The fall of once-a-unicorn LivingSocial

The first thing you see when walking into the headquarters of LivingSocial is row upon row of mostly empty desks, broken up by small street signs that employees once needed to find one another when the office teemed with people. On a recent visit, some desks were piled high with boxes of employee belongings, the detritus left behind after a round of layoffs that eliminated one-fifth of the workforce.

The technology industry’s boom over the last few years has been defined by the rise of ‘unicorns,’the private companies that investors have valued at $1 billion or more. Before the term came into vogue, LivingSocial was among the biggest unicorns of its day. It now offers a glimpse of what some of today’s unicorns might look like several years down the road if things go awry. Just four years ago, LivingSocial and its larger rival Groupon grew rapidly on a simple pitch: The companies would match customers to local businesses with a daily deal in users’ inboxes, like half off at a local deli or a two-for-one massage promotion. LivingSocial and Groupon would take a cut of each transaction.

Venture capitalists anointed daily deals as the way the internet would invade local business, and by late 2011, LivingSocial had raised more than $800 million and reached a valuation of $4.5 billion, according to data from the research firm VC Experts. The company counted Amazon and the mutual fund giant T Rowe Price among its investors.

From unicorn to unicorpse

Today, LivingSocial is more unicorpse than unicorn. The company never filed for an initial public offering(IPO) and consumer fervor for daily deals has cooled. The company’s workforce has shrunk to around 800 employees from 4,500 at its peak in 2011. LivingSocial is now struggling to evolve its business by focusing on ‘new experiences,’  such as a coupon-free programme that puts cash back on customers’ credit cards when they dine at certain restaurants.

LivingSocial may soon have more company. There are 142 unicorns that are together valued at around $500 billion, according to the research firm CB Insights. Some of those highly valued startups are starting to show some cracks.

Venky Ganesan is a venture capitalist in Menlo Ventures. Just as LivingSocial’s valuation set expectations that were too high for the company to meet, he said, “today’s unicorns will face the same problems.” LivingSocial was founded in 2007 by four friends, Aaron Batalion, Tim O’Shaughnessy, Eddie Frederick and Val Aleksenko.

The first iteration of LivingSocial, called Hungry Machine, produced apps that hooked into Facebook, including polling apps and a way to share favourite books with friends. About a year after getting into the business, the company said it had 10 million subscribers spread across the US and Europe. But even as it spent big, the underlying business was not sound. Amazon’s recent financial filings show that in 2011, LivingSocial generated $238 million in revenue — but lost $499 million. of going public.

LivingSocial’s investors now say it is easy to see that the growth-at-all-costs strategy created a downward spiral of overhiring and overexpansion. No one paid much attention to how the company would ultimately make money. It is now run by a new chief, Gautam Thakar, who joined in August 2014, after a nearly decade at eBay. The company’s next act, Thakar said, will rely less on the deals and instead focus on a new cash-back initiative. A pilot programme, Restaurants Plus, gives customers cash-back discounts on their credit cards — no printed coupons required — when they dine at certain restaurants. LivingSocial takes a cut of each transaction.

There is other evidence that the daily deals fad is passing. Amazon recently shut down its own daily deals business.  Internally at LivingSocial, employees have been skeptical about the strategy shift, according to three employees who left this year. About a dozen former employees and current investors said the company’s strategic missteps had taken a toll on morale. “We’re focusing on our investments in technology, and focusing particularly in English-speaking countries,”  Thakar said. “In many cases, people said they wished this had happened earlier.”

Investors, founders and many employees of LivingSocial are underwater with their shares, and an IPO or sale seem very far off. When asked about this trajectory,  Thakar said valuations were all “notional.” He added, “Valuations are one of those things that are in the eye of the beholder.”