CityDeals: A Canary in a Coal Mine

CityDeals croaked, and was dealt to the Beehive State’s top waterparks operator. The acquisition came at a tremendous loss for the company’s backers, who put millions into a company that was ultimately claimed by one of its lenders—a lender who, in turn, still saddled the investors with CityDeals’s liabilities. However, the tale of the company’s failure—according to interviews and financial statements from the company confidentially obtained by peHUB—should serve as a cautionary tale for the rapidly-evolving daily deals industry, which is already beginning to wring out weaker competitors.

Utah-based CityDeals aggressively pushed for scale in the Southwest, and in Northwestern states like Washington and Idaho, despite continually burning through cash even as its revenue grew. Worse still, the company was far too late to the mobile daily deals segment, a vertical that will soon claim the majority of transactions that hundreds of companies like CityDeals, Groupon and LivingSocial push to consumers every day. Increasingly, the industry is seeing smaller, weaker and poorly-managed competitors kicked to the wayside after the kudzu-like development of the daily deals business.

CityDeals’s hockey-stick projections, said sources who spoke with peHUB, were reminiscent of previous bubble-era machinations whose forecasts reflected almost hysterical optimism. In fact, even as CityDeals continued to hemorrhage capital, its executives told any investor willing to listen (apparently, none were, for too long) that they anticipated more than an eight-fold increase in revenue (to more than $40 million for the last quarter of 2012, according to documents obtained by peHUB).

But CityDeals, which raised more than $4 million from early investors, racked up nearly $700,000 in losses from November 2010, approximately when its most recent financing round was held, to May 2011. Last December was the company’s worst month; it lost more than a quarter million dollars on about $700,000 in revenue. Losses slimmed in January 2011, on revenue of about $575,000, to approximately $35,000. But, when CityDeals’s revenue picked up, its losses grew again. By May, on about $1.1 million in revenue for the month, the company more than doubled its losses, to around $85,000.

One investor who rejected CityDeals put it succinctly: “Their cap tables were horrendous.”

Another investor, who backs one of the country’s top daily deals sites, acknowledged that CityDeals was likely too far behind the game to ever get back into it. The company had no mobile business segment in place, only plans to execute one. Mobile strategy will be crucial for companies looking to break away from the competition in the deals business, and most of the nation’s leading daily deal sites are already raking in double-digit percentages of their revenue from smartphones. This source said that—astonishingly, perhaps—daily deals sites expect that by the end of next year, up to half of the industry’s revenue will be derived not via the inbox, but by mobile device.

“The pace that the business has evolved is astonishing,” this source said.

Of course, CityDeals was not nearly as well-supported as some of the country’s other daily deals operations.

In late 2010, three board members—Todd Peterson, Ken Murdock and Keith Rosenberg—contributed most of a $3 million round of equity to support the company’s operations. The company had nearly $1 million, split almost evenly between merchant debt and a convertible note to early investors, and other prior backing to boot. Instead of claiming VC backing, sources said, the company’s investor base was made up of dozens of smaller individual investors, who pumped an unspecified amount of capital into the company in its earlier years.

Executives from CityDeals could not be reached for comment.

Still, were a lack of adequate capital and a mobile strategy implementation that moved as fast as a glacier not enough, CityDeals committed what sources said are the cardinal sins of the daily deals business: poor customer service and unattended merchant relationships.

“To show extreme growth, CityDeals structured some tough deals and got the merchants to finance part of their business,” one source said, but they “didn’t find enough future deals to pay back earlier merchants. I think we’ll see more [business failures] continuing as small business smarten up and understand that too often, the long-term results don’t match the initial outflow.”