Deals Company Valuations Are Plummeting: Report

A new study says the daily deals field is glutted with copycats, and it’s up to Groupon and LivingSocial to prove the model works.

skydiving

Success breeds nothing if not copycats, and few industries have seen more imitators in the last 12 months than the daily deals space. New companies pop up every week, some purporting to specialize in certain niches, others in particular geographies. According to Yipit, 53 new deal sites launched in August alone.

But companies looking for hefty exits might be sobered by a new report on acquisition activity in the deals space. According to the 2010-2011 Daily Deal M&A Activity and Valuation Multiples Report, from CB Insights, the price of acquisitions has been plummeting.

"Since their peak hit just two quarters ago in Q1 2011, the Price per Subscriber and Price per Voucher Sold multiples paid in private company M&A transactions have declined 36% and 40% respectively in Q3 2011," the report says.

Part of the reason is that there are simply too many companies out there, the report says. As Fast Company pointed out earlier this month, technology is no barrier to entry in this space, and so it’s relatively easy to hang out a shingle. That, says the report, has produced "an oversupply."

"Many of these companies are at the relatively early stages meaning that subscriber counts, vouchers sold and technological differentiators are insignificant," the report says. "As a result, many of these firms look alike and are not significantly differentiated from one another. From an acquirer perspective, this provides options and leverage."

The report did, however, include some observations that could be good news for Groupon, LivingSocial, Google Offers, and Amazon Local. It said the negative press following Groupon’s S-1 filing and the subsequent questions about the financial viability of the space, combined with the glut of deals companies, are making some investors skittish about tossing more money into this industry right now.

"While the technical barriers to entry in the daily deal business are low, scaling the business requires significant amounts of capital," the report says. "Hiring armies of sales staff and account managers is necessary to develop relationships with merchants, and this is expensive. And so before throwing more money at the daily deal space, investors want to see that the model works."

All four of those companies have the necessary resources to scale. But the report says the lion’s share of the burden for proving that the industry can work lies largely on Groupon and LivingSocial’s shoulders.

"A successful IPO by either or S-1 filings which show healthy financials and which don’t see universal ridicule by analysts and the media would go a long way in reinstating some faith in the daily deal space," the report says.

Read Also: Why Deals Aren't Dead—And Why Facebook Will Be Back

[Image: Flickr user qyphon]

E.B. Boyd is FastCompany.com's Silicon Valley reporter. Twitter | Google+ | Email

Add New Comment

1 Comments

  • Emma

    Ridiculous article. With millions of people buying the daily deals each day clearly there is a massive demand for this new model of online-offline connection and it is here to stay... But yes, at this stage of the game copycats and new starts have a few giants to compete with and will need truck loads of cash to do so. The industry will continue to grow and evolve like any other. With revenues of $50-100 million a month the big guys should have no trouble finding investors if they go to IPO... Who doesn't want to get a piece of that cash cow given half a chance? Group buying is here to stay and for the most established businesses in that space we are looking at the new Facebook / Google. Maybe a clever innovator will top them... Who knows with the internet? Sure the smaller, newer businesses will struggle and fall away - I wouldn't be touching them at this stage of the game - but certainly, given half a chance, I'd be buying shares in the top 4... Hurry up and list!!!! $5 billion dollar valuation today? In five years time it'll be five, 10, 20 times that. Tough times breed bargain hunters... If the GFC worsens customer demand for value will increase. Daily deals are a recession proof business.