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If you doubt that the recession has made consumers more cost conscious, consider this: Online coupon destinations are now the second-fastest growing content websites behind job sites, according to marketing research company ComScore, which estimates traffic has shot up 41% since last year.

That massive increase has prompted VCs to take a closer look at the space, but they’re not quite certain if the sites make sense as investments.

Joshua Goldman, a general partner at Norwest Venture Partners, says that he has been wrestling for months about whether, and how, the firm might invest in the online coupon space. So has angel investor Ron Conway, who has looked at several coupon sites with Baseline Ventures, an early stage firm based in San Francisco. And at a March event held by incubator Y Combinator interest by VCs was palpable during the presentation of PetaSales, a startup that recently launched a coupon site that works with small retailers.

“Online coupons have become hugely popular with consumers,” says Oakland, Calif.-based digital media analyst Greg Sterling, who adds that it’s more than just the economy driving the trend. “There’s also far less concern than there has been historically about fraud, and these coupons can do a lot of things, including track customers to the point of sale and reach customers via Twitter feeds,” he notes. “Now is the moment for coupons.”

Indeed, Norwest’s Goldman, formerly CEO of the comparison shopping site MySimon, which was acquired by CNet for $700 million in 2000, predicts that traffic for online coupon sites will surpass that of comparison shopping engines in the next few months.

“About the same percentage of people who look up travel online are now looking up coupons,” Goldman says. “That’s huge, particularly if you consider how many investment dollars have gone into travel.”

Easy To Copy

Any two kids in a dorm room can build a coupon site in 30 days. It’s very difficult to differentiate your offering.”

Joshua Goldman

So why hasn’t investor interest already translated into an abundance of venture deals for coupon sites? One VC whose firm recently considered backing a coupon startup decided against it because “a lot of these coupon companies require less Silicon Valley-style innovation. They’re really relying more on tricks of the trade.” Those “tricks” include search engine optimization, which doesn’t necessarily sit well with VCs.

Another obstacle for startup coupon sites is the potential threat from large, deep-pocketed competitors. Search giant Google, for example, used to have a coupon creation tool for small businesses to distribute through Google and Google Maps. It “sort of deemphasized it and it’s never materialized in a way it could have,” Sterling says. Nevertheless, if Google were to decide it wanted the revenue that coupon sites are deriving, it could become a disruptive force.

That’s saying nothing of shopping comparison sites such as Shopping.com and NexTag. Neither distributes coupons to customers, but that could quickly change since coupons are “a primary way for people to start their online shopping experiences,” Goldman observes.

The biggest obstacle to investing in coupon sites is the industry itself. For starters, there are markedly low barriers to entry. In the past couple of years, hundreds of sites have emerged, and many don’t hesitate to scrape information from other company’s sites. “Any two kids in a dorm room can build a coupon site in 30 days,” Goldman says. “It’s very difficult to differentiate your offering.”

Big Lead

More, about half a dozen bootstrapped players lead the pack in terms of traffic—including Coupons.com, CouponCabin, RetailMeNot.com and Slickdeals.net. Given their lead, they may be expensive to fund and they will certainly be difficult for competitors to catch.

Chicago-based CouponCabin, formed in 2003, received roughly 2.3 million unique visitors in March, numbers that are 60% to 70% higher than they were in March of 2007, brags Scott Kluth, the company’s founder and CEO.

Down the road, people might not need to save that $16, but for [a time commitment of] 88 seconds, I expect that people won’t be willing to leave that money on the table.

Scott Kluth

Those kinds of numbers mean power. The company, which employs 15 full-time people and offers 7,000 offers and 2,000 coupons at its site on any given day, is able to ensure that about 300 of those coupon codes are proprietary because of its sheer size and related bargaining power with retailers.

CouponCabin also has the money to fight those who’d scrape its site. In fact, Kluth, who says the company pulled in $8.8 million in revenue in 2007 and has seen “incredible growth since,” tells VCJ that the company is currently suing a smaller competitor over trademark infringement.

Moreover, the company has the size and means to pursue ambitious growth plans, including entering the print coupon business, which it did in April. “We’re trying to become the definitive source of coupons—online and off,” says Kluth.

Competition from Down Under

CouponCabin competitor RetailMeNot.com is also growing at a strong clip. Founded in late 2006, the Melbourne, Australia-based company gets 9 million unique visitors a month, according to co-founder and CEO Bevan Clark. That’s up from the 3.8 million unique visitors the service received in March 2008.

RetailMeNot.com differs from CouponCabin in several, apparently meaningful ways. For example, it doesn’t emphasize proprietary codes. “They don’t provide any particular benefit for our users” says Clark, a former programmer who instead has developed numerous ways to catch and prevent competing sites from scraping his site.

Retailmenot.com also sports a more pleasant user interface. “We launched partly because we saw the need for a coupon site that wasn’t spammy,” Clark says.

We launched partly because we saw the need for a coupon site that wasn’t spammy.”

Bevan Clark

The company also has a stronger focus on community than some competitors, including a 50,000-member social network and giveaways like T-shirts and gift baskets to users who find and contribute the best coupon codes to the site.

Still, RetailMeNot.com has plenty in common with CouponCabin. Like CouponCabin, RetailMeNot.com began adding printable coupons to its user offerings in April. The bulk of both companies’ coupon codes come from customers. Most telling, both have been fielding an increasing number of calls from would-be investors. Kluth estimates he receives calls from between five to seven investors a week. Clark says he receives at least two per week.

Staying Power?

Whether coupon sites will continue to thrive once the economy turns around remains to be seen. Kluth maintains that they will, noting that CouponCabin is training people how to be almost effortlessly frugal. An average visit to the site lasts just 88 seconds, but each visit averages out to user savings of $16, he claims. “Down the road, people might not need to save that $16, but for [a time commitment of] 88 seconds, I expect that people won’t be willing to leave that money on the table,” Kluth says.

Despite the success of these sites, there is no consensus about whether they represent a golden opportunity for VCs.

“Maybe someone smart will come along and aggregate some of these sites or roll them up,” says Norwest’s Goldman. In the meantime, he plans to sit on the sidelines, chin in hand. “I’m watching the top players very closely, but I still think it’s too easy to enter this space. There’s a big opportunity here, but I’m still trying to figure out what it is.”