What’s next for LivingSocial

April 18, 2012, 5:35 PM UTC

FORTUNE — Few remember LivingSocial as anything but a deals site. But when CEO Tim O’Shaughnessy co-founded it with three colleagues from Revolution Health four years ago, deals were the farthest thing from their mind. The fledgling start-up actually got its start as a Facebook developer, cranking out apps like Visual Bookshelf and Pick Your Five.

That changed in 2009 with the acquisition of a small company called Buy a Friend a Drink. Partnering with companies and restaurants, LivingSocial offered people coupons for free beers and cocktails. That’s when they saw a business opportunity and seized it. In the years since, the Washington D.C.-based company has become one of the largest daily deals sites, second only to Groupon (GRPN), run by 4,900 employees supporting 60 million users in 647 markets across 20 countries. More than just a purveyor of daily local deals, the company offers services for getaways and online food orders as well.

But massive expansion has been polarizing. LivingSocial and its competitors have many loyal customers, but there have been reports of unhappy merchants and questions about their business model’s viability. Fortune caught up with O’Shaughnessy to discuss the company’s rapid expansion, criticism of the market, why they killed their LivingSocial Instant business, and what’s to come.

A year-and-a-half ago, the public perception of deal sites might have been a very positive one — all about growth, for instance. Has the narrative changed?

I think we have viewed ourselves for a very long time as having an opportunity to become a local platform and having the opportunity to connect consumers with merchants. You’ve probably heard a lot about local commerce and how the daily deals space is part of the ultimate solution. It’s not the ultimate solution. I think you’re starting to see some of that filter through in the press a bit more, and I think that that’s fundamentally a good thing because that’s how we’ve been operating our business for a while. And so I think that narrative is starting to become a little more true.

With regards to the kind of category and what other people [have said] and what happens, you can only do so much. You can’t control external factors. We tend not to worry a huge deal about that. We tend not to get too high on the highs of the category or too low in the lows.

How do you think the conversation about the business model has changed? Is there something people or media don’t understand about it?

I think some people draw conclusions that may not necessarily be accurate, but the test of time usually goes and solves that. I do think people have gotten smarter about the business overall from an external perspective, and I think that that’s a good thing. Lumping everyone within the category as well. That happens quite a bit, and it’s probably not the right assessment.

A few months ago, you said that while Google may be the go-to solution for search and Facebook for social, there isn’t a “default answer” for local. Do you still think that? 


How can LivingSocial be the default answer to local then?

I think particularly on the consumer side, there is a desire for people to be more connected with their city. And people want to support the business down the street. They want to, when they’re walking around, go and know something about their community. They want to brag about their community. ‘This is why my sports team is better than your sports team.’ Those things all matter, and I don’t think there’s been a company able to go and help facilitate that in a broad-based way. I think if we can go and do that, while providing merchants and customers with new revenue streams in a thoughtful, effective way, there is that opportunity to seek that answer for local.

Does that include integrating original editorial like say, what AOL is doing with its hyper local news venture, Patch?

We’re interested in integrating things into our experience that we think will make people feel more connected to their community. Some of those could be commerce-related. Some of those could be content-related. But you know, you’ve got questions around timing. You’ve got questions around the business model. So I can’t definitively answer what that looks like, but I think if you ask me at a very high level if people want to know more about their communities, I want to say, ‘yes.’ Are there a host of tools that can do that? I think so. Are any of them going to knock them out of the park right now? I’m not so sure.

For a moment, it seemed like everyone — from Facebook to Google — was trying to do what you were doing, but that’s not the case anymore. 

This isn’t a rocket scientist statement, but when you’re focused on one thing and that’s what you maniacally think about every single day, your chances of success are going to be higher than someone who’s not thinking about just that thing every single day. So I think people always underestimate that value.

Second thing. I think that there’s a perception. Early on, people wrote about this, that there’s no business. There’s no moat around it. We would have said it’s not a particularly hard business to get into, but it is a particularly hard business to scale and operationally manage. I think we saw a lot of people, whether it’s a lot of small, independent competitors or larger companies trying to do this as adjacent things that just couldn’t get over that point. That couldn’t figure out how operationally to scale efficiently and effectively.

Still, there remains a large number of me-too deal sites. How does LivingSocial set itself apart?

