Can GroupMe still compete in the messaging wars?

By Erin Griffith , written on October 8, 2013

From The News Desk

If there's ever a startup you might call an overnight success, it would be GroupMe. Built literally overnight at a TechCrunch Disrupt Hackathon, the messaging app quickly accumulated millions of users, millions in venture capital, 20 employees, and an overwhelming barrage of doting media attention, all in a matter of a year. The momentum was enough to convince Skype to shell out somewhere between $43 million and $80 million for GroupMe (the company would not confirm the exact amount), and not a minute too soon. Shortly after the sale, the market for mobile messaging apps exploded.

Two years later, GroupMe has amassed more users, but the app's early promise -- product integration with Skype, international expansion, possible monetization -- has stagnated. Meanwhile, messaging apps like WeChat (400 million registered users) WhatsApp (300 million users), Kik (80 million users), and Line (200 million) have leapfrogged it in terms of downloads and active users. Likewise Apple's iOS 5, rolled out just after GroupMe sold to Skype, integrated group messaging with basic texting functionality. Facebook launched a standalone messaging product that allows for groups, and Google Hangouts offers a solid mobile product to 450 million Google+ users.

Last month, GroupMe's charismatic founders left the company. So what is the value of the thing that Skype owns? Can GroupMe still compete?

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  • No matter what becomes of it, GroupMe will always hold a special place in the hearts of New York techies. The company's 2011 sale to Skype represented the first big, splashy exit from this wave of New York startups.

The deal felt like proof — finally — that New York’s emerging tech scene was more than just a media trend story.

Suddenly, New York had everyone's attention. This was the summer that Foursquare and Tumblr raised monster rounds of funding from Silicon Valley firms at nosebleed valuations of $600 million and $800 million. With the GroupMe sale, an app two guys built overnight was, in a matter of a year, a business worth tens of millions. It helped that those two guys were impossible to dislike. Founders Steve Martocci and Jared Hecht had an infection enthusiasm that rubbed off on anyone who met them.

The GroupMe sale showed the city's skeptics that an app earning zero revenue was actually worth real money. It wasn't a fashion, finance, media, or advertising company that leaned on New York's legacy industries -- it was a Silicon Valley-style social media app. That deal felt like proof -- finally -- that New York's emerging tech scene was more than just a media trend story.

That sale also distributed plenty of real money back to New Yorkers. GroupMe counted prominent New York firms Lerer Ventures (a PandoDaily investor), First Round Capital, Thrive Capital and Betaworks, as well as angel investors David Tisch, Joshua Stylman, Peter Hershberg and John Maloney among its backers. One investor got four different checks from the sale, since in addition to angel investing, he was an LP in several of the funds that invested.

Jared Hecht, left, and Steve Martocci, co-founders of GroupMe. Jared Hecht, left, and Steve Martocci, co-founders of GroupMe.

Then came the lies all entrepreneurs tell themselves when they sell. GroupMe's founders expressed excitement over all the resources they'd now have. The deal gave GroupMe access to Skype's 175 million monthly users, the team wrote in their announcement blog post. "Integrating GroupMe into the Skype experience is an amazing opportunity for us and accelerates the execution of our vision tenfold," Martocci said in a press release. Likewise in any startup acquisition, the acquirers at Skype paid lip service to its grand plans for turning this small, promising product into something massive. Said Tony Bates, CEO of Skype, in the announcement press release: "Skype and GroupMe have a shared vision of creating applications and experiences that are the daily communications choice for a billion people. We will continue to seek the top talent and technology to make that vision a reality."

Skype paid somewhere between $43 million and $80 million, not for GroupMe's user base. At the time of the deal, only 1.2 million people had used GroupMe (an estimate based on recent growth numbers). No, Skype purchased GroupMe for its future value -- what GroupMe could become. A few weeks after the deal, founder Steve Martocci declared (through a spokesperson) that, while GroupMe would not be his last startup, he was "100% committed to seeing Skype and GroupMe grow to 1 billion users." It hasn't quite worked out that way.

GroupMe had solved the problem of staying in touch and coordinating with friends better in realtime. Its next goal was to scale, scale, scale. GroupMe wanted to change the way people across the globe communicated, and Skype could definitely help with that, even though there was no specific plan laid out on what an integration would look like at the time of the deal.

