GroupMe hopes group texting will be the next breakout hit

By Laurie Segall, staff reporter


NEW YORK (CNNMoney.com) -- Sometimes the winner in a tech field isn't the company whose invention is the fastest or the sleekest -- or even the first. It's the company that hits the exact right point in the timing curve.

Meet GroupMe. The current darling of the New York tech scene, the group-text-messaging startup created its prototype product in May during a 24-hour "hackathon" at TechCruch's Disrupt conference. Fast forward seven months: GroupMe just closed a funding round rumored at $9 million.

As giants Twitter and Facebook continue to expand, a number of startups are searching for ways to cut through the social-networking noise. Cofounders Jared Hecht and Steve Martocci -- startup veterans who previously worked at Gilt Group and Tumblr -- saw a need for a group texting service that can essentially serve as a chat room between friends.

"We're sort of in this age of broadcast overload," Hecht says. "We have these wonderful publishing platforms where we can really express ourselves freely to the entire world, but what we don't have is a good product or platform that scopes that down."

GroupMe isn't the first startup to create a way for groups to text each other. There's also TextPlus, Beluga, and most recently, BrightKite.

But GroupMe backer Andy Weissman, co-founder of investment firm Betaworks, thinks GroupMe launched at exactly the right moment.

"If you think about the different success factors, timing is one of them. You can be way ahead of the market or way behind the market," he says. "In terms of the apps people are using, the devices people are using, [GroupMe's timing] was exactly right."

GroupMe's biggest advantage is the so-called "normal factor." While companies like Foursquare have to sell users on the benefits of sharing their location, and Twitter took years to convince the world that tweeting is useful for things beyond broadcasting your breakfast choices, group text messaging isn't such foreign concept. Users don't even need smartphones to do it.

"For some people who don't really understand Twitter or the concept of a status update, they do understand conversing with their friends or conversing with the families," Martocci says.

GroupMe's founders won't disclose how much venture capital they've taken, but the company's backers include big-name investors like Betaworks, First Round Capital, Lerer Ventures, and Ron Conway. The company's valuation is believed to be around $30 million -- and there's talk that a bidding war broke out.

"It's a great idea at a great time," Hecht says of the company's golden run. GroupMe was able to quickly raise cash and start hiring -- it now has a staff of 10.

Charlie O'Donnell, one of GroupMe's first investors, says deals are moving quickly, especially for startups targeting the consumer market.

"There's a lot of money competing to get into a small number of deals that are showing traction," he says. "The company has very significant traction in terms of user base and usage, and any company that's showing hockey-stick charts is going to have a lot of people interested."

The investor swarm that descends on promising ventures has the tech field muttering about a new bubble. O'Donnell says he isn't concerned about the soaring valuations -- but he admits that the talent war is getting fierce.

"If there's a bubble anywhere, it's a talent bubble of how much engineers cost," he says.

GroupMe cofounders Martocci and Hecht agree.

In a market where everyone seems to have the next big idea, "it's engineering talent that's determining whether your idea is created -- not necessarily the money," Martocci says.

Of course, there's always the money question. Cool ideas don't necessarily translate to profits.

GroupMe's founders say their business model will rely on sponsorships and advertising. A recent test run at the Austin City Limits music festival experimented with how sponsored groups can work at live events. The next big push is for South by Southwest in March -- an event known for launching tech stars.

Not everyone is convinced that GroupMe will take off.

Richard Wong, a partner at Accel who has backed ventures including Facebook and Twitter, took a pass on investing.

"Even though it's much easier to start companies and get them off the ground, it's still a limited number of companies that actually have the chance to become broad-scale," he says. He likes GroupMe, but isn't sure how the business plan will pan out.

But O'Donnell -- and other investors -- think they've found a winning horse.

"It's easy to see the fundraising numbers and prices and to say that could get out of hand," O'Donnell says. "But which of the following things do I think the public wants to do more: tweet to over 500 people or talk to small private groups? The potential market for something like GroupMe is way bigger." To top of page

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