January 10, 2011
Just before the holidays I took a colleague out to lunch at Devi in Union Square in NYC. It’s widely regarded as one of the best Indian restaurants in the country. We enjoyed their spectacular 5 course chef’s lunch menu over a leisurely 2 hours. We each had a drink. The total bill? $68. An incredible steal. And they were thrilled to have us.
You want to do it tomorrow? You can. You want to do again on Wednesday? Be my guest.
I’m thrilled today to announce our latest investment here at High Peaks – we’ve joined a terrific set of partners – Hearst and GrandBanks Capital – in a Series A investment in NYC-based VillageVines. VillageVines is the leading online source of discounted dining experiences at America’s top restaurants – think hotels.com for restaurants. More details below, but first, a step back.
So quick – name the only thing the world needs less of right now than another VC blogger? If you said another daily deal site, you’re right.
The proliferation of Groupon clones represents without question the most remarkable burst of me too-ism I’ve seen in my 12 years in the very me too-ish world of venture-backed startups. I’ve seen counts ranging as high as 1,200 daily deal sites around the country as of the dawn of the new year. A bubble, no doubt.
It’s a bubble driven by low barriers to entry and spectacular unit economics. Aside from a sales guy who runs around signing up merchant partners and someone to write copy and do a minimal amount of design work, there are very few variable costs to these businesses, zero inventory expense, and cost of goods that don’t have to be paid for until weeks after the revenue cash comes in the door. TechCrunch did a nice teardown of Groupon’s economic model here. It’s a pretty sweet business model, and dead simple to get started. I expect that the low startup cost and terrific unit economics will lead to a surprising number of these clones surviving. They won’t be big winners, but I’m sure there will be dozens and dozens of profitable, niche players still around in a few years.
My partners and I have spent a bunch of time talking about the opportunity created by the fantastic job Groupon, LivingSocial, and the like have done in training both consumers and retailers as to the power of these business models. In particular, I’ve been thinking a lot about the merchant side of the equation and how to better address their needs.
Groupon, while incredibly effective at driving new customers, is not always an economic picnic for the retailer. This has been much discussed – a recent Rice University study highlights the challenges faced by retailers. And independent of the questions around the profitability of the deals for retailers, we’ve heard again and again that merchants want solutions that can help them out every day, not just episodically.
In a world where Hotels.com, Priceline, and others long ago proved that there’s an enormous opportunity in helping the owners of high value perishable travel inventory (hotel rooms, airline seats, etc.) dispose of that inventory and thus optimize capacity utilization and better manage their bottom lines, it’s taken a long time to start treating restaurant booths, salon chairs, or massage tables the same way. The same fundamental principles apply to perishable inventory in these businesses – if a salon owner is paying a stylist to be in the shop, every incentive is there to get him working rather than standing and waiting, even if at a substantial discount. And while many people think restaurants must be different – food is expensive, isn’t it? – the reality is that most restaurants know that they are overstaffed most Sunday through Thursday nights. With food costs typically running only 25-30% of revenue, if you can control when discounts are redeemed, there’s a lot of margin left to play with in driving more people through the door and more money to the bottom line.
With smaller transaction values (and thus lower absolute gross profit) than travel, consumer and merchant acquisition costs have previously kept these markets from opening up. But thanks to the Groupon phenomenon and their (a) training of consumers and merchants to the deals concept and (b) innovation around viral customer acquisition models, I think the economics of these businesses have now fundamentally changed.
So I started last year looking at models that integrate deeply with the business practices of the retail partner and become a reliable way to dispose of excess inventory every single day. Be more than just a sporadic driver of new business (a merchant can get onto the Groupon calendar not more than 2x/year), become a critical part of how the merchant plans and forecasts their business. In short, be a real partner. Do that, and they’ll never let you go.
I first looked at a few opportunities in the high-end personal services space – Brooklyn-based LifeBooker has the right model there. Then in early fall I met Ben McKean and Dan Leahy, co-founders of VillageVines, shortly after they re-launched their business and expanded from NYC into Chicago, DC, San Francisco and LA. These guys are super bright, incredibly thorough and analytic, and very hungry. And I think they’ve got the formula nailed for the restaurant business.
Restaurants use the VillageVines platform to upload inventory that they need to fill. Those tables are then offered to VillageVines customers at a 30% discount off the entire food and beverage bill. Amazingly, it includes everything – order a $1,000 bottle of wine, pay $700 – the more you spend, the better the deal. And they make it dead simple for the restaurant to sign up – it takes less than an hour to get a new partner into the system. In NYC they’ve signed up almost 100 restaurants, including a bunch of big names like Le Cirque, Delmonico’s, Kittichai, and Aquavit.
It costs you $10 to make a reservation (refundable if you cancel). When you arrive at the restaurant, you do everything like you normally would, but then when the bill arrives, the 30% has already been magically deducted. There’s no coupon, no special card, nothing else to do. You could take someone out on a first date or a client out for an important dinner using VillageVines and your guest would never know. This seamless experience has greatly enhanced adoption and usage of the service. And it’s naturally viral – I make a reservation, we go out together and split the bill, you save 30%, you go home and sign yourself up.
As a consumer, I’m addicted to the service – I’ve had 8 VillageVines meals in NYC in the past month, and have a reservation for tomorrow. But it’s even better for the restaurateur – a no-brainer tool that enables them to take an otherwise unfilled table and fill it, while not risking driving discount diners on days or at times when she doesn’t need the business.
The early results are awesome – membership is growing very rapidly in all five markets, and restaurants have really figured it out and are starting to come to us in large numbers. Adding to the appeal, restaurants report that VillageVines is bringing them attractive, high-end clientele who end up ringing up larger than average checks, driven by the healthy discount. They’re getting a great boost to their top and bottom lines while opening up a new channel for customer acquisition, enabling waitstaff to earn more tips, and giving consumers a great deal. Everybody wins.
We’re thrilled to be investors, and I’m thrilled to be a consumer. While I can’t offer you the chance to invest, if you live or travel to one of our five markets, I can certainly encourage you to become a member – join the fun and have some great meals on us at www.villagevines.com. And if you’re not in those markets, don’t worry – we’ll get to your city soon!