Groupon Tragically Controls the Fate of Daily Deals Sites

Investors are balking on their initial enthusiasm for the cottage industry

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The daily deals bubble is leaking air, loudly. As we noted last month that consumers were getting sick of the daily deals sites, that they felt "overwhelmed" by the flood of emails from myriad companies offering bargains, and  business owners are becoming increasingly skeptical of the long term benefits of giving their products away to large amounts of people. We can now add investors to the pool of naysayers. A new industry report from CB Insights shows that after a spike in interest acquisitions of daily deals sites are tanking due to skepticism about the viability of the business model. As the biggest, oldest and most visible players in the space, they say, Groupon and Living Social will show the world whether or not the business model can work. Given the fact that investors also think that Groupon is a Ponzi scheme, this all sounds very discouraging.

It's no mystery that daily deals sites are a popular business model. With 53 new services launched in August alone, the space is becoming increasingly crowded and terribly confusing. These kinds of businesses are easy to launch, the CB Insights report explains, but complicated to actually run:

While the technical barriers to entry in the daily deal business are low, scaling the business requires significant amounts of capital. Hiring armies of sales staff and account managers is necessary to develop relationships with merchants, and this is expensive. And so before throwing more money at the daily deal space, investors want to see that the model works. …

A successful IPO by either or S-1 filings which show healthy financials and which don't see universal ridicule by analysts and the media would go a long way in reinstating some faith in the daily deal space

Groupon and early copycat Living Social built the models that startups are copying and investors are scrutinizing. Groupon has had a little bit trouble with their IPO and may or may not be delaying it. As if this weren't bad enough news, the condemning blog posts of early skeptics of the Groupon model are starting to look pretty prescient. Former venture capitalist Jose Ferreira explained in June how the company resembled a Ponzi scheme this past June based on evidence that local merchants not only didn't benefit from agreeing to daily deals, they actually lost money in the long run. Rocky Agrawal, a local business entrepreneur, went into pain-staking detail about how exactly Groupon screws over its merchant partners in a four-part series at TechCrunch. Agrwal goes into detail with first-hand accounts from business owners who say they got screwed over by Groupon's deals.

Groupon could very well IPO and see some success, but it's hard to imagine the media fire storm dying down. This leaves us with Living Social, a seasoned copycat but a copycat nonetheless.

This article is from the archive of our partner The Wire.