when you need an oil change and serve you up that deal at the right time? Indeed at the time of that mega round, Greylock penned a post about how it hoped big data and all that customer information would make Groupon a better recommendation engine. In the end, Groupon seems to have talked a good game around this and not delivered.

They second fatal mistake: It didn't come up with a model that was sustainable for the bulk of small businesses that used them. This could have been achieved by walking mom and pops through the more successful test cases, creating a better promotion and discovery product for consumers that didn't rely on such heavy discounting to get people in the door, or frankly, listening to what small businesses wanted.

I had a telling conversation with the founder of OrderWithMe, a company that helps US small businesses bundle orders to buy goods direct from Chinese factories. They had a meeting with Groupon about whether a partnership around Groupon Goods mades sense. They walked away concerned about Groupon's future -- before everyone was -- for one reason: It was clear they weren't actually talking to small businesses. This wasn't the first time I've heard this.

A third huge factor, which I've written about for years: The hundreds of millions of dollars Groupon spent on an ill-advised international strategy. It repeated all the classic emerging markets mistakes of the late 1990s -- particularly the arrogance of hiring Western MBAs to lead markets they didn't understand, who frequently didn't even speak the local language. In other cases, it bought local copycats and left them to their own devices. We've heard of a few cases where the entrepreneurs who were running them simply checked out of the day-to-day grind.

All this combined is what killed Groupon -- and its many copycats who were struggling to spend enough to keep up in a 90s-like, land-grab mentality. All of this would have killed the best idea in the world.

It's impossible to go back and prove that a better customer experience, a service that worked for you and worked for small businesses, and a sensible international strategy would have netted a better company. And it's all but certain that no one will get the chance to for a while -- the stain on the concept is just too great.

But there is a reason that many of the best investors in Silicon Valley put money into Groupon's high-priced "like a billion dollar" round, even given the red flags, and there's a reason Google offered it as high as $6 billion after full due diligence to acquire it. Sure, there's a greed and a lemming argument. But that's not the entire explanation.

At each new low Groupon hits, I've had private conversations with people who were behind these deals asking them what it was they got so wrong. They each said that there were certainly some warning signals -- many of those I've mentioned above were included. But they were seduced by this market opportunity. It was just too good to pass up. Every portal -- from MSN to AOL to Yahoo to Google -- has tried to crack small business marketing in a new way. And really, each has failed. It's the remaining El Dorado of the consumer Web.

And as time goes on, the need becomes more desperate not less. Someone will find a way for offline businesses to acquire customers online, at scale. And because offline businesses are the bulk of the businesses in the world, this can be a huge company -- it's a $100 billion market opportunity, with nearby businesses consuming 80 percent of the average consumer's wallet, according to Greylock's math at the time it invested.

Groupon was the first that looked like it could, which is why some investors have admitted in private conversations that they overlooked the wild, self-inflicted execution errors.  Because it's competing with local old media models that are dying, it's a wide open playing field. There just aren't many of those left on the Web.

Of course, it's still a wide open space for a reason: It's a formidable product challenge and  a formidable sales challenge. It's taken companies like Craigslist, Yelp, and OpenTable the better part of a decade to get multi-city network effects, and lately Foursquare has been moving away from a strategy of selling to small businesses to larger national partnerships.

Several investors I've spoken with have said they hoped their guidance could correct some of the more cringe-worthy elements of the execution. But many of them invested far too late. The biggest mistake on the part of people who backed or wanted to back Groupon at its zenith -- and indeed recent investors who bought the turnaround story like Tiger Global -- may have been their own arrogance that they could talk sense into the team.