Succeeding where Groupon failed
‘People don’t need an app with discounts for subpar restaurants. They need a motivation product’
In November 2011, the well-known discount marketplace Groupon went public with a $17.8 billion market cap. Fast forward twelve years, the company's shares have plummeted by 97%, confirming that the early doubters were right—the discount model is broken.
Reflecting on this, David Shaner had an intuition, "The world doesn't need an app with discounts for subpar restaurants. People want to try new experiences, and they need a product that motivates them to actually do that. People need a motivation product."
Driven by this gut feeling, he launched Offline in Raleigh, NC to a small group of 150 subscribers. To his surprise, this number quickly doubled to 300, then 500, then 1000, leading the company to a $1 million run rate within just two years of launching. So, what is Offline, and how exactly are they solving this $17.8 billion problem?
David has always been passionate about exploring the city and sharing unique experiences with friends. This led him to start the Offline newsletter, a curated guide to the best local activities, bars, and restaurants. "It was a fine lifestyle business, and we paid the bills with ads," explains David. "Our goal was to get people off their couches, motivating them with our content. With advertising though, you make more money by sucking people into their screens. That wasn't a great way to fulfill our mission."
Many have tried to build companies around coupons, and David had indeed considered them as an alternative monetization strategy. But things didn't quite resonate with the way people behave. "We had to really get into human behavior," he notes. "Why do people get a coupon book and eventually just toss it into the trash? We understood that it's not just about saving money. It's about motivating people to actually do things."
And consumer behavior is just the tip of the iceberg. The coupon model is not sustainable for the B2B side of the business either. As David puts it, "Coupon books make money by charging the restaurant. This way, you end up with the worst restaurants in town because they are the only ones that tolerate this." This will inevitably result in a downward spiral of deteriorating consumer experiences, which ultimately undermines the sustainability of the business. David had to find a better way.
If not ads, if not coupons, what's the right business model for restaurant discovery? "We started looking at the consumer subscription landscape," says David. "Spotify for music, Netflix for streaming, ClassPass for fitness... there is a unicorn subscription business in every category except for restaurants. No one has really cracked that nut yet."
Eager to understand whether a subscription was the best course of action, David invited their most engaged readers for a coffee and pitched them the idea. Their reaction: a collective eye roll.
"Oh gosh, yet another subscription. I already have a million," they told him.
“Listen, I actually have no idea what this is going to be,” replied David. “Just tell me, what would you pay ten bucks a month for, for the rest of your life?
“Just give me more than $10 worth of value and I’ll give you $10.”
Such a simple, yet eye-opening answer played a pivotal role in shaping Offline’s business model. “It's a monthly subscription,” explains David. “Users pick two restaurants to try from an incredibly curated list. They get between $10 and $30 for each restaurant and some content about it. Credits expire at the end of the month.”
This model taps into people’s desire for variety, motivates them to act, and gives them access to quality experiences. At the same time, restaurants attract customers without compromising their brand and without paying half of their revenue to marketplaces like Groupon. This win-win business model resulted in incredible word-of-mouth, with Offline achieving $1 million in annual recurring revenue within just two years of launching. Little did David know though, that the COVID-19 pandemic was soon going to ruin the party.
With restaurants closing and people staying home, Offline's core business model was under threat. David had to hunt down a solution to reduce churn in these incredibly difficult circumstances. "Our subscription base is the company's most valuable asset," he notes. "We had to keep that asset at all costs, even if people couldn't go to restaurants." But how do you retain customers if they can't use your product?
David had a brilliant idea to launch a program that allowed users to maintain their subscriptions in order to support struggling restaurants. The company acted as an intermediary by redistributing the revenue from subscriptions to their partner restaurants. And when the strictest lockdown was over, Offline launched a takeout version of their subscription 'as fast as humanly possible', adapting to the new dining landscape.
This brilliant move allowed Offline to weather the storm. However, that period will always remain a vivid memory for David. He admits, "We were reading all the government releases trying to understand how to navigate our system. '55% of the first 2/3 for the first 5 employees is reimbursed at 20%' - what does that even mean? I remember reading that stuff at 2 in the morning, thinking it was such a low point for me. As a founder, sometimes you have to learn things you never considered before, and you have to do it because no one else can do it for you." While growth was swiftly returned to pre-pandemic levels, another challenge was right around the corner.
"Your customers don't tip. All of our servers are really upset," a restaurateur's words hit David like a ton of bricks. Perplexed by this feedback, David asked them to analyze the data from their point of sale system. To their surprise, the tipping percentage for Offline members was almost the same as their regular customers. How was that possible? Why did the servers have this wrong perception?
David observes, “When you have a group of people that you can apply a label to, it’s far easier for a story to spread. When Offline users don’t tip, it becomes a memorable story for the restaurant staff, while the same behavior from other customers is easily forgotten.” He had the data to prove this. “But it doesn’t matter,” he says, “because your customers’ perception of reality is reality.” He couldn’t just go to all the servers and tell them they were wrong. He had to tackle the problem at its roots.
This was a big head-scratcher for the Offline team, but they eventually solved this problem as well. “We have always had a rating system for members to rate the restaurants,” observes David. “But after that feedback, we introduced a dual rating system to let restaurants rate members as well.” This move allowed Offline to maintain the integrity of the system while at the same time fixing restaurants’ perception. This is also an interesting anecdote about how nuanced finding product-market fit can be.
As Offline continued to grow, David was ready to raise capital and scale further. However, he decided not to pursue a traditional investment round. "While evaluating all the different sources of capital that we could go after," he says, "it struck me that Offline has been community-driven from day one. When we launched our MVP, we used to invite our users to the office once a month and just talk about Offline for two hours with some pizza and some bottles of wine. Our users are people who live in the same city and have the same interests, and community is a big part of the product as well."
Reflecting on this, David was thinking of ways to deepen this sense of community. That's when it clicked in his mind to launch a community round on Wefunder and let Offline members become investors. The result was overwhelming—hundreds of users invested $2M in the company. He recalls, "Not only did we raise $2 million in sixty days, but the ripple effect of our community round was really powerful. When you raise with a traditional round, you are pitching your story to a small number of institutional investors. Instead, we have told our story to tens of thousands of people, and when our customers invested, there was a snowball effect that attracted people who had never heard of us before. We now also have more funding options moving forward. We're not locked into somebody else's business model. We can run our company on our own terms."
When asked what his advice is for founders considering a community round, David explains that this might not be a fit for every company. "There is a misconception that a community round is easier than raising money in a more traditional way. And it can be, but only for startups that have a really good base of customers or fans. If you have that, you will probably see a snowball effect. But if you don't, then you should think about whether complete strangers are really going to invest. Do you already have a community of people who want to be a part of your journey? If yes, then a community round might be one of the best ways to raise capital."