An Open Letter to LivingSocial: Learn from Groupon's International Mistakes

Another day, another unfortunate piece of news out of Groupon’s international operations. Today it’s that SoSata, Groupon’s Indian site, got hacked.  In a letter to users, Groupon encouraged them to change user names and passwords and assured them no financial information was compromised because none is stored on the site. Compared to the flood of angry headlines about Groupon of late, this is nothing.

But the minor blight comes on the same day that the number two daily deals site in the US, LivingSocial, is also getting more serious about international expansion. The company has acquired three small daily deals sites: DealKeren of Indonesia, its parent company Ensogo which operates in Thailand and the Philippines and GoNabit which operates in Dubai, Abu Dhabi, Lebanon, Jordan and Kuwait. LivingSocial also announced it’s offering daily deals in the Netherlands. This brings LivingSocial’s global reach to 21 countries.

Assuming LivingSocial has been watching Groupon carefully, it may be able to avoid making the same costly international Groupon made gobbling up sites in far flung parts of the world. That could give Living Social, long seen as the daily deal also-ran, its best opportunity to go head-to-head with the soon-to-be-public market leader.

But how can LivingSocial beat a better-funded competitor with more name recognition who has a 22-country head start on them? Ironically by moving more slowly, throwing around less cash and being smarter with local hires, not pricey consultants and MBAs.

As we’ve reported for nearly a year, speed to market and “near endless” funds have only created bigger problems for Groupon that are sucking the company’s cash coffers dry, worrying potential investors and increasingly consuming the senior management’s time. While Groupon has done incredibly well in many markets, you could argue that “head start” has been as much of a curse for the company as a blessing.

Here are a few suggestions of what to do differently, gleaned from nearly a year of talking to insiders at Groupon divisions around the globe, Groupon clones in more than fifteen markets and dozens of locals in several of Groupon’s most challenged locales.

1. Hire locals and give them local autonomy. This one seems obvious, but it’s the biggest mistake that Silicon Valley companies make over and over again in emerging markets, particularly in China. Companies have legitimate concerns about letting a bunch of rogue foreigners use their brands and resources unsupervised in a market they don’t understand. But there’s a fine line between keeping a supervisory eye on a subsidiary and requiring that every decision flow back through the corporate office. I’ve heard this again and again from former employees of Microsoft, Google, and eBay and nearly every other company that has failed in China. The speed of competition moves so quickly in the country, waiting on timezones and permission has hobbled local teams to the point where they can’t function.

Groupon didn’t make the local autonomy mistake with its International operations. If anything the US operations paid too little attention to what was going on. The bigger problem was trusting the wrong people in some of the biggest potential markets. China is the glaring one here, where Groupon’s German team brought in expats and international MBAs and consultants to build the site, rather than hiring locals. Finding talent can be hard in many emerging markets, but in China the Internet sector is mature enough that there’s plenty of savvy talent there. Sure you have to pay up for it. But Groupon has clearly not been tight-fisted in building out these markets. Better to overpay for an experienced Chinese executive than overpay for a consultant with vague international experience who doesn’t speak Chinese.

International expansion requires a deep recognition that you do not have the homefield advantage. Internet penetration, maturing business models, and a fluid global venture capital market has given local entrepreneurs around the world more advantages than they’ve ever had before. Unless US-companies hire key people who do get the homefield advantage, they will lose before they get started.

2. When making acquisitions, structure contracts so management still has skin in the game. Over and over again I’ve heard of entrepreneurs in other markets selling to Groupon, and viewing that as the end of the journey, coasting until their shares vest and they can leave. Obviously, this is something we’re familiar with in Silicon Valley. Few entrepreneurs work as hard for someone else as they did for themselves, and even fewer stay after their lockups expire– no matter what they say when the deal is announced. In Silicon Valley, there’s little acquiring companies can do about this, because most startups have other options and they’re not going to sell if the terms aren’t pretty standard.

But in emerging markets– especially ones where liquidity events are rare and venture capital can come and go with market whims– an acquiring American company still has a big advantage and can set whatever terms it desires. Structure contracts so that entrepreneurs have to reach ambitious goals to get more reward. Come up with creative new terms that make them feel like they’re still working for themselves.

A good example might be what Klaus Hommels’ network of flash sale and daily deal sites have done across dozens of countries, operating essentially as a holding company for a network of wholly owned subsidiaries.

3. Report back to US HQ. As much as local autonomy is important, so is corporate accountability. Arguably Groupon’s biggest error was allowing its international operations to be run by the freewheeling Samwer brothers for so long. Filling on-the-ground positions with over-studied expats is bad enough. Structuring it so they didn’t answer to anyone in the company’s senior management was in some parts of the company a disaster.

Every time there was an international black-eye, Groupon US was quick to pass the buck to Germany, rather than fixing the underlying problem with the reporting structure. Even if execution had been flawless, a business unit that loses $170 million a year should have C-level oversight, period. Groupon has corrected this now, and I expect rapid improvements in international operations now that it reports to seasoned Groupon COO Margo Georgiadis. But there’s no reason LivingSocial needs to make that same costly mistake.

4. The economics of startup building in the US go double for emerging markets. There’s ample documentation that companies do better when they build under more rigorous cash constraints because it forces focus and creative problem solving. Daily deal sites are a gold mine of revenues and venture capital is flying at them right now, so the temptation is to throw money at the international problem and go into a sheer land-grab of buying up clones early and often before they get too far along. Problems aside, I give Groupon huge props for recognizing the world outside of Silicon Valley, while a lot of other hot social media companies do not. But there are no shortcuts to making the most of these markets, least of all throwing around money.

5. Take your time. Because daily deal sites have instant revenues, no other Internet business model has sprung up so quickly with so many thousands of clones in nearly every corner of the world. That has sparked the frenzy to expand into these markets as fast as possible. But remember: First mover advantage only means so much. Even in a business that seems as fail-proof as daily deals, there are huge execution challenges and risks.

Many of these clones aren’t as big of a threat as they may seem. I’ve met with dozens of daily deal clones around the world, and many are building profitable niche businesses around specific cities and specific verticals like spas or restaurants. They don’t necessarily have the backing or the management team to scale up quickly. I’d guess both Groupon and LivingSocial have more time than they feel like they have in most markets. Rare exceptions among the countries I travel to are Lashou, which is dominating China and Peixe Urbano, which has an impressive management team and Valley backing in Brazil.

LivingSocial seems to get this already. Not only is it operating in half of the number of countries in Groupon’s empire, but it’s moving cautiously into the most challenging ones like India and China. Today’s purchases into the juicy but less sexy South East Asian markets of Indonesia, Thailand and the Philippeans are LivingSocial’s first forays into Asia.

Continue to chew your food, LivingSocial. Let these new markets digest and make sure you’ve set the right local incentives and offered the right oversight in place. Then head back to the buffet for more.