The Biggest Startup Battle: Lessons from Groupon-Inspired Startups in China
When Groupon began to pick up pace in 2010, it was the fastest-growing company ever, and has since become a common textbook example of startup growth. A more niche reference point is that, after the US-based company enjoyed a successful Series B funding round, many entrepreneurs in China began to take notice.
Numerous Chinese companies mimicking Groupon’s daily deal model burst onto the scene, resulting in a fierce battle that only one company could win.
In this article, we’ll run through the strategies, tactics, and management adopted by the winner — with the goal of explaining why its approach worked and what you can learn.
The Daily Deal Gold Rush
Prior to the Groupon breakthrough, central banks had been injecting liquidity into the market, so venture capital in China was growing already. The safest way to use these new funds was to follow the classic Silicon Valley route before finding their own way of doing things.
When the venture capitalists and entrepreneurs noticed how rapidly Groupon was growing, they knew a similar model would be a hit in China.
In less than six months, more than 1,000 daily deal platforms launched in China. After a year, this number was five times larger.
Number of Daily Deal Platforms on Market (2010-2013)
Winners and losers
Across many platforms, there were a few players of particular significance:
The King of E-commerce - Taobao
The Yelp in China - DianPing (DP)
The SNS tycoon - Tencent
The Affiliate of Facebook Inc in China - NuoMi (Startup N)
The Joint Venture of Tencent and Groupon - GaoPeng
There were also several leading daily deal startups brave enough to compete with these giants:
Wowo Tuan (Startup W) 2010.3.15
Lashou Wang (Startup L) 2010.03.18
Mei Tuan (Startup M)
However, the giants only joined after the startups had paved the path with blood. If you were the investor, which team would you bet on?
The one with the most traffic? The one who had already connected with numerous local businesses? The one with “royalty” from Groupon involved? Or the startup that had the fewest resources yet grew the fastest?
Spoiler: The startup that only grew the second-fastest in its first year got the last laugh and won over the majority of the market. Despite receiving the least media coverage of the three startups, raising its funds the slowest, and lacking any major advantages other than a great founder and team.
Now, let’s take a look at how exactly it did it.
Battle Phase 1: Barbaric Growth
No one remembers who comes in second. Certainly not the customers.
The daily deal business model isn’t a complex one — especially when you’re entering a new market with no established competitors. From March 2010, startups launched one after the other.
Since Groupon had already proven product-market fit, it was straightforward to launch a business (as long as you have some initial capital). The difficult part was figuring out how to scale fast enough to leave the others behind.
Each startup was based in a different city, so the key strategic questions became: Where, when, and how fast. There were three main options for scaling:
Acquisition — burns a lot of cash
Scaling in one city at a time — slow but ensures service quality
Franchising to small competitors — fast and cheap but may harm service quality and brand
Let’s look at which path startups W, L, and M chose.
Paths to scale
Startup L put speed first. Although it had raised impressive amounts of funding (L closed three rounds worth $160M in the first year), it burned through the cash like crazy and scaled at lightning speed by launching in 100 cities within three months.
The company adopted all three methods — mostly franchising, with some direct sales and acquisitions.
Startup W had a third of startup L’s cash reserves. Fortunately, it was really good at exaggerating, so it claimed it had raised $200M. Thanks to positive media coverage (paid for of course), many small competitors let W acquire them. At one point, W had the largest market share in this battle (though not for long).
Despite having the least funding, Startup M fumbled its way to finding the best scaling recipe. At first, M focused mainly on service quality, and waited a month or two to launch in a new city. But when it saw that L had secured funding and planned to launch in 200 cities, M decided to speed up through acquisitions and franchising.
After one year, it was launching at 35-40 new cities each month — and it even retrieved a third of its franchises after a few months to strengthen management and service quality.
Yet the number of cities the startups launched in is just one side of the story. Ultimately, it was the size of those cities that would determine their profit margins and the result of the battle.
Choosing the right cities
The CEO of M knew business development (encouraging businesses to launch on its platform) would be key to winning the war. Once you monopolize the supply, you monopolize the market. It took six attempts, but eventually he persuaded a BD expert to join. That expert was none other than the vice president of Alibaba’s business development.
Together, they made a list of over 300 Chinese cities and graded them as SABCD depending on their market size.
S is for super cities like Beijing, Shanghai, and Guangzhou, which they decided were "too big to win." In these cities, they focused on the demand side instead, building great IT systems and providing top-notch service for hard-to-please clients. That way, when they applied these high standards to cities with lower-tier clients, they had a higher chance of success.
Instead of focusing on S cities, M directed most of its attention to B and C cities, which it deemed "monopolizable” — in small- and mid-sized cities, there’s limited supply of competitors.
"We know that in cities like Beijing and Shanghai, you’ll never be able to defeat your enemies. As a result, cities ranking 25-94 will decide the outcome. Then, once other competitors retreat, we’ll be able to hold on and become profitable," says M’s VP of business development.
