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Learn from Groupon and Gilt Groupe: Create startups that use technology, not technology startups.

July 9, 2010

In my last post, I looked at Foursquare, why it’s receiving so much hype, and what it needs to do to live up to that hype. Now, I want to examine Groupon and Gilt Groupe, two others on my list of five hottest startups.

Social deal sites are exploding. Slide/ PayPal founder Max Levchin nailed it when he tweeted, “‘We’ll distribute great local deals to our audience’ is the business model meme of the year.”

I think there are three big reasons why. And these reasons offer important lessons for other startups.

1. They are not technology startups. They are startups that use technology.

That’s a crucial distinction. Lumping them in with Twitter doesn’t even make sense. In many ways, they’re competing more against Target than Twitter. This is not a new strategy for tech companies. Amazon has said that it “is most of all a logistics company”. That means their financials look fundamentally different than other dot com companies. And so do the activities. In the case of Groupon and Gilt Groupe, it’s about things like revenue partnerships with local retailers and fashion shoots – not typically top of the list for software startups. Taken together, this points to important lessons for people who are involved in high-tech startups.

Think about who you’re really competing with – it may not be other tech companies.

Link your service to an existing real-world application, like “getting in on a good deal.”

Have your business involve some legwork – not just coding in isolation – and make it easier for users even if that makes it harder for you. This different kind of work will make result in a less crowded space to play in.

Make it a company that uses technology, rather than a high-tech startup. That is, compete against Farmer’s Markets, not just FarmVille.

2. They are for “the normals.”

Unlike most tech startups, they are not targeting “early adopters,” really. Scale is a lot easier when you do that. But how do you appeal to non-early adopters, who by definition aren’t the first to adopt new things? You don’t make it “new” – you require as little behavior change as possible. After all, what’s Groupon to the user? It’s just a mailing list + eCommerce. The lesson here is:

Consider targeting a mainstream audience, instead of tech enthusiasts. However, to do so successfully, make sure to fit your service into existing behaviors. Early adopters are attracted to new and different – others aren’t.

3. Social media is mature enough to support ever more use cases – and they’ve chosen wisely.

A lot of people hear about deal sites through social networks like Facebook and Twitter – just like people used to hear about a deal through the grapevine. It’s kind of like a traditional “friends and family discount” on crack. One more example of how social media is becoming embedded in more and more aspects of our lives. But the really interesting thing? It’s an email list! Just goes to show: sometimes the most effective communication isn’t the sexiest. The lesson?

Social networking/ social media isn’t any one thing. Explore the full range of options – don’t just blindly add Facebook-like social features, or some “Share” buttons.

Looking ahead…

So that’s why they’ve been successful to date. But just as importantly, what do they need to do to continue to thrive?

  • Local deals are ok. But I think finding a balance between targeted deals and an element of serendipity will be crucial. Perhaps these deal sites will even morph into a better way of finding things to buy. Think: A Pandora for purchases.
  • Here’s the issue: Right now, deal sites have little lock-in, and not much proprietary competitive advantage. So what’s to say it will be winner-take-all? Maybe the Kayak-style aggregator model makes most sense? I think the answer will lie in whether any individual company can build network effects and switching costs. If they can, then it’ll behoove users, new and existing, to keep using that particular service.

Groupon and Gilt Groupe are fascinating startups, because they don’t quite fit the “tech startup” mold. That also makes them great examples to learn from for others who want to break the mold.

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