The Full Story Behind BuyWithMe’s Big Layoffs: Debts Come Due For Daily Deal Industry

Betabeat has been covering the layoffs at BuyWithMe since Wednesday, when more than half the staff, at least 100 people,

One kind of pink slip can lead to another

Betabeat has been covering the layoffs at BuyWithMe since Wednesday, when more than half the staff, at least 100 people,  were laid off without warning or severance. There has been almost no word from the company or its management. As a result, we’ve had to rely mostly on anonymous sources who know bits and pieces. But over the last 24 hours, we’ve been able to put together some big pieces of the puzzle.

The statement released yesterday by CEO James Crowley, that the company was reorganizing to best serve its clients and customers, was disingenuous at best.  Numerous sources Betabeat spoke with confirmed that BuyWithMe is looking to be acquired by a larger player in the daily deal space, and has been for some time now. The layoffs were intended to make it a more attractive purchase.

How did BuyWithMe end up in such dire straights? Betabeat has heard from a source that not only did the company purchase six smaller startups in the last six months, burning through some of its capital, but it also took out a $10 million debt round from its backers that was never disclosed to the press. That goes a long way towards explaining how the company got to where it is today.

BuyWithMe was at one point regarded as the number three player in the daily deal space, talked about in the same breath as giants like Groupon and Living Social. But as thousands of clones started popping up in the industry, margins shrank and customer acquisition costs went through the roof. Consolidation and rapid growth became the name of the game.

In December of 2010 CEO Cheryl Rosner stepped down. Many hoped Chief Product Officer David Wolfe, former CTO of Napster, would get the nod, but instead an outsider, James J. Crowley, was brought in. Mr. Crowley had experience with big exits, having taken a company public in the dot-com days and overseen two big acquisitions over the last decade.

Mr. Crowley’s first job was a roadshow, pitching investors on a Series C round of venture capital that would raise around $100 million dollars and value BuyWithMe at around $500 million. But while Mr. Crowley’s track record looked good on paper, sources say he was a poor public speaker, and failed to convince any big funds to invest at that price.

Insiders say there was interest in partnerships from big firms like Amazon and Google, who were trying to get into the daily deal game themselves, and looking for companies with boots on the ground to source offers. But BuyWithMe declined those partnerships, despite the fact they would have generated substantial revenue, hoping to keep its brand autonomous and aiming for that big exit.

Everything changed June, 2, 2011, when Groupon filed for its IPO, and its financials became public for the first time. The biggest player in the space had long claimed to be profitable, but turned out to be losing hundreds of millions of dollars each year. Suddenly the emperor had no clothes, and all the companies who had been positioning themselves as players in the same space had a much harder case to make when it came to their value.

In the meantime, BuyWithMe had been losing steam. Industry insiders say that by the beginning of this summer, while it was still being talked about as a top player, it had in reality fallen to around the seventh biggest player in the nation. Copycats were everywhere. BuyWithMe tried to ramp up, buying six companies in six months to juice their growth. But sources inside the company said it wasn’t working.

At the same time, the macro picture was getting dark. The IPO window that seemed to be opening for tech companies with the debut of Pandora and LinkedIn had snapped firmly shut again. In July, BuyWithMe purchased Edhance, a discount site aimed at college students. Insider say this was the most costly of BuyWithMe’s acquisitions, but came with great technology that Edhance has developed. To help fund the purchase, BuyWithMe took out a $10 million debt round, which was never disclosed to the public.

BuyWithMe continued to purchase companies, acquiring Scoop St. the next month and TownHog in September. These were cheap deals, made possible by the fact that many daily deal clones were struggling themselves. But it was quickly becoming apparent that BuyWithMe was not going to be able to raise a new round of venture, and that an IPO was impossible. With about six months left before they burned through their cash, a sale became the only option.

To sell the company at a premium, BuyWithMe decided to lay off everyone who was non-“performing”. Essentially this meant stripping the company down to its sales force, who generated revenue, and the executive team, who of course got a free pass. Founder Andrew Moss reportedly wanted to move most employees from full time to contract, saying a mass firing was like cutting off the legs to save the body. But source say he was overruled by the rest of the board, which includes CEO James Crowley and partners from BuyWithMe’s backers, Bain Capital and Matrix Partners.

And so it was on Wednesday that 100 employees were laid off with no warning and no severance. Several large firms are still in talk to acquire BuyWithMe, and the company is now a lean property, consisting largely of a sales force, the technology from Edhance, and $30 million in venture backing which needs to be repaid. From a business perspective, it was probably the wisest course of action. But the human toll, and the way in which it was executed, are a grim reminder of what happens when the bubble bursts on an over-hyped industry.

The Full Story Behind BuyWithMe’s Big Layoffs: Debts Come Due For Daily Deal Industry