Revolution’s Savage: Finally, Innovation for the $150B Local Pot

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Tige Savage has worked closely with AOL founder Steve Case for years, co-founding Revolution with him and now heading up its venture investments, including being the first investor in LivingSocial, the daily deals company. As Groupon aims toward an IPO exit and deals, location and hyperlocal startups continue to pick up funding, Savage discusses what makes it an attractive market for investors, how these companies are expected to evolve, and the changes finally taking place in local advertising.

What are the key changes or market dynamics of the last few years that have opened up hyperlocal?
One is just the socialization of the web; the rise of the social web. If you look back 10 years, there were companies trying to do what are now big businesses and they failed. Companies like Mercado, where Paul Allen put $100 million and it failed. That IP was acquired by the Tippr guys to help them kick start their business. But the consumer side of the market was not ready at that point for [Mercado]. There wasn’t the trust for online as a channel for offline commerce, and the social elements of the web – it’s not that they hadn’t matured, but they basically didn’t exist at that point. That’s an important way to bring communities together. A big piece of local is community, but it didn’t exist. So, on the consumer side I think it’s the rise of the social web.

On the merchant side, my view on this is driven largely by the Groupons and LivingSocials of the world. On that, if you take a look at the innovation in advertising over the last 20 years, a big piece of that is the migration from CPM-based general brand advertising applied across the board to action-based advertising. Google was a great example of that. Google allows action-based advertising, or paying for performance. Over the same period of time in local advertising, there’s been no innovation. So, if you’re a restaurant and you’re launching Laura’s Coffee Shop 20 years ago, the first thing you do is call your friends and tell them to come get a cup of coffee. The next thing you do is you take out an ad in the local paper. The next thing you do after that is you get an ad in a local magazine, you know, the Boulderian or whatever it is. Then the next thing you do is you take out an ad in the Yellow Pages.

The right question is, “What are the opportunities, of which daily deals is one, to capture trends so that merchants get greater efficacy on their $150 billion that they are already spending?”

Well, if you do that again not 20 years ago, but four years ago, it’s exactly the same thing. There’s just all of these changes that we’ve seen in terms of pay for performance in advertising in general but have been beyond the reach of merchants, right? Small and medium sized businesses, local businesses are looking for ways to be able to track customers. The technology now makes that possible. The ability for companies to aggregate consumers and then deliver messages from merchants to consumers in a win-win way is something that didn’t exist before.

What has drawn Revolution to this category?
In the case of LivingSocial we were the first investor in LivingSocial. We backed four really talented product and technology guys who came out of another company of ours. At the time that we backed them, the idea was not as mature as it is now. It was as simple as there must be a smart way to do online customer acquisition and preference acquisition and find ways to monetize those people not just online, which is where everybody was fighting.

Where do you see the potential winners in hyperlocal?
There’s $150 billion sitting out there and as I mentioned before, in my view, there’s not been a lot of innovation against that $150 billion in a while. So, the question is where are there opportunities for that innovation to be placed against that $150 billion pot. It’s not [necessarily] the daily deals business – people like to say, “Well, how big can this daily deals business get?” I think the answer is “big,” but that’s the wrong question. The right question is, “What are the opportunities, of which daily deals is one, to capture trends so that merchants get greater efficacy on their $150 billion that they are already spending?”

In that, I think, the companies that succeed have a handful of things in common. A key one is their ability to deliver engaged, commerce-focused consumers. You see lots of companies enter this category because they have lists. But it’s not just about an email list; the question is, is it a relationship with consumers that is about commerce? I mean, with people their relationship with Amazon is about commerce and Amazon has been smart about adding to that commerce experience by introducing content around it. At LivingSocial, this is an area where we’ve really tried to focus. We’re not just delivering you the best deal. We’re not delivering you a coupon. Our name doesn’t have “coupon” in it. What we’re delivering to you is our experiences that we think you will value. This is important to the consumer, because at the end of the day it’s not just a race to the bottom in terms of bottom in terms of pricing, and that’s what merchants often fear.

There are studies now – you can pull them up – that indicate that the LivingSocial brand is more aspirational versus its peers in the category, that it’s a brand that consumers trust, that stands for something. We’ve cultivated that by delivering more than just the cheapest ads. We started by being your guide to the most interesting and fun things in your city, and then giving you a good deal on those. We’ve matured that to be experiences, journeys, and adventures.

The merchants likes this because it’s not just, “$15 on x.” Let me rephrase that. It’s not just the cheapest hotel room that shows up on Expedia, but instead it’s a bundle of value where it’s not evident that the savings is the hotel room, but the savings is the dinner included, or that it’s the tour of the local winery, or it’s the picnic we included, or that it’s the romantic getaway that’s in there. By putting that stuff together, I think it’s valued by merchants. So, companies that are going to succeed here have consumer relationships that are about commerce and have the ability to take merchant inventory and layer on top of it something. In our case, it’s brand experience standing for things interesting in a local way. So, the merchants ultimately don’t find themselves on a race to the bottom.

The last one I think where what companies are going to be successful – this sounds canned, but I really mean it – but it’s the innovative players in the market. I said earlier that I don’t think it’s the daily deals business, but that daily deals is a piece of transformation in local commerce and advertising.

Do you apply any different sort of metric or view when it comes to hyperlocal investments?
We spend a lot of time talking about the fact that basically Google proved there’s a big opportunity in doing performance based advertising. There’s $150 billion in annual spend that hasn’t been influenced yet. So, that applies to this whole category: What’s the market position of the company? You know, bigger companies with more entrenched scale have the ability to make the economic machine work better. So, bigger players in this category – actually in my view, it makes sense to buy even higher. That’s how I think about it. You can use that to do your own math, but then it will lead to this question, “Do you think there’s a bubble?”

In my view, the companies that are doing a very good job and check all the boxes I just described, those companies are getting great valuations in the minds of lots of folks, but I think very fair ones. Anybody who’s invested in one of the market leaders so far has for a couple of weeks been questioned about the value they paid, then for months or years been congratulated on the value they made. Listen, at the end of the day it doesn’t matter to what matters which is money in the bank, but these companies have continued to – at least speaking for LivingSocial and I presume for the other – done better than they projected. They keep missing their budget favorably. So, investors have been rewarded.

Now, what’s happening is those multiples are being applied to businesses that don’t check all the boxes I talked about. In that case, I think the argument is fair whether or not those companies deserve such full valuation. Some do and some don’t.