What Scale Means After Patch and Groupon

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Scale iconWorking at Street Fight, I’m often asked where two major hyperlocal experiments, Groupon and Patch, faltered. The former has rallied in recent months, but both projects shared a similar trajectory between 2009 and 2013. Rapid investment, followed by massive growth, and then a sudden, swift contraction.

Macroeconomic developments and internal politics aside, both Tim Armstrong and Andrew Mason succumbed to the flawed assumption, held by many at the time, that local was a land grab. They mistook opportunity with urgency, falsely believing that the local market was some homogenous block, which would open its coffers to the first company that invested enough money, or put enough feet on the street, to make it work.

The mistake cost Mason his job, and has tarnished Armstrong’s remarkable turnaround at AOL. But in the wake of the collapse, and the the resulting hangover that sucked up much of 2012, the industry has moved on. Yelp has earned its keep as the de facto leader in the industry, and a new breed of startups have grown steadily, shedding the obsession with scale for a more cautious, market-focused approach.

Evan Fain knows the transition well. Fain, who now heads up business development at education startup CourseHorse, was part of a small strategy and analytics team at Patch during its heyday in 2010. The team, which reported to then-VP of finance John Rucker, was responsible for developing the project’s organizational structure, analyzing what was working and what wasn’t as the company rapidly added sites in the wake of the AOL acquisition.

“There was a mentality at Patch that there was this giant land grab going on for local, which turned out not to be true,” says Fain. “There was this feeling [that the company] needed to blow out before deciding on a revenue product that fit — and they still don’t have a revenue product that makes sense. But maybe the biggest mistake [Patch made] was deciding to build everything at once, and do in-house, instead of partnering or making acquisitions.”

With the exception of the acquisition of Outside.In, a small content API service, in 2011, Patch’s meteoric growth was funded almost entirely by AOL shareholders. In 2011 alone, the company poured $147 million into the project, according to a report released by an activist investor during a proxy fight last year, expanding from 140 sites in 2010 to around 900 today. Like Groupon’s international bender in 2011, Patch’s unbridled growth turned small holes in the model into craters, and drowned the few profitable markets in a sea of problematic and half built entities.

The rest is history. Groupon has rebounded (somewhat) after sacking Mason, Patch shredded its staff and continues its crawl to profitability, and veterans of that first phase of local, like Fain, have moved onto to other ventures in the space. But whether it’s in media or commerce, there’s seems to be a cultural shift at play in the industry, moving from the combative, winner-take-all mentality of 2010 to a more partnership-driven and collaborative vision of the local web today.

CourseHorse, Fain’s current project, is one of those firms. The startup helps universities and continuing education companies sell local classes online, using its site and partnerships with media publishers to market classes, and allow users to pay and reserve spots without picking up a phone. It’s currently operating in New York and L.A., where residents can reserve classes for anything from HTML5 to ‘marbling’ and origami. Think of it as a Seamless-for-schools without the delivery.

The project is one of a number of new companies that have focused on building marketplaces for specific, largely underserved local verticals. Uber has garnered the most attention, but a number of other startups are finding success building platforms to buy and sell local services online. ZocDoc, for instance, raised $55 million to help people review and reserve time with local doctors, while projects like MyTime and ClubLocal have launched to allow people to find, reserve and buy services online.

Here’s the big difference between the first phase of the local web and local web 2.0, so to speak: there’s a deep investment in the supply side. Whereas Yelp can put out one reviews-and-advertising product for a number of verticals, marketplaces like Uber or ZocDoc are in the enterprise, as much as the consumer, software business. To sustain critical features like live inventory search, real-time reservations, and buying, these marketplaces have to either build their own merchant platform (Uber), or tie directly into the back-end systems already in use. And doing so means these companies have to be far more attentive to the variations in the legal and operational realities of doctors, dentists, contractors, or whomever they’re focused on.

Subsequently, depth beats breath. Companies can sell software, in addition to audience, opening new incremental revenue stream, which simply do not exist for publishers. Consequently, the lifetime value of each merchant increases, reducing the need for firms to expand their addressable market. What’s left is an ecosystem dominated by vertically-focused software businesses, rather than scale-obsessed publishers.

The dynamics may change, but the challenges faced by Patch and other early players remain. Fain, who briefly ran a daily deals site before joining Patch, says that CourseHorse faces a lot of the same challenges, which he saw during the hyperlocal networks growth phase — namely, scaling a local audience. “The big questions are still the same: how much does content costs, whether it’s information about a class [or journalistic content], what is it going to get you from an ROI perspective, and does it make sense from an economic and audience-development angle as well. “

But it’s a quality game now, say Fain. Quality breeds engagement, and engagement, not reach, creates value in a local marketplace in which software can take a customer from impression to checkout. Scale, as it were, has a third dimension.

Steven Jacobs is Street Fight’s deputy editor.