The Groupon, Angie's List and Yelp IPOs Proved One Thing: Local Is Really, Really Hard
That's the one thought I'm left with after reading through the S-1's of Groupon, Angie's List, and Yelp.
Let's dig into the numbers. Here's a look at the losses and revenues for each:
- Groupon
- FY 2010: a loss of $456M on revenues of $713M.
- Q1 2011: a loss of $146M on $644M in revenue.
- Angie's List
- FY 2010: a loss of $27.2M on revenues of $59.0M.
- First six months of 2011: a loss of $25.8M on $38.6M in revenue.
- Yelp
- FY 2010: a loss of $9.51M on revenues of $47.7M.
- First nine months of 2011: a loss of $7.6M on $58.4M in revenue.
And what's the main driver of these losses?
- Groupon
- $208M spent on marketing in the first quarter of 2011 and another $178M on sales people and the rest.
- Angie's List
- $48M spent on marketing (of which $35 million was on TV ads) and $22M on sales.
- Yelp
- $38.5M, or nearly two-thirds of its revenue, spent on sales and marketing.
So a very large contributing factor to the losses for each of these companies comes down to marketing and sales. The marketing side of this is pure customer acquisition (read: advertising). And the sales side is simply feet on the street. Or warm bodies hitting the phones.
As Rocky Agrawal noted in his analysis of Yelp, there is very stiff competition in the small business advertising market so earning and keeping their business is difficult and expensive.
Of course, there is a good reason why these companies are putting so many bodies behind the phones: the local advertising market is massive. So massive in fact that when I tried to find a number for the size of the local advertising market I came across a range from $14 Billion all the way up to $130 Billion. Companies realize that "to the winner go the spoils" so they're dedicating lots of resources to local in order to get out ahead of the competition.
Indeed, local advertising is such a big market that my own company Pandora is aggresively going after it as well. Although it's a slightly different market in that we're going after local radio dollars specifically -- an area where I think we're well primed to gain market share in.
There are of course many strengths in all of the above businesses. The rate that each of them has grown revenues is no easy feat and should be applauded. I am personally a huge fan of Yelp the product. It's by far the most comprehensive source of reviews out there and the best place to go when I want to find a new restaurant. I am no longer a Groupon subscriber because the emails got to be too much but I've been impressed by their efforts with personalization. And I've bought deals through Groupon Now a couple of times too and been happy with the experience. Marc Andreessen nailed it when talking about Groupon recently in his predictions for 2012:
I've always felt that the criticism of Groupon has been unwarranted. People have really underappreciated what Groupon has done, which is they've created a way for small businesses that aren't online to spend money online and be able to dial up customers on demand. That's a really big deal.
But investors have to look for the strengths AND the weaknesses of a company. One weakness (if big enough) is enough to cripple even the best company despite its many strengths.
The question, that we've asked before, is can these companies get their marketing and sales costs down even in the long term? I'm of the opinion that a more automated solution is the answer. I know it might be sacrilege for a salesperson to say so, but if a local advertiser wants to book $1,000 worth of ads, should they have to go through a sales rep in order to do so? At some point it is just not scalable.
More importantly, the question gets put back startups: is there a better way to do things in local?
Also: Two Opposing Views on Groupon
