After Harrowing Ride, LivingSocial Raises $110 Million to Press On

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[UPDATED with information from PrivCo Report, 2:0o p.m.] [UPDATED with information about memo from CEO Tim O’Shaughnessy refuting PrivCo Report, 2:50 p.m.]

After a harrowing second half of 2012, it looks like LivingSocial has righted its ship — or at least avoided sinking it. In a memo to employees on Wednesday, CEO Tim O’Shaughnessy said the company raised $110 million in a new round of funding from “existing investors.” O’Shaughnessy did not say whether Amazon, which wrote down its $175 million investment in the company in Q3, had invested in the latest round.

“This new investment round will allow us to dedicate the resources we need, while also building a significant cash reserve against unanticipated events or bumps in the road,” O’Shaughnessy wrote in the memo. The company’s CEO went on to say LivingSocial had an “aggressive roadmap” that would lead to profitability by the end of 2013.

LivingSocial has been in something of a tailspin since writing down nearly half a billion dollars in botched acquisitions in the third quarter of 2012. After cutting 10% of its 4,000-person workforce in November, reports surfaced that the company was running dangerously low on cash and was in need of a transfusion. Meanwhile, Groupon’s stock continued to tank, creating even more downward pressure on the company’s valuation.

Tough Times at Living Social:

Given the $800 million which investors had already sunk in LivingSocial, the latest round looks like less of a “doubling down” on the company’s model than a patch to avoid catastrophe (e.g. bankruptcy).

For one, if reports that the company was running on $50-$100 million in cash were correct, then it was in more danger than one would expect. Remember, in the daily deal business, companies tend to pay merchants with revenues generated from future merchants’ campaigns. That means deal companies need to have sizable cash reserves at the ready in case new revenues suddenly slow (as they did with LivingSocial) and the company cannot cover the funds owed to previous merchants.

Secondly, the $5 billion valuation which many investors bet on is a distant memory. Take Groupon. After tumbling nearly 80% since its IPO, the company is trading on a 1.5x revenue multiple (meaning that its enterprise value is 1.5 times its annual revenue). Using this metric as a benchmark, LivingSocial’s valuation should be around $804 million, just a hair above its total funding so far.

UPDATE I: PrivCo. has published a report claiming that LivingSocial’s latest funding came in the form of distressed financing (rather than a VC investment), and was closed under “oppressive terms.” According to the report, the terms of the financing effort, which was allegedly led by Amazon, included a host of onerous obligations that effectively rendered LivingSocial’s employees stock in the company and nearly a billion dollars in prior investment worthless. That includes CEO Tim O’Shaughnessy ‘s equity as well.

The report also cites a “senior Living Social communications executive,” saying that merchant payables were now “hundreds of millions of dollars more than [LivingSocial’s] cash on hand.” The source added, “so yes we owe local merchants a lot of money, more than our Cash, and these Merchant Payables are most of our Current Liabilities as PrivCo surmised, but I will point out that at least it’s not as as great a portion of our Current Liabilities as Groupon’s.”

UPDATE II: In another leaked memo to employees, CEO Tim O’Shaughnessy refuted the PrivCo report, denying the research firm’s claims that the funding was an emergency debt infusion. According to O’Shaughnessy, the company sold 7.5% in equity for $110 million, which implies a valuation of roughly $1.45 billion. Additionally, O’Shaughnessy says that the round effects employees stock “some, but not much,” contrary to PrivCo’s claims that employee stock had been rendered worthless.

PrivCo CEO Sam Hamadeh told Fortune that he stands by the firm’s original report, saying that O’Shaughnessy is misleading employees and that classifying the round as equity is a technicality given the “debt-like provisions.”

“I don’t think the real story here is the details of the financing,” Hamadeh told Fortune. “It’s what’s going to happen to the little guys, all of the merchants who are really the company’s unsecured creditors, if LivingSocial goes bankrupt… You’ll see that we were right in six or nine months.”

Steven Jacobs is deputy editor at Street Fight.