The blogosphere is abuzz over tech-darling Groupon’s proposed $950 million Series G round. Many people have asked “Why do they need all that money?” And while expansion is the obvious answer, it’s a bit more nuanced than that. Groupon knows that in order to grow at scale in the SMB market you need a big sales organization with feet-on-the-street in the markets you’re hoping to reach. If you look at the successful small business advertising providers—the one’s that own large chunks of the market—they all have large sales forces. And it’s the large sales force that has stood between many a great, local-business-focused business plans and actual success.Groupon knows that without people pounding the pavement, pounding on doors and pounding the phone, they won’t reach the mass of SMBs who are 1) not actively seeking out new advertising options online and 2) are hounded by traditional SMB advertising providers like the Yellow Pages, who don’t ever let up on closing small business deals. And to put that organization in place is going to take a ton of cash. You need sales agents in each city, you need sales management, you need office space, you need call centers, you need fulfillment, billing and operations teams to handle that size of a customer base. And that takes a ton of money.
What Groupon is doing is something that no other tech company has done in recent memory—made a real run at securing a big chunk of the SMB market. Sure, new local-business-focused companies pop-up all the time. But most of them are either niche providers or they partner with the big existing yellow page providers to get access to their sales organization. They become a B2B channel provider leveraging the existing sales force because few can generate or raise the cash necessary to build a sales organization to go out and reach those SMBs directly.
Even mighty Google has taken this approach until now. They’re either unwilling to, or culturally unable to, commit to the SMB market with a massive sales force. Google has targeted savvy SMBs directly with AdWords solicitations; but has also worked aggressively to partner with yellow page companies to sell AdWords as part of existing yellow page bundled services, and often resold as CPM-based impressions (e.g. spend $2,500/month to get a quarter-page ad in the yellow book, a bolded listing with a photo on the site and a bucket of impressions driven by CPMs). And they’ve supported that initiative with direct mail, SEM (of course) and some print advertising as air cover to increase awareness and trial of AdWords through one channel or another.
But it was not until just last week that Google started outbound telesales direct to small business owners. That is a direct response to Groupon spurning their offer, and the realization that if they’re going to get serious about local business they can’t solve it with an algorithm. They need to put people toward the business unit to succeed.
All of this of course sheds quite a bit of light on the Groupon/Google negotiations and why the deal fell apart. I think what Groupon’s board realized (and kudos to them for this insight) is that Google—at its core—is not a sales-driven company. They don’t have the internal buy-in to be a hardcore sales organization and they’ve never committed the resources needed to make small business a booming success. They’ve tried to do it every other way except invest in a massive sales force. And I think Groupon looked at what has worked in reaching SMBs at scale and they realized it’s not arms-length. They realized that SMB advertising is still old school. It’s still knocking and dialing for dollars.
Groupon realized that what they needed is a sales-focused organization, not a technology-focused one. And tying up with Google would be a mistake, because at their core the two companies are fundamentally different in what they know about going to market. Google knows that it’s tech and better and more tech; Groupon knows that it’s how many calls can we make in a day. Groupon’s board knew it wouldn’t thrive under Google.
Additionally, Groupon knew that tying up with a dinosaur of a yellow page business was a bad idea too. The margins are non-existent, advertising dollars are shrinking and moving online, and most observers are waiting for someone to drag those pre-Internet monoliths out behind the wood shed and put a bullet in them. So the only logical step for Groupon, between their options, is to go out and build the sales organization they need that supports the tech organization that they are.
So while everyone oohs and ahhs at $950 million and will continue to talk about bubbles in the tech space; I personally think Groupon has made a very savvy decision to truly be one-of-a-kind, to be the first tech company to go hard after the SMB market—and win.