Lefkofsky as Would-Be Schmidt Tested at Groupon After IPO: Tech
Eric Lefkofsky prodded Andrew Mason in 2008 into giving up work on a website called The Point to focus on a successor project -- an e-commerce company called Groupon Inc.
Lefkofsky had invested $1 million in The Point, a site that helps aspiring activists raise funds and build petition lists, and he fretted that his investment wasn’t panning out, people familiar with the matter said. That’s when Mason began work on Groupon.
Three years on, with Groupon valued at $16.7 billion after an initial public offering, Lefkofsky as executive chairman still calls many shots alongside Mason, who represents the company’s public face. Lefkofsky’s outspoken manner has drawn regulatory scrutiny, and his mixed record at other startups may leave some investors reluctant to buy shares of Groupon as it faces rising competition from Amazon.com Inc. and Google Inc. (GOOG), said Kris Tuttle, chief executive officer of Research 2.0.
“He’s a guy that makes a good entrepreneur, a startup guy,” said Tuttle, whose Boston-based firm researches technology investments. “To get to your first $20 million, you can have all the color you want, and he’s got that. But now, you’re talking about a public company that’s going to take direct competition from Amazon and Google.”
With Groupon’s stock rising 31 percent on the Nov. 4 debut, Lefkofsky, 42, must demonstrate that he can provide the oversight the company needs to fend off bigger rivals while chasing profitability. He would follow in the tradition of Google Chairman and former CEO Eric Schmidt, who helped guide founders Larry Page and Sergey Brin through the search engine’s 2004 IPO.
Management Growth Needed
Groupon owed almost twice as much to merchants at the end of September as it held in cash. Marketing costs rose 37 percent in the latest quarter, four times as quickly as its cash pile. And rivals’ discounts are putting pressure on Groupon’s margins, according to researcher PrivCo.
“They have to prove that they’re a real company, that they can continue growing,” Jeff Clavier, founder of SoftTech VC in Palo Alto, California, and a Groupon shareholder, said in an interview on Bloomberg Television. “We’ll see whether the management team can grow into a public company management team.”
Groupon’s shares gave up some of their first-day gains today, falling 0.5 percent to $25.97 at the close in New York. Earlier, the stock dropped as much as 5.8 percent.
Culture of Debate
Lefkofsky, the largest shareholder with a 17 percent stake, keeps an office on the seventh floor of Groupon headquarters in Chicago’s River North neighborhood, one level above where CEO Mason sits. While he oversees Lightbank LLC, a technology incubator that has invested in almost 20 companies, Groupon occupies a majority of his time, according to people close to the company.
Lefkofsky is frequently seen drinking coffee in the hallways and meeting rooms at Groupon. He attends the weekly “National Deals” meeting, where the company plans widespread discounts designed to raise its profile.
The gatherings act as a stage for what Mason, 31, has referred to internally as a “culture of debate,” where most proposals are met with objections from Lefkofsky or someone on the executive team, say people close to the company. In one meeting, Chief Financial Officer Jason Child called Mason and Lefkofsky a “married couple” because of their tendency to bicker, according to a person familiar with the matter.
While no business unit reports directly to Lefkofsky, the chairman moves between several functions in the company, including legal affairs, mergers and acquisitions, partnerships and fundraising, according to a person familiar with the matter.
Lefkofsky’s hands-on role alongside Mason -- a college music major who dropped out of a master’s program in public policy to start websites -- has lessened the need for a chief operating officer and contributed to the departure of two executives in that role in six months, a person with knowledge of the matter said.
Rob Solomon, who joined in 2010 after stints at Yahoo! Inc. and Electronic Arts Inc. (ERTS), left in March. Margo Georgiadis, who succeeded him in April, departed in September to return to Google, where she worked before Groupon.
Lefkofsky, whose stake was worth $2.86 billion on Nov. 4 and ranked number 293 on the Forbes 400 list of richest people in America this year, also caught the attention of the U.S. Securities and Exchange Commission, whose rules limit what companies can say about future prospects to potential investors between the time they file for an IPO and when shares start trading.
In remarks to Bloomberg News, Lefkofsky said he expected the money-losing company to become “wildly profitable.” The company later updated its IPO filing to tell investors to disregard the comments.
