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Originally published November 10, 2010 at 10:10 PM | Page modified November 11, 2010 at 6:21 AM

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Groupon thrives with unconventional approach

Groupon, a coupon site with 20 million users, has neared a $3 billion value in less than three years without the Silicon ...

Bloomberg News

Groupon, a coupon site with 20 million users, has neared a $3 billion value in fewer than three years without the Silicon Valley pedigree startups deem vital.

Since starting the company in Chicago in 2008, Groupon Chief Executive Officer Andrew Mason, 30, has built a work force of 2,600 employees, four-fifths of them in sales. That contrasts with the biggest Internet startups, including Facebook, Twitter and Zynga Game Network, which are brimming with programmers and based in the San Francisco Bay Area, near the top technology companies and richest venture-capital firms.

Mason's unconventional approach has paid off. Groupon's daily deals, distributed in 29 countries, are expected to help the company generate $500 million in sales this year, reaching that milestone faster than Web pioneers Google and Amazon.com. The company is seeking funding that may value it at $3 billion, sources say.

"He's obviously a savvy entrepreneur and operator, and he found a clever business model that he's been able to scale," said Anand Sanwal, co-founder of CB Insights, a New York-based research firm that tracks private companies. "It's not as technology-intensive as a Facebook. It's pound the pavement, get salespeople out there and get merchants involved."

Unlike many new companies that dot San Francisco and its environs, Groupon's success stems less from a breakthrough technology — say, algorithms that improve Web search — than from a straightforward use of e-mail, a communication tool that's falling out of favor as Web surfers use social networks.

"It probably couldn't have been born in Silicon Valley, because I think most of the VCs and technologists there would have tried to tackle the problems with a pure technology solution," said Groupon President Rob Solomon.

Groupon sends a daily e-mail to registered users in a given market, offering steep discounts on products and services, ranging from cupcakes to yoga classes, dinner cruises to dental exams. Groupon keeps a 50 percent cut of every deal sold, while the company benefits from a rise in new customers. Deals, known as groupons, activate when a certain number are sold, encouraging users to recommend offers to friends.

Internet photo-sharing service Shutterfly ran a national Groupon campaign in September, offering users a $30 photo book for $10. Between 100,000 and 200,000 people bought the coupons, said Shutterfly Chief Executive Officer Jeffrey Housenbold.

His Redwood City, Calif.-based company lost money on each book purchased. Yet, luring that many customers through traditional marketing would have cost more, Housenbold said.

"It's good economics for me, and it might get better if they add other things in their cart or they come back and make a holiday order," he said. "I get the lifetime value of that customer."

An April investment by a group led by Mail.ru Group gave Groupon a valuation of about $1.3 billion. Owners say the company is worth more now because it's growing at a faster pace than other new companies.

"To be as big as we are and as profitable as we are is not typical for tech startups," said Eric Lefkofsky, a partner at LightBank, a Chicago-based early investor in Groupon.

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"It speaks in large part to the power of our model and the fact that we've executed well in expanding our model." Lefkofsky is also on Groupon's board.

Sales may exceed $500 million this year, two sources say. Since May, Groupon has doubled the number of markets it serves to more than 300.

The company could use additional funding to fuel a hiring boom. Groupon needs on-the-ground salespeople to enlist the local businesses, including nail salons, restaurants and coffee shops, that provide its more than 400 daily deals. It's hiring about 150 people a month and about 80 percent of the total work in sales roles, Solomon said.

Groupon has almost 1,000 more employees than social- networking site Facebook, which started four years earlier. Its workforce is more than twice the size of Zynga's and eight times bigger than Twitter's.

Look-alikes such as LivingSocial aim to capitalize on the growing popularity of daily deals and could become a threat to Groupon. The site also has become a victim of its own success, with some small companies becoming overwhelmed by the sudden surge in new business spawned by Groupon offers.

Groupon has introduced consulting programs and seminars to help merchants cope. It's also releasing a mobile-phone application to help retailers track the thousands of customers who purchase deals, Vice President Mihir Shah said in October.

Lefkofsky says Groupon can fend off rivals by offering more deals and tailoring them more effectively to audiences.

"People all over the world have launched sites that are effectively Groupon clones," he said. "They have been unable to get any meaningful traction because it's not just about offering a deal; it's about offering great deals from the best merchants that are the most relevant."

Hiring is easier in Chicago than it would be in Silicon Valley, where competition for talented workers is fierce, Solomon said.

"Groupon is the most interesting company in Chicago from a technology standpoint," he said.

Mason, an entrepreneur and software developer with a degree in music from Northwestern University, takes steps to keep Groupon unusual. This year, he hired a man to dress as a ballerina and walk around the office without talking to anyone.

"It was some kind of social experiment," Solomon said. "People were shocked at first, and then it was part of the scenery that makes Groupon Groupon."

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