Nailing that down turned out to be harder than GroupMe originally thought.

After the sale, GroupMe (and, by extension, New York) learned a few things about large tech conglomerates. For starters, integration is hard. Beyond that, getting basic stuff done in a big organization is hard. And most importantly, getting those big, exciting bold ideas approved? Basically impossible.

"You'd talk to someone at Microsoft in mobile, and they'd be like, 'What's GroupMe?'"

These are common lessons that startups learn when they sell. But GroupMe's situation was much worse, because its acquirer, Skype, was dealing with the same thing on a much bigger scale. Mere weeks after buying GroupMe, Skype agreed to sell itself to Microsoft for $8.5 billion. GroupMe's cute little $43 million acquisition was .005 percent of the value of the Skype deal.

"It was like a little fish that's getting eaten by a medium-sized fish, which is getting eaten by a big fish," GroupMe founder Jared Hecht explains. "We'd never been part of an organization that large," Martocci adds.

They had spent the past year selling GroupMe to the world, figuratively (and then selling it, literally, to Skype). Now they had to sell GroupMe all over again to people within Microsoft, a company which also operates multiple different divisions worth billions of dollars. "You'd talk to someone at Microsoft in mobile, and they'd be like, 'What's GroupMe?'" one former employee recalls. "That's how disconnected we were from them."

Making matters worse, the person who'd championed the deal within Skype experienced health problems, which left him unable to guide GroupMe through its transition. Skype had obviously wanted the deal to be a success, but it wasn't clear how much the company would be able to help GroupMe within the wider organization.

Martocci spent the first year getting "caught up in Skype," he says, trying to push through plans to integrate GroupMe and Skype. "We started out a little wide-eyed and optimistic," he says. "Once Microsoft got in the picture, we realized it was going to be difficult."

Standard processes suddenly took much longer. Hiring, for example, took two to three weeks. Decisions around product and strategy, which could typically be done in a few hours, would take a month to go up the chain of command. After a year of spinning his wheels, Martocci retreated to GroupMe, refocusing himself on making the product better, regardless of technical integrations with Skype.

There was one obvious benefit to this arrangement -- GroupMe faced zero monetization pressure. "We had the luxury of just focusing on growth," Martocci says. "They were not asking for us to go make money."

That point is more crucial than it may appear. The GroupMe founders wouldn't say it, but I will: Had GroupMe stayed independent, it would now be scrambling to find ways to monetize.

That much has become quite clear with the recent monetization difficulties of New York's other darling startups, Foursquare and Tumblr, both of which had raised far more capital and had millions more users than GroupMe. Foursquare had to take on debt earlier this year to avoid raising a down round of funding, and Tumblr sold to Yahoo months away from running out of cash. Those events served as a big warning to eager New York techies who were taken in by in the idea of fame and fortune (on paper, at least) for zero-revenue apps. Even the biggest success stories will struggle.


GroupMe has experimented with some monetization strategies under Skype's umbrella, to limited success. In 2012, GroupMe launched Experiences, a way to book tickets to Unique Special Exclusive Cool Things To Do. The product came at a time when dozens of other startups out there were offering similar things. In addition to catch-all deal platforms like Groupon, Google Offers, and LivingSocial, there was SideTour, which recently sold to Groupon, Zozi, which is now focused on commerce in addition to adventures, Fun Org, which shut down, and Sosh.

GroupMe Experiences never caught on and earlier this year, GroupMe quietly shut the product down. The company also launched Split, a payments function that allows users to split up costs and charge the group through the app, which is still running.

Turns out, it's damn hard to monetize a messaging app in the US. Just look at the strongest ones, which have hundreds of millions of users. Even they don't have an obvious means of income, except WhatsApp, which charges its users 99 cents to a download. Kik has vaguely discussed freemium options. The rest -- Line, WeChat, MessageMe and many others  -- are selling novelty stickers. The stickers are proving to be a decent-sized and sustainable business in Asia; it's unclear if that will be the same story in the US. (What's worse is the pool of potential acquirers for these apps is quite small. Besides their massive user-bases, what do these apps offer that Facebook or Google don't already have in their own products?)