While Lefkofsky sways debate, his view doesn’t always prevail. Early on, he repeatedly rejected Mason’s idea to increase spending on marketing to bring in more customers. Lefkofsky shot Mason down because he wasn’t convinced that customers acquired through marketing would be valuable over the long haul. Mason created a mathematical model to prove his point, and eventually won the day, people familiar with the matter said.
Lefkofsky encouraged deliberation when Groupon received two buyout offers in 2010. In the fall of that year, after Yahoo offered $3.5 billion to buy the company, Mason wanted to immediately reject the offer on the grounds that he didn’t want to work for Yahoo or its then-CEO, Carol Bartz. Lefkofsky insisted that the board take time to discuss the offer, which they did for about three weeks before deciding to turn it down.
Google’s offer for $6 billion, made in November 2010, also prompted a drawn-out debate by the board. Kevin Efrusy, a Groupon director and partner at Accel Partners, wanted to turn down the offer. Lefkofsky wavered on the matter for about a month, before he and Mason finally decided that the deal would take too long to pass clearance with regulators, according to people close to the company.
As Groupon’s IPO filing brought questions about its accounting practices and rising marketing costs, Lefkofsky’s leadership has helped give the company credibility, said Andrew Stoltmann, a Chicago securities lawyer.
“Eric has always been viewed as the most experienced hand on deck,” Stoltmann said in an interview. “He’s the adult in the room, the babysitter, the supervisor -- a lot of people have a lot of confidence in him and that he’s on board.”
Other technology startups that have turned to seasoned executives to provide oversight include Facebook Inc., which brought in former Google executive Sheryl Sandberg as chief operating officer to work beside founder and CEO Mark Zuckerberg.
Not all of Lefkofsky’s background instills confidence for investors. His investment in Groupon follows a series of past ventures, some of which floundered. In the 1990s, Lefkofsky and his business partner, Brad Keywell, bought children’s apparel company Brandon Apparel Group. It later faltered after accruing debt and when fashion trends shifted, Lefkofsky explained in his blog.
Lefkofsky also co-founded Starbelly.com, an online promotional-merchandise seller, in 1999 and then sold to Ha-Lo Industries Inc. for $240 million. Ha-Lo filed for bankruptcy protection from creditors in July 2001 after writing down the acquisition.
In 2001, he founded printing-service provider InnerWorkings Inc. (INWK), which went public in 2006. He also helped found Echo Global Logistics Inc. (ECHO), a shipping-technology company, in 2005. That company held its IPO in 2009.
“Mr. Lefkofsky is proud of his track record as a founder of successful and innovative technology companies, including InnerWorkings, Echo, MediaBank, and Groupon,” Charles Sipkins, a spokesman for Lefkofsky, said in an e-mail. “His career has not been without numerous learning experiences that have shaped him as entrepreneur and investor.”
Lefkofsky also raised eyebrows with his sale of shares in Groupon. In late 2010, he brought together a pool of investors that included large institutional backers like Fidelity Investments and T. Rowe Price Group Inc. to raise $950 million in equity.
Lefkofsky sold $257.5 million of his Groupon shares to investors during that round of funding, in addition to the $57.1 million he had already sold in a previous round, transactions that are unconventional for a closely held company, said Mark Cannice, a professor of entrepreneurship at the University of San Francisco School of Management.
“You wonder if that makes the most sense for the long-term value of the company,” Cannice said. “Early investors have already achieved large liquidity events well before the public gets involved.”
Lefkofsky gradually lessened his involvement in InnerWorkings and Echo Global after their IPOs, according to people close to the companies. He also spends less time focused on Groupon than he did at its founding, the people said.
Whatever his daily involvement, Lefkofsky still holds a disproportionately large share of voting power. In recent months, Groupon approved a dual-class stock structure that grants shares owned by Lefkofsky, Mason and Keywell 150 times the voting power of all other shares.
“He’s really the puppet master behind the scenes,” Sam Hamadeh, CEO of New York researcher PrivCo, said on Bloomberg Television. “I don’t think he wants to let go of this company, and he’ll be pulling the strings behind the scenes for a long time to come.”
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