Deal Gone Bad? BuyWithMe Struggles as Investors Sour on Groupon Clones.

BuyWithMe, one of the early contenders in the daily deals space, has laid off a significant portion of its staff and is now in limbo as the company finds it more difficult to raise capital.

It’s got some serious obstacles.

BuyWithMe is competing with both Groupon and LivingSocial, which have voracious appetites for cash — and frankly, have the market share to come closer to justifying it.

Groupon is close to completing a $540 million IPO and LivingSocial is assumed to be considering raising another private round instead of tapping the public markets.

Reports by DailyDealMedia and BetaBeat pegged BuyWithMe’s layoffs at between 50 and 75 percent of the company’s staff. A year ago, it had 90-plus employees, but its ranks have likely swelled as it made several acquisitions and attempted to expand nationally.

In an official statement last week, CEO Jim Crowley said: “BuyWithMe did have a significant reduction in staffing … We did this so the company is in the best position to continue to serve its merchants and members. As an organization we’re continuing to pursue our business and to support our customers throughout the country.”

In all, the company had raised at least $21 million from Bain Capital Ventures and Matrix Partners at one time.

A year ago, when the company’s CEO Cheryl Rosner, formerly of TicketsNow and Expedia, left after only eight months on the job, its plan was to add more markets, hire more employees and raise more cash.

Since then, it’s done all but one of those three things, meaning its burn rate and expenses increased without additional investments.

In the past six months alone, it purchased six companies, many of them smaller players, as well as some technology, too.

However, as it turns out, investors haven’t been impressed by the company’s artificial growth rates.

A source close to the situation said BuyWithMe hasn’t been able to raise more money, and “they need a lot.” Meanwhile, the insiders don’t want to cough up what’s needed. “They spent as though money was no object to try to compete,” the source said.

It’s not that capital has dried up for all companies competing in the broader daily deals space. In fact, some might consider it downright frothy. Beyond Groupon and LivingSocial, San Francisco-based Bloomspot raised $40 million in capital in August and Group Commerce, a white label provider, raised $10 million in a follow-on round in May. In the broader space, there’s been a coupon craze, with several providers raising hundreds of millions of dollars in the past few months alone.

But without many points of differentiation, BuyWithMe’s prospects are shrinking.

The company has often been considered the third-largest player in the space behind Groupon and LivingSocial, but now others are elbowing in, such as Travelzoo, Google and Amazon.

BuyWithMe’s best chances are to find a buyer.

It has a sizable — and valuable — email list, some technology assets and a recently rolled-out loyalty program. And, there are definitely still companies looking to enter the space.

A study by the 451 Group’s M&A KnowledgeBase found that as of August, mergers and acquisitions in the daily deal and coupon space were up 700 percent year over year to 35 from only five in the same period in 2010. Since then, dozens of others have been made.

The buyers aren’t always what you expect them to be, either. While some providers, like BuyWithMe and CrowdSavings, are adding markets through the acquisitions of one-off daily deals sites, other buyers are large marketing firms. For instance, Stamford, Conn.-based Affinion Group, a marketing and customer-engagement agency, paid $30 million for Eversave in July. ReachLocal, a search-engine marketing company for small and medium-size businesses, purchased DealOn Media for $10 million.

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