BuyWithMe raises $5.5M for group buying

BuyWithMe founder Andrew Moss makes a practice of keeping prices low for shoppers of the website, whether it’s a $2 frozen yogurt, half-price facials or $20 for six rounds of mini golf.

When it comes to corporate expansion, however, Moss thinks big.

Last week, the group-buying company announced that it secured $5.5 million in a Series A round of venture funding from Boston-based Matrix Partners. BuyWithMe, which currently posts discount deals in Boston, Washington, D.C., and San Diego, will use the money to help fund a national expansion.

“We’re going to be unveiling new cities relatively quickly,” says Moss, a law school graduate-turned-entrepreneur who started the company early last year.

As its name implies, BuyWithMe offers a service through which groups of people can buy products and services in their local areas at a discount so long as a certain number of buyers agree to prepay.

While he didn’t disclose revenue figures to date, Moss says that since the site’s public launch in May, customers have “saved” more than $2 million over retail prices through purchasing with BuyWithMe.

Commonly, deals offer customers discounts of 30% to 60% off regular prices. Recent offerings have included a pre-game reception and tickets for the Boston Bruins, 2-topping frozen yogurts at the chain Red Mango and professional teeth-whitening services.

In recent months, group buying websites have been a popular investment pick among venture capitalists. Firms have invested more than $130 million over the past year in at least eight such companies, with headquarters spanning from California to Russia.

In many cases, investors have had to compete to get into funding rounds, says Nick Beim, general partner at Matrix, which also backed luxury goods-focused group buying site Gilt Groupe. Beim described Boston-based BuyWithMe as “one of the most competitive east coast Internet investments we’d seen in recent years.

Bulk buying isn’t a new concept, Beim notes. Companies such as Costco and Sam’s Club have been making money from club buying for decades in the brick-and-mortar world. But online, he says, companies launched in the late 1990s struggled to gain traction, and only recently has the sector shown such promise.

“What’s different between now and the late 1990s is the presence of social media, which enables companies to have an authentic viral following,” Beim says. “When there’s a very significant deal, you see an echo effect on Facebook and Twitter. That accelerates consumer following.”

The online group-selling business model also holds potential for large profits. For example, Moss says BuyWithMe was cash flow breakeven within six months of the site’s launch.

The site is free to shoppers, but makes money by charging merchants who run offerings on it. If the offer does not secure the agreed-upon number of buyers, there is no charge. But if it does, BuyWithMe commonly gets a share of revenue, Moss says.

Potential for rich return-on-investment helps explain why venture firms are piling into the space. In addition to BuyWithMe, companies that have raised sizeable investments in recent months include:

Groupon, a competing site based in Chicago that offers discounted deals for group buyers in several U.S. cities, raised a $30 million round in December led by Accel Partners with participation from New Enterprise Associates. Deals cover fine dining, golf outings and skydiving.

Gilt Groupe, based in New York, raised $43 million in August from Matrix and General Atlantic to build a private online shopping community with a luxury brands focus.

Ideeli, based in New York, raised $20 million in December for its luxury brands shopping website. Backers include Constellation Ventures, StarVest Partners and Kodiak Venture Partners.

HauteLook, based in Los Angeles, raised $10 million in May from Insight Venture Partners to expand a shopping club featuring private sales that last 48 to 72-hours., a Russian online shopping club, raised a $20 million funding round this month led by Accel.

But while there’s vigorous competition in the shopping club space, Moss says, there are ways for rivals to set themselves apart. In BuyWithMe’s case, he says, one of the strategies is to focus on “experiential” packages, such as a meal and sightseeing trip, spa treatment and a fruit-picking expedition.

“I don’t think apple picking shows up at Sam’s Club,” he says.