TownHog Deal Speaks Volumes About VC-Backed Deal Startups

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TownHog was not supposed to get bought.

Yesterday I got a note from the daily deal site, announcing that it had been purchased by BuyWithMe. I subscribed to the former but not the latter (although in real life, I just rely on aggregators like 8Coupon and Yipit to summarize deal offers).

BuyWithMe has been looking to scale to catch up with Groupon and LivingSocial, and this is its sixth acquisition this year. TownHog, which has a strong footprint in the Bay Area, where it was started, is a nice feather in their cap.

But TownHog was backed by some serious hitters. As TechCrunch noted, “The company…was backed by a host of star investors (Jawed Karim of YouTube fame and Kevin Hartz of Xoom / Eventbrite to name but a few).”

I think what’s is happening behind the scenes is that deal sourcing has become increasingly difficult for even larger, better-funded group buying startups. What’s more, group buying fatigue among customers (and the difficulties in differentiating any group buying brand in the age of aggregators) have probably either stalled email list growth or driven customer acquisition costs still higher.

The smaller, bootstrapped group buying startups can endure it by staying ridiculously small, with only one or two principals deploying all manner of shoe leather. The big guys, like Groupon, can access capital. Those who have partnered up well, like LivingSocial, can look to strategic backers in a pinch (both for distribution and for additional funding, in the case of Amazon). But the richly funded startups looking to post growth numbers that will satisfy venture capitalists who bought in for big bucks, those startups who got started late and have no other Web touch points (like OpenTable or Yelp, both of which have added deals to their existing business lines) are pushing the rock uphill right now.

The U.S. acquisitions have been on the small side. But I’d look for the merger pace to accelerate in the deal space—and pronto—as the glow of summer wanes and the cold winter of too many group buying sites scrambling for a more slowly growing pot settles in.