• by Jeff Pundyk , December 2, 2010

In late 1998 two colleagues and I left our comfortable jobs in technology trade publishing to start an e-commerce group buying site. By the beginning of 2001 the business was out of money, as were we, and we quietly shut it down. As I read about the prospective sale of group buying site Groupon to Google for a reported $6 billion, I can't help but cry a little and wonder why the outcomes were so different.

A bit of background: My partners and I had been among the first wave of media people to publish professionally on the Web, launching sites as early as 1994. But we did so from within the confines of a traditional trade publishing company. While it was in many ways a luxury to be able to innovate within a corporate environment, we watched with envy as pure Internet companies sprang up, moved quickly to stake their claims, and were rewarded with outsized valuations that they used to grab talent, deals, and payouts. The bubble was growing.

We wanted in. Our idea was simple: eBay for group buying. We imagined an open marketplace where people could start or join a group to buy anything at a volume discount, and where sellers could see the demand grow and bid down the price. We named it Zwirl.com, raised about $1 million from friends and family (that was the easy part), and set off to get rich.

Things didn't work out quite as we planned. Turns out you need to reach an awful lot of people to get enough buyers interested in joining a group, particularly if you spread out the demand by letting people start a group about anything. And you need a fair number of sellers able to fulfill that anything to create a competitive marketplace that yields real discounts. We had neither. Nor did we have the resources to get them.

We tweaked the idea. Rather than bring the buyers to us, we would go to them by embedding our application in content sites throughout the Web.Then we'd aggregate the demand regardless of where it came from to create group deals. Great idea -- on Powerpoint. The content sites had their own problems. The last thing they wanted to hear about was earning a tiny commission on some crazy dynamic-pricing scheme. We weren't the answer for them and they were in no position to help us. We were all going down together.

OK, so why does Groupon succeed where Zwirl failed? Well, its founders made some smart decisions at the outset -- focusing on local merchants and a single deal each day, for example. They've executed really well -- I'll save the litany of our mistakes for some other time; this is hard enough as it is. And, they are very clear about their value to both buyers and sellers. But, mainly, Groupon owes a big debt of thanks to the social grid. The social grid puts the group in group buying.

In 1999, our biggest challenge was collecting people. It was an expensive proposition, one solved either through buying ads or paying commissions. It had to be tackled on a retail level. There was no other way. Even when we moved to a distributed model, the onus was still on us to do the work to get the people through our virtual doors. There was no social network online in 1999. (Friendster launched in 2002, MySpace in 2003, "The Facebook" in 2004.) Today, the buyers do the work for Groupon, taking a huge cost out of the system and raising their own value in their social networks by sharing deals. The social grid solves the problem of creating enough demand to make the deals work. The social grid is the secret sauce.

So, to review: Zwirl: some great stories (remind me to tell you about the Romanian hackers and the FBI or about our countless meetings with so-called smart money), some enduring friendships, and some lessons learned. Groupon: you read the news; don't make me say it.

Still, I look at Groupon's success with a mix of envy and pride. Somewhere in its story is a little bit of validation of ours. I was recently looking at some notes I made near the end of the Zwirl days. This bit, from November, 2000, is worth dusting off: "It seems obvious that the models and technologies that have come out of this period of heated innovation are transitional. The majority of the companies may disappear, but the innovations will be absorbed into service of an evolving economy. Chalk the whole thing up to a massive publicly and privately funded R&D effort that will bear fruit."

Hey, Groupon, you're welcome.