NEA’s Barris Turns Football Loss Into More Than 150-Fold Gain From Groupon

At a Northwestern University football game in October 2005, venture capitalist Peter Barris watched his alma mater suffer a 33-17 defeat to Michigan. The blow was softened by getting the best investment tip of his career.

A friend at the game told him about an entrepreneur named Eric Lefkofsky, and the two soon hit it off. Barris’s firm, New Enterprise Associates, began investing in Lefkofsky’s endeavors, including a $4.8 million bet on a startup called The Point.

That company, started in 2007 with a vague idea about “group action” and no prospects of making money, morphed into Chicago-based Groupon Inc. Less than four years later, NEA’s stake has now increased more than 150-fold to $2.28 billion, thanks to Groupon’s initial public offering this week.

“We were fascinated by the concepts, but there really wasn’t a way to monetize it,” Barris, 59, said in an interview earlier this year -- before Groupon entered its pre-IPO quiet period. “We bet on the belief that the team could mine the promising aspects of the model, and they did.”

NEA, one of the nation’s biggest venture-capital firms, can use the returns. While it had a successful IPO this year with the flash-memory startup Fusion-io Inc., NEA missed out on many of the top social-media companies, including Facebook Inc., LinkedIn Corp. and Zynga Inc. Investments in that market have bolstered the portfolios of venture firms such as Accel Partners, Greylock Partners and Union Square Ventures.

Kate Barrett, a spokeswoman for NEA in Chevy Chase, Maryland, declined to comment for this story because of quiet- period restrictions.

Shrinking Funds

While social networking has been a bright spot, most venture firms have struggled to make money over the past decade. A drought of IPOs has made it harder to earn a payback on investments, and funds aren’t attracting as much money. U.S. venture fundraising fell to the lowest level in eight years in the third quarter, when companies canceled $8.9 billion in IPOs, according to the National Venture Capital Association.

Groupon jumped $6.11, or 31 percent, to $26.11 in its first day of trading. That gives the company a $16.7 billion market cap and values NEA’s stake at $2.28 billion.

Groupon may help the IPO market regain some momentum, said Dixon Doll, co-founder of investing firm DCM and a 35-year technology-industry veteran. That bodes well for other companies registered to go public.

“When the industry shuts down, it takes a strong company to blaze the way forward and pry the door open again,” said Doll, who has co-invested with Barris in the past. “We have other good companies that are in registration that would like to take advantage of a reopening window.”

Bumpy Ride

Still, Groupon’s journey to an IPO hasn’t been smooth. Since filing to go public in June, the company has come under fire for its aggressive accounting, executive departures and comments that company officers made about financial prospects.

Barris, who joined NEA in 1992 after a career in technology, has worked with challenging startups before. He’s on the board of Web-phone service provider Vonage Holdings Corp. (VG), which had a disastrous IPO in 2006 because of competition from bigger competitors and a patent-infringement suit.

Vonage’s shares plunged in the weeks following their debut. After warning that bankruptcy was a possibility in 2008, Vonage is now profitable and the stock has regained some of its value.

Barris isn’t afraid to play a hands-on role at portfolio companies. In 2009, he had to make a critical decision at employment site Jobfox Inc., where he was an investor and director. The chief executive officer, Rob McGovern, was in a car accident that left him in a coma for two weeks.

Handling Crisis

Barris had backed McGovern at his previous company, CareerBuilder Inc., and was committed to helping him while he was hospitalized. Barris asked a fellow director to take the CEO role on an interim basis, and McGovern fully recovered and returned to the company about nine months later.

“Peter wanted to make sure the board wasn’t going to be rash,” McGovern, 50, said in an interview. “He had the chance to say, ‘Let’s go hire another CEO,’ and he didn’t do that. He really stayed with me.”

Barris has similar responsibilities at Groupon. As chairman of the compensation committee, he’s charged with reviewing succession planning for management, as well as approving executive compensation and change-of-control arrangements.

NEA is counting on him to protect its 13.7 percent stake in the company. The firm invested a total of about $10 million in Groupon from 2008 to 2009. Groupon sold 35 million shares at $20 a piece yesterday. That values the company at $12.7 billion.

Juniper Networks

Assuming the stock holds its value for six months, a period during which insiders can’t sell, it would make Groupon NEA’s second-biggest gain in the firm’s 35-year history. The largest was computer-equipment maker Juniper Networks Inc. (JNPR), which went public in 1999. NEA made more than 500 times its money on that deal.

Prior to Groupon, NEA had invested in three other Lefkofsky companies. They have so far produced less dramatic gains.

In 2001, Lefkofsky founded InnerWorkings Inc. (INWK), a provider of software to printing companies. NEA paid $40 million for 19 percent of the company in January 2006, seven months before it went public. The firm now owns a 15 percent stake valued at $66.4 million.

That year, Barris led NEA’s $13.1 million investment in Echo Global Logistics Inc. (ECHO), a company started by Lefkofsky and his friend from law school, Brad Keywell. Echo Global, which provides technology for the transportation industry, went public in 2009, and NEA now owns an 11 percent stake worth $38.8 million.

Andrew Mason

The third investment came in 2007, when NEA bought a stake in MediaBank LLC, a developer of advertising software that in September announced plans to merge with another company to form MediaOcean.

In building Groupon, Lefkofsky and Keywell were joined by Andrew Mason, who had worked at InnerWorkings. They started The Point in 2007 to “solve collective action problems,” according to Lefkofsky’s website. NEA’s $4.8 million investment, the following year, valued The Point at about $30 million. By 2010, as Groupon, the company generated more than $300 million in annual revenue and rebuffed a $6 billion takeover offer from Google Inc. Mason serves as Groupon’s CEO.

“It was the combination of the business savvy of Eric and Brad with the creative genius of Andrew Mason,” Barris said.

Barris keeps backing Lefkofsky and Keywell, looking for more Groupon-like returns. NEA is an investor in their seed- stage venture firm, Lightbank, which they started last year. Lightbank has invested in about 20 startups, including Sprout Social Inc., which helps businesses bolster their presence on social networks.

Sprout Social

Barris and his partner at NEA, Harry Weller, met the Sprout founders on a trip to Chicago in 2010. The startup had received $1 million from Lightbank and wasn’t yet ready to raise another round. Their meeting with the NEA partners went so well that when it was time to bring in more capital, it was a quick decision. NEA invested $10 million in February, and Barris joined the board.

“We had already talked about our business and brainstormed with them,” said Justyn Howard, the 32-year-old CEO of Sprout. “They were excited and willing to help, so it made it really easy to make the jump and actually do business with them.”

To contact the reporter on this story: Ari Levy in San Francisco at alevy5@bloomberg.net

To contact the editor responsible for this story: Tom Giles at tgiles5@bloomberg.net

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