GroupMe is not quite big enough to mess with ads, and either way, doing so would ruin the app's clean user experience. Skype has been talking about a native ads platform since last year; the company could extend that to GroupMe once it makes sense. 

Overall, the GroupMe founders' return to focus on product yielded one major result: GroupMe grew its users by 10 times in the two years it was owned by Skype. The company, operating mostly as a tiny remote island off the continent of Microsoft, now has more than 12 million registered users, four million of which are monthly actives.

Martocci and Hecht are also proud that they maintained GroupMe's culture, which includes keeping most of the team intact and hiring 10 more new employees. The company was known for its unique culture, from its grilled cheese and lighters at SXSW, to its internal photoshop memes, company hackathons, and obsession with pinball. Two employees who left after the acquisition, Jeremy Schoenherr and Michael Novak, actually returned to the company because they missed it. (The company's latest emoji packs reflect GroupMe's culture, and also include emoji versions of Martocci and Hecht.)

Still, it came as little surprise when, the minute Martocci and Hecht hit their two-year earn-out, they left. The hype aside, this was just like every other acquisition after all. Martocci is now working on a collaboration app for making electronic dance music called Splice. Hecht is working on a yet-to-be-named company related to finance in some way.

GroupMe’s head of engineering, John Pignata, and its head of product, Chris Connelly, will lead the team going forward. Martocci and Hecht will remain advisors.

"GroupMe is a better spot than its been in in a long time," Martocci says. The product roadmap is strong, he says, and the new leadership has been itching to take over.

Even combined with Skype's 250 million monthly users, GroupMe's four million monthly active users is a far cry from the billion users Martocci promised after the sale. It's also a far cry from the hundreds of millions that WhatsApp, Line and WeChat have.

The GroupMe founders are quick to point out that these other services don't focus on groups, an area which GroupMe dominates. "We are for groups, that is our fundamental distinction," Hecht says. "That has been enough of a distinction, and that will persist. I don't think we're going up against the others because we didn't ever have one-to-one messaging."

Besides, Hecht and Martocci argued, one-to-one messaging is commoditized. The problem is that the commoditized market for one-to-one messaging appears to be a lot bigger than the market for group messaging is.

GroupMe now has the curious distinction of operating a startup inside a giant corporation.

These new messaging behemoths have grown so quickly because of their international adoption. Hecht and Martocci said international expansion was an area they wished GroupMe had done better with. The company's user base is extremely US-centric, where the messaging market is very fragmented. Still, they are happy to see GroupMe own a decent chunk of that fragmented market, pointing out that the other messaging apps don't release monthly active user numbers.

GroupMe is currently the 179th-most popular iPhone app in the App Store and 267th in the Google Play Store. It lags behind Kik (No. 26 for iPhone) and WhatsApp (No. 20), but is competitive with Line (No. 150 on iOS) and Google Hangouts (No. 190 on iOS).

GroupMe now has the curious distinction of operating a startup inside a giant corporation, something that most big companies say they do but never really execute. The idea of "intra-preneurship" is something most "outra-preneurs" would scoff at, since small divisions inside large companies don't carry the same risks as a stand-alone startup.

GroupMe is likely to continue its steady, but not explosive, growth trajectory.

So did the mascot of New York's tech resurgence screw up by selling? It's hard to argue that GroupMe would have become a massive company if it hadn't sold. In the meantime, the deal was a positive for New York, because it primed the city for more wins that were even bigger.

Sure, VCs don't invest in startups for the "base-hits," like GroupMe. They invest for home runs like Tumblr. But sometimes a budding ecosystem like New York needs a few of those small wins, because they inspire more people to take a risk and start their own company. The sale has freed up two of the city's most well-known entrepreneurs to build something totally new. And now, they've got the experience selling that may keep them from making the same move again. A big reason Twitter never sold was because Evan Williams had a similar experience selling Blogger to Google.

Selling to Skype didn't turn GroupMe, the overnight success, into GroupMe, the messaging behemoth. The end result wasn't what the founders wanted for the product and team. But it may have been better for New York than GroupMe withering away on the other side of the hype cycle.

[Illustration by Hallie Bateman for PandoDaily]