Another important reason for this strategy is that the "first-mover advantage" is more powerful in small cities. Most customers won’t be aware of daily deal platforms, so the first-mover becomes the one to define what daily deals are and what to expect from them. This strategy — “encircling the cities from the rural areas” — was also adopted by Mao when the Communist Party took over China with minimal resources.
Will it work in business wars? The CEO of M thought so.
Execution and roadblocks
Once the strategy was set up, execution became the biggest challenge. Surprisingly, one of the biggest issues came from inside the company — more specifically, the board of directors.
“Most boards of directors live in first-tier cities like Beijing and Shanghai. And since our strategy limits how much investment and resources we put into those cities, the directors could barely notice us. They’d even praise our competitors for doing better in their cities, and questioned our team and product,” says the VP.
This is understandable since early investors don’t have the time and energy to analyze each city carefully. However, the CEO gradually convinced them that their performance outside of China’s major cities was very good, and that it's all about the bigger picture.
Some startups might have bent to the stress from investors and put more resources into top-tier cities just to please them, but M's management team insisted that their mission was to create value for customers.
The rest of the challenges the startup faced related to how well they could carry out their strategy.
Battle Phase 2: Fight of Efficiency — Every Bullet Counts
Efficiency in two areas would determine the result of this battle: Attracting enough demand and providing high-quality supplies.
While most competitors focused on burning money to attract customers through cash bonuses or ads, startup M noticed something different. In 2010, most customers were primarily PC users — but data analysis suggested the conversion rate from smartphone browsers was unusually high (at 30%).
Whether it's Tencent, Nuomi, or Groupon, most tech companies were only familiar with advertising on desktop browsers. Mobile internet was only just emerging, so promotional techniques weren’t very developed. While the competition was at its peak, M decided to focus all of their promotion resources here, giving up on PC and offline ads.
It was a bold move, but it proved to be one of the key factors in making M the final winner — it was the only startup that grasped the growing trend of mobile internet.
Despite having the fewest funding resources, M was brave enough to bet on the mobile internet wave, and it was successful at attracting demand in a highly efficient way. Next, it turned to the supply side.
With trillions of small businesses supplying all kinds of services, how could M convince them to join — and prevent them from jumping to competitors?
Supply focus
As mentioned above, one of the key advantages M had was being the first daily deal startup to move into lower-tier cities. Although a single third- or four-tier city has limited demand compared to metropolitan sprawls, when you add them up, total demand is huge.
In 2014, 70% of the lower-tier cities market belonged to M. It was estimated that, when the newcomers entered the cities where M was already established, their marketing budget needed to be ten times higher than M's initial expenses.
To speed up the scaling efforts, M equipped all its business development personnel with an iPads when they visited clients. Once the clients say “yes,” they upload their solutions to the platform immediately.
Therefore, another reason for M's success was the amount of resources it focused on back-end services, which enabled supply-end clients to manage their deals quickly and easily.
M was also one of the first teams to provide location-based services, as well as top-notch CRM and MIS. The competitors didn't take notice of these “back-end” moves — but the features significantly increased the overall M’s operational efficiency.
And even more importantly, its survival rate when winter came.
In 2011, most competitors had 3000-5000 employees to support their huge market, while M only had a team of 1000-2000. While startup L and W had to downscale their teams when the capital market calmed down, M announced that it had $60M sitting in its account.
This was the turning point — M had gone past the point where its competitors would stand a chance of catching up with it.
Battle Phase 3: Think Outside of the Battle
Today, startup M — or rather, Meituan — has become China's largest food delivery and on-demand local services provider. It has a market value of more than $300 billion.
It’s worth mentioning that M's business map has gone far further than its original inspiration, Groupon. While the latter is still a daily deal platform, M has become a conglomerate that combines the services of Uber, Doordash, Groupon, Hotel.com, and Cheapflights. It even owns a local banking business.
As early as 2012, the founder of M told its investors that M never compared itself to Groupon. Instead, M's ambitions are closer to becoming Amazon — it wants to build an “every service platform.”
Once one side of the business becomes profitable, M invests the profits into another side so it can widen its scope of services. As with Amazon, profits come from an obsession with customer experience — both for the final customers and business clients.
Plus, M puts the pressure on its employees. At the heat of the battle, all sales representatives were required to visit eight clients per day — anyone who failed to do so three times was fired immediately. Meanwhile, exceptional members of staff obtained company options as rewards.
In contrast, most of M's competitors were only thinking about getting more from VC and going public as soon as possible. Only when you can think outside of the battle, can you win more.
To Be Finite or to Be Infinite?
While its competitors were playing the finite game (aiming to become the best daily deal platform in China), M was training its team to build a multi-billion platform. Startups W and L might have seen some initial success, but they lacked the long-term vision to cross the finish line first.
M's team, trained as an army, was forged to win infinite battles. No matter what sector they operate in, this is a takeaway that any budding startup can apply.