Coupon Sites Getting Their 15 Minutes, and Maybe Much More

If you’ve recently been visiting coupon sites for the first time, you aren’t alone. Owing to factors like the lousy economy and privacy concerns, online coupon destinations are now the second-fastest-growing content sites behind job sites, according to the marketing research company comScore. In fact, the number of visitors to coupon sites is up 41% over this time last year.

Venture capitalists have noticed. Joshua Goldman, a general partner at Norwest Venture Partners, has been wrestling for months with whether, and how, Norwest can capitalize on the trend. So has renowned angel investor Ron Conway, who said in an email earlier today that he’s looked at an array of coupon sites with Baseline Ventures, the early-stage, San Francisco-based venture firm. Meanwhile, at last week’s “demo day” at Y Combinator, a Mountain View-based company that incubates startups, the rustling of paper was audible during the presentation of petaSales, a startup whose coupon site works with smaller retailers. The VC-packed audience was taking notes.

To find out more about who the players are in the coupon space, and where the opportunities may be, I spoke at length with Norwest’s Goldman, an e-commerce expert who was the CEO of comparison shopping site MySimon when it sold to CNet in 2000 for $700 million.

I gather you think there’s a big opportunity here.

The coupon space is very active and growing. Searching for coupons is definitely in the top 10 activities of what people are doing on the Web. It’s my belief that in the next few months, online deals and coupons will pass comparison shopping engines in terms of traffic. Some data suggest we’ve already shifted.

Comparison shopping engines were a ripe area for VCs, and saw some big exits. Why haven’t I been hearing about venture-backed coupon deals?

It’s true. You’d think there would be tons of VC interest in this right now. I think either it’s an overlooked opportunity — it’s early and it’s just going to start now — or there’s something fundamentally wrong [from an investment standpoint] with this space. That’s what I’ve been trying to figure out.

What have you concluded are the biggest challenges in the space?

Well, there are primarily three. First, only the biggest of these sites can make any real money. Online coupons isn’t like travel or gaming, where lots of people are making lots of money. It’s not a toxic issue [as an investor] but it’s a problem.

It’s also very tough to differentiate your offering. Basically, these are listings sites, and typically, the content is rapidly copied by everyone else in the space. They regularly scrape each other’s websites and steal each other’s codes.

Third, there are very low barriers to entry. Essentially, two kids in a dorm room could, in 30 days, build a business. VCs hate that.

I gather that Google could become a threat, too. Or is that not the case?

For now, I still think of coupons as vertical search. Travel, for example, is a big activity and Google can help you find some deals, but it has never focused on how you gather and distribute data. I’m not yet of the belief that Google will quickly capture the space, or do any better with coupons than they have with travel or comparison shopping, which they’ve tried and never become a major player in.

Also, with coupons, the data changes very quickly. Google could crawl retailers’ sites, but right now, it [isn’t a major threat]. Think about the way that Google crawls for news and headlines. It works, but you still get the news the fastest by going to CNN or the BBC.

How many coupons sites are out there? Dozens? Hundreds?

There are hundreds that are simple listings and that monetize with a simple model, which is that they sign up for affiliate networks, like Commission Junction or LinkShare. This is the kids-in-the-dorm-room model. You can make some money, but as long as you use affiliate networks, you aren’t going to make a lot of money.

Then there are what, a half dozen or so leaders in the space?

Well, there are about 10 to 12 players that are big enough that they’ve broken out of affiliate model. They’re big enough to have account managers and to go directly to retailers.

Then there are maybe half of those that have gotten big enough to get proprietary deals and coupon codes, meaning some retailers will generate a particular coupon for their sites. Those are the companies that could get investment dollars.

These proprietary coupons can’t be scraped?

It can still happen, but at a site like CouponCabin for example, the coupon will actually be branded, like CABIN43295, or whatever, so it’s hard to use elsewhere [without being obvious about scraping]. Sometimes, too, the retailer will only use the coupon if you’ve linked to their landing page directly from CouponCabin’s site.

Are any of these big players looking for venture capital? Do they need it?

I don’t think so; these things are relatively capital efficient, though I’m also still not sure they’ll ultimately be big enough businesses to be successful [as a VC investment]. I don’t think we’ve seen the very top of the pyramid yet, with maybe a passionate community that both contributes content and is protective of these sites because its members’ reputations are tied to them, like you see at forum sites.

RetailMeNot [the fourth-fastest growing coupon site, according to Comscore] is probably closest to that top of the pyramid, where it has some community, along with some more advanced technology, but there are two or three others that are getting there. And it’s where you  build barriers and you have proprietary deals that you build a really big business.

I’ve been hearing a lot lately about Twitter as a means of distributing hundreds of thousands of coupons, too. How meaningful a medium will it become, do you think?

Very meaningful, because it’s an extension of community. I also think these top sites will focus increasingly on mobile and iPhone apps and SMS to keep users passionate about their service.

What about comparison shopping sites? You obviously know a lot about them. Do they pose a threat to the growth we’re seeing by these upstart coupon companies?

Frankly, this is a space that companies like and NexTag should have owned. They should have integrated coupons and they didn’t and that could be to their peril. These [coupon] sites are becoming a primary way for people to start their online shopping experience. One of [the shopping comparison sites] might get smart and start integrating the coupons, but they may be too late to the game. It drives me crazy because there hasn’t been much innovation in that space in the eight years since I got out of it.

Still, despite your enthusiasm, I don’t get the impression that you’re anywhere near moving on a coupon deal.

I’m still too worried about the barriers, but I’m watching the top players very closely.