We see a lot of those people going away, not existing anymore or through small amounts of consolidation. That trend is going down at a pretty fast clip. That’s helpful overall for the ecosystem. For us, it hasn’t changed what our plans and strategies have been.

Our takeout and delivery product just soft-launched. Are people going to be ordering more food online five years from now or less? That’s something we think they’re going to do much much more of. We have the relationships with merchants where we think we can provide that value to them.

Takeout and Delivery sprang out of LivingSocial Instant, which was a big push for the company but ultimately killed. What happened?

It was one of those things where they either don’t work or they don’t work as well as you would have hoped or relative to what other opportunities are, and that’s one of those cases. The underlying strategy that local businesses have inventory effectively that is going to go away that they want to go and liquidate, that the timing with it just wasn’t right. I think the high-level strategy is something we take at a look at down the road. But performance relative to what we thought we could do just wasn’t there compared to other things we could invest in.

With Takeout and Delivery, you’re entering a space already dominated by companies like Seamless and GrubHub. How are you going to standout?

I think this space overall is very very early. The vast majority of people have never ordered food online before and so there’s a lot of education that needs to go on, and we think we’ve got a great ability to be able to do that.

On the merchant side, we’ve got this opportunity to promote them from a deals perspective. As a merchant, say you want to drive new customers and you want to make it more efficient in your business, and convert them from people you want to order from online. We can start to provide multiple pieces of that value chain for you.

What else does the company have planned?

We’ve been testing other initiatives. We have this physical space in D.C called 918F Street, where we work with merchants and create new content or programs that didn’t exist previously. We re-did a building and did a lot of work on it in order to allow this to happen. It’s about generating new revenue streams for our merchants that we’re working with.

Literally, we just worked with this restaurant Sticky Rice where we did sushi-making and sake making classes, operated in this full demonstration kitchen we built for cooking classes. On the consumer side, you couldn’t go and get sushi lessons from the chef of Sushi Rice, and on the merchant side, it’s a brand new incremental revenue stream that will also bring them awareness and introduction to new customers. So we think that in a lot of ways we can actually be that connective tissue and we’re willing to invest.

Last year, it was reported that LivingSocial expected to make $1 billion in revenues, but Amazon’s regulatory filing indicates revenues were $245 million and the company lost $558 million. What happened there?

Two things on that. One is that accounting isn’t always economics. Seeing a few lines in another company’s filings doesn’t give the full picture associated with things. Over the sense of time, things will be revealed.

I also think people were using a pretty different definition of what revenue was at that point and time so you might have a little bit of an apples to oranges comparison as well.

Amazon has invested in you, but recently they’ve been hiring and building up their own local deals service. Is there overlap there? Are they a competitor now?

I think the high-level rationale for the agreement is they have a high level of customers. We have a high level of merchants. Boy, when you put those two together, that will be fantastic. We are predominantly the source behind — on the merchant side — of that offering. In the short to mid-term, I don’t think that that’s something that’s real high on our list of things.

Long term, you never know. Eric Schmidt was once on Apple’s board so it’s impossible prognosticate. The crystal ball gets hazier and hazier.

Speaking of Amazon, Jeff Bezos has said you sometimes need to fail in order to  succeed. Do you agree with that?

I think we’ve screwed up before. We talked about LivingSocial Instant. It’s one of those realizations. It’s good for a company to know that you don’t bat 1,000, whether it’s hiring, product development, strategy. The more you can get the big things right, [fail at the] the little things, get the bounds around it, the better you are.

We think failure in the right circumstances is actually to be embraced. I’ll answer your Jeff Bezos quote with a Jeff Bezos quote. The worst thing that can happen is your EBITDA [earnings before interest, taxes, depreciation and amortization] improves. As long you as know how to measure them appropriately, and understand how it will affect your business, improve what you offer to consumers both in-depth and breadth of that and in the business model associated with that, whether it’s on the daily deal front, I think the spectrum of merchants will increase.

By the end of this year, hopefully some of that perception versus reality, that gap will have started to close, and close in a meaningful way.

Correction: This story mistaken reported the number of markets and countries in which LivingSocial operates. The figures have been updated to reflect the most current information. Fortune regrets the error.