LivingSocial Offers a Cautionary Tale to Today’s Unicorns

WASHINGTON — 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.

One row, “BYFAD Lane,” was named after a start-up, BuyYourFriendADrink, which LivingSocial acquired to get into the daily deals business. Other signs, such as “Sky Diving Street,” were named for some of the hottest discount coupons that the company once provided. 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 work force. In one refrigerator, the milk was six months old.

The street signs are “anecdotes from our past,” said Mike Santore, who was director of content strategy at LivingSocial, referring to a time when it was nearly impossible to find a quiet desk to work. Now, he said, the signs “don’t mean anything, really.” Mr. Santore left the company this month.

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 that 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. LivingSocial spent heavily, blanketing the airwaves with TV ad campaigns. Riding a wave of momentum, the company explored going public.

Today, LivingSocial is more unicorpse than unicorn. The company never filed for an initial public offering and consumer fervor for daily deals has cooled. T. Rowe Price has written down its stake in LivingSocial to nearly zero, data from Morningstar shows. The company’s work force has shrunk to around 800 employees from 4,500 at its peak in 2011. (Groupon, which did go public, is trading at more than 85 percent below its I.P.O. price.)

LivingSocial is now struggling to evolve its business by focusing on “new experiences,” such as a coupon-free program that puts cash back on customers’ credit cards when they dine at certain restaurants. The company is grappling with employee retention. It has also been selling nearly all of the foreign companies it bought and closing offices it opened during its boom days.

“It’s hard to change a business at scale overnight,” said Jim Bramson, general counsel for LivingSocial, who has been at the company for five and a half years. “We’re in a little bit of an Act II.”

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

Snapchat, the messaging company, and Dropbox, the online storage business, were recently marked down in value by mutual fund investors. Zenefits, a human resources start-up, has said it missed sales targets and that it is slowing its hiring. On Wednesday, the payments company Square, which was valued at $6 billion by private investors last year, priced its public offering at $2.9 billion. Silicon Valley venture capitalists such as Bill Gurley of Benchmark and Michael Moritz of Sequoia Capital have warned that a unicorn shakeout is coming.

Venky Ganesan is a venture capitalist in Menlo Ventures, which has invested in the ride-hailing company Uber and other unicorns. 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, who had worked together at a health care start-up called Revolution Health Group. The first iteration of LivingSocial, called Hungry Machine, produced apps that hooked into Facebook, including polling apps and a way to share favorite books with friends. Over time, Hungry Machine became a company that sent customers daily emails with deals from businesses. Mr. O’Shaughnessy was the chief executive.

Consumers flocked to LivingSocial’s daily deals. About a year after getting into the business, the company said it had 10 million subscribers spread across the United States and Europe. A few months later, it said it had more than doubled its subscriber base. It pushed into Asia later that year. Its investors included Revolution Ventures, Lightspeed Venture Partners, Amazon and JPMorgan Chase; in total, LivingSocial has raised more than $919 million in capital.

Over the next several years, LivingSocial acquired consumers as fast as possible in an effort to build an unbreakable lead in daily deals. The company spent money on TV ads to create brand awareness. To increase expansion, LivingSocial scooped up start-ups in Spain, New Zealand and other markets that it knew little about. The company introduced deals in new categories such as travel and food delivery. There were hiring sprees.

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.

Groupon, which was also unprofitable, went public in November 2011 and promptly faced investor skepticism about its sustainability. The suspicions were contagious, infecting LivingSocial and halting its chances of going public. The start-up tried to raise $400 million in late 2011, but managed to secure only $176 million, according to Securities and Exchange Commission filings.

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.

“Our philosophy at that point was, ‘Customers are never going to be easier or cheaper to acquire as they are today’ and we, as a small company and board, said we have to step on the accelerator to build this out,” said Tige Savage, a LivingSocial board member and managing partner at Revolution Ventures. “We literally bet the company and went through 12 months of runway in a couple of months because we thought that the time to own the market was right.”

Mr. O’Shaughnessy, who was chief executive of LivingSocial until the beginning of 2014, did not respond to calls for comment. Only one of the four co-founders, Mr. Aleksenko, remains in a daily operating position.

LivingSocial 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, Mr. Thakar said, will rely less on the deals and instead focus on a new cash-back initiative.

A pilot program, 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.

“Our core audience is affluent, educated women — 25 to 40. What can we do to help this woman have a good weekend?” Mr. Thakar said. “Our job as a marketplace becomes helping merchants with data.”

Mr. Savage, the board member, put it more bluntly. “The fact of the matter is that vouchers are yesterday’s news,” he said.

There is other evidence that the daily deals fad is passing. Amazon recently shut down its own daily deals business. And Rich Williams, the new chief of Groupon, said in a blog post on Thursday that the company was “misunderstood” and that it was a myth that Groupon was an email daily deals company.

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. The discontent has been compounded by the inability of early employees — many of whom were lured with lucrative stock packages — to sell their LivingSocial shares.

As a result, retention is an issue, especially as LivingSocial competes with new unicorns for engineers. The company can no longer offer huge salaries and tantalizing stock packages to attract the top talent.

“It’s not the easiest thing in the world to hire tech people, wherever you are,” Mr. Thakar said. “We’re not Google-esque.”

LivingSocial has also been in belt-tightening mode, with a round of layoffs in October and divestitures of entire divisions. The company has shut offices in several cities, including New York and Seattle. Last fall, it sold Ticket Monster, based in South Korea. In February, the company sold LetsBonus, a Spain-based start-up it had acquired in 2011. Two months later, LivingSocial shed its Australia and New Zealand businesses, which Mr. Thakar characterized as “superfluous” to the company’s remaining operations in the United States and Canada.

“We’re focusing on our investments in technology, and focusing particularly in English-speaking countries,” Mr. 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 I.P.O. or sale seem very far off. When asked about this trajectory, Mr. Thakar said valuations were all “notional.” He added, “Valuations are one of those things that are in the eye of the beholder.”