Value Added: Online, the art of the deal

By Thomas Heath
Monday, May 31, 2010; A10

I am not on Facebook. I have never bought anything on eBay. My Amazon account is retired and my LinkedIn activity lapsed long ago.

I regularly tweet on Twitter. So at best, my online social activity is at the low end of the scale.

But I am fascinated by the marketing opportunities the online world presents. Every business under the sun, including newspapers such as this one, is trying to figure out how to make money through the Internet.

It looks as if one Washington enterprise might have cracked the code.

LivingSocial is a start-up run by some online entrepreneurs, led by Georgetown University graduate Tim O'Shaughnessy, 28.

The company has a simple online model: It has a deal of the day, in which participants use a credit card to buy, for instance, $50 of goods or services from a local company for $25. LivingSocial customers punch in their credit-card information and receive a code (or coupon) redeemable at the restaurant, spa or retailer participating in the offer. LivingSocial keeps 30 to 50 percent of each transaction and passes the rest to the deal-of-the-day business.

The May 19 deal of the day was a $40 voucher for food at Georgetown's Il Canale that sold for $20. O'Shaughnessy said 1,373 people bought in. That means LivingSocial took in around $27,460. At a hypothetical 50-50 split with Il Canale, LivingSocial's cut was $13,730.

Not bad. Throw in the fact that the company is operating in 20 cities, with dozens more on the horizon, and LivingSocial looks like a nice business indeed. It expects to gross $50 million this year; its net profit should be around 10 to 15 percent of that. One big competitor is Groupon, a company with a similar concept.

LivingSocial raised $40 million from venture firms such as Vienna-based Grotech Ventures and from former AOL mogul Steve Case this year. O'Shaughnessy, the son-in-law of Washington Post Co. Chairman Donald E. Graham, invested some of his own cash during the fundraising to increase his stake in the business. The four founders still own a significant portion of LivingSocial, though it is less than half of the company.

O'Shaughnessy is a busy man these days. I caught up with him on the telephone after a long day of meetings in San Francisco, and before he jumped on a red-eye flight back to Washington.

Business is in his blood: His father runs a trucking firm in Minneapolis. O'Shaughnessy joined AOL after graduating from Georgetown's undergraduate business school in 2004. Two years later, he left the Internet giant to join Case's Revolution Health, an online site designed to help people take better care of themselves. O'Shaughnessy ran a 20-person products team in charge of the entire site, which offers a variety of things, from a calorie calculator to a listing of symptoms for diabetes.

Revolution Health paid the bills, but O'Shaughnessy and three buddies had been noodling for years over the business possibilities of online social networking. Specifically, they were trying to figure out how to use the social side of the Internet to get people to buy stuff. After a day at Revolution Health, they would head to the nearby Brickskeller Saloon on 22nd Street NW, where they would bounce around business ideas.

In July 2007, O'Shaughnessy and his pals resigned from Revolution Health the same day. Soon they had used Legal Zoom to incorporate as Hungry Machine: "We were hungry to do a lot in the technology world."

By then, Facebook had opened up a platform that allowed companies to build products that worked with the hugely popular social networking site. Hungry Machine noticed.

They found space above a Georgetown antiques store and started doing two things. First, they built their own product, a book-review site called Visual Bookshelf, which they offered to Facebook's millions of users.

Second, Hungry Machine picked up consulting gigs for companies such as ESPN. That covered operating costs while they beavered away at Visual Bookshelf. Visual Bookshelf would attract readers through its reviews, then take a fee from retailers such as Amazon for every customer sent their way. By 2009, it was grossing $2 million a year.

They experimented, inventing an application called "Pick Your Five." The advertising-based site posed fun questions to Facebook users: "What are your five favorite movies of all time?" "What five people you don't want to wake up and see standing at the end of your bed?"

The group shut down its consulting business in 2008 and decided to build on Visual Bookshelf and Pick Your Five. O'Shaughnessy went to the D.C. venture capital market, and in June 2008 they received $5 million from Grotech.

They closed down Hungry Machine and launched the LivingSocial brand, which concentrated on one question: How do we bridge the gap between knowing what beer people drink, what they eat and what they like to do -- and driving them to the businesses that offer those things?

"It seemed like a really big nut to crack," O'Shaughnessy said.

They experimented more.

"Hot Potato," an online game in which people could compare one another's success at passing a potato, taught them loads.

"We learned that if you put up a leader board, people wanted to win," he said.

When LivingSocial built a leader board in Visual Bookshelf, where people competed to see how many books they could review, the number of reviews jumped 30 percent. The result was more online traffic and more advertising.

A key move came in early 2009 with the acquisition of BuyYourFriendADrink. Beer, wine and liquor companies paid LivingSocial to steer its online audience to bars and restaurants where they could buy the clients' products.

"It was pay for performance," O'Shaughnessy said. "Participants would get a code that you would bring into a bar, and [the bar] would then plug it into their point-of-sales system like a credit-card number. For every person we brought in, we would get paid. There would be a specific list of participating bars."

By last summer, LivingSocial had moved into its current 7th Street NW offices and began running with the coupon model from BuyYourFriendADrink.

The "aha" moment came last fall, when they offered $8 one-way bus tickets from Washington to New York. They sold 2,500 tickets in a single day, filling up 50 buses.

LivingSocial now sells coupons for restaurants, spas, sky diving, cooking classes, boat cruises, hot-air balloons, golf lessons and bed-and-breakfasts, to name a few things. The company employs 120 people and is growing by the month.

I haven't bought anything on LivingSocial, but I'm thinking of it.

Anyway, I am not a complete online dinosaur: O'Shaughnessy and I follow each other on Twitter.

You can follow me on Twitter at addedvalueth.

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