Why Lightspeed invested in Living Social

Well, I’ve been busy since the beginning of the year! Earlier this week Lightspeed’s investment in ShoeDazzle was announced, and today our investment in Living Social was announced.

Both companies reflect our belief in entertainment commerce, or push commerce.  The traditional model of ecommerce treated buying things like a chore, crossing things off of a list. Some of the newer commerce models, the ones that are quickly growing to millions in monthly revenue, help users discover great deals and great items that they were not explicitly looking for. By manufacturing serendipity, they help create demand, rather than just fulfilling demand. Living Social falls into this category.

Living Social sends a local deal each day via email (see some examples here) to residents in 18 cities across the US. The deals are usually 50-80% off on a local restaurant, spa, bakery or similar merchant. If the deal appeals to you, you buy it directly from Living Social. Living Social makes money by keeping a cut of the revenue, and sends the rest on to the merchant.

The leader in this category by far is Groupon. Groupon has seen tremendous growth, from $100k in revenue in January 2009 to $10M in revenue in January 2010. Living Social got started 6-9 months after Groupon, but is seeing similar growth. According to Hitwise, traffic in the group buying category is up 72x since last year, with Groupon and Living Social neck and neck for traffic at around 49% each (click through to see the full graph):

Sadly they are not neck and neck for revenue, at least not yet!

There are many entrants into the local deal space, with Techcrunch reporting earlier this month:

When Yipit launched a little over a month and a half ago (!), the startup could already identify 30 daily-deal Web services. Today, the company tracks deals from no less than 66 Groupon-like websites across the United States, more than double the number it counted less than two months ago.

As you can see from the chart above (click through to see the full graph), the 66 companies are delivering 176 daily deals. Since 50+ of these deals are from Groupon, the other companies are averaging 2 cities each. This is an easy category to enter, but I believe that it will be a difficult category in which to scale. Success will depend on building the email subscriber base, which is challenging on a single city basis. The more targeted you want to be, the harder it is, whether you are relying on viral growth or buying advertising. National growth is easier, but requires a national footprint of deals to take advantage of it. That is hard to do, and expensive to do. It is an execution game which will require great management and significant capital.

I suspect some of the other 64 companies will be able to reach viable scale to join Groupon and Living Social. Both companies are well funded, and with very impressive management teams. Anyone hoping to make it to scale will need to bring the same assets to the table.

We’re excited to help Living Social continue in its growth.

Read the original story at Lightspeed Venture Partners