Behind Groupon’s quiet billionaires

By now you’ve probably heard about the freshly minted billionaire Andrew Mason and his company Groupon, which floated on the New York Stock Exchange last week in a blaze of glory last week.

But Mason, who is aged 31, is the public face of the business as chief executive and co-founder of the group.

Behind the scenes he has been backed by two entrepreneurs who have driven Groupon’s development and become quiet billionaires in their own right.

Eric Lefkofsky and Brad Keywell are long-time friends and partners in a Chicago-based tech investment firm called Lightbank, which invested in Mason’s first venture (a philanthropic platform called The Point) and helped him create Groupon in 2008.

The site has provided the pair with their biggest payday. A few days after Groupon’s float, it has a market capitalisation of $15.3 billion.

Lefkofsky’s stake is worth $US3.1 billion, based on his shareholding of 129.2 million shares, although he has previous sold shares or received dividends worth a further $US325 million.

The Groupon float also propelled Keywell into the billionaire’s club. His stake is worth $US987 million, not including the $133 million in cash he received from shares sold during previous Groupon funding rounds.

Like most overnight successes, Lefkofsky and Keywell have long entrepreneurial careers, with a few spectacular hits and a few ugly and somewhat controversial misses.

Carpet, clothes and a dotcom crash

Lefkofsky says that he started his first business after a girl dumped him. Apex Industries (the “industries” was designed to make the company sound bigger) sold carpet to new students at the University of Michigan. Over his college career, Lefkofsky would expand to five schools and before he sold the business was making “about a hundred thousand dollars a year, which, I thought at the time, essentially made me the richest man on planet Earth”.

He started a sold a company called Mascot Sportswear and then in 1994 he teamed up with Keywell to buy Brandon Apparel, a company which made athletic apparel. It was a disaster.

“We bought the company when it was doing about $2 million in annual sales and we leveraged it up to about $20 million. Along with our sales growth came lots of debt which eventually crippled the company when fashion trends changed in the late 1990’s,” he wrote on his blog.

From there, the pair got out of the rag trade and into the booming internet sector, launching an online promotional products company called Starbelly in March 1999. The company would raise $US9.5 million in May and July and then in December it was sold for a staggering $US240 million – just before the dotcom bubble burst.

But HALO was in poor shape and a year after the deal Lefkofsky left his position as chief operating officer. In July 2001, the company filed for bankruptcy.

The winning streak begins

Lefkofsky might not have found the right business, but his enthusiasm for the web was not diminished. After leaving HALO he started InnerWorkings, a company which helps find and sell spare printing capacity. The business was floated on the NASDAQ in 2006, and currently has a market value of $US407 million.

Around that time, Keywell left the employment of legendary investor Sam Zell, to start an online business called Echo Global Logistics, which helps users find cheap moving services. That company floated in 2009 and now has a market capitalisation of $US340 million.

During this period the pair also launched a private company called MediaBank, a cloud-based company that routes advertising to media companies. The business is still in private hands, but handles more than $50 billion of advertising through its systems.

The big payday

In December 2006, Lefkofsky was approached by a former colleague from InnerWorkings named Andrew Mason, with an interesting idea about using the internet to collect money for worthy causes.

“I was intrigued with the idea and offered to invest $1 million if Andrew would drop out of school and start the company,” Lefkofsky wrote on his blog.

The site Mason built was called The Point. The idea was that anyone could organise a campaign (such as raising money for a cause) but it would only go ahead once enough people supported idea. Mason and Lefkofsky called this the “tipping point”.

But 18 months in, Lefkofsky was worried – The Point simply wasn’t making money. He seized on a small component of the site that allowed a business to make a discount offer to a group of people that would only go ahead once there was a tipping point.

Lefkofsky directed (or ordered, depending on the versions of events you read) Mason to start developing Groupon. Mason would admit in an early IPO filing: “I started Groupon to get Eric to stop bugging me to find a business model.”

Searching for the next big win

In early 2010, Lefkofsky and Keywell decided to formalise their entrepreneurial pursuits with an investment fund called Lightbank. The model is unusual.

“The philosophy is what it is and what it’s not,” Keywell told Reuters last December.

“What it is, is us partnering with entrepreneurs and helping them grow their businesses and getting more actively involved than any traditional venture capitalist would ever do to help them work on their business models and figure out what the levers are as they build their businesses and also find the right people and really execute on the growth of each business. So therefore what it’s not is passive investing or taking a tiny stake and making a lot of bets hoping that one of them pays off. It’s a whole different philosophy.”

The company’s website shows more than 30 companies in which Lefkofsky and Keywell have interests. The key attributes the company looks for, it says, are early stage businesses chasing large addressable markets and high growth industries. Applicants need disruptive technologies, simplicity and “awesome people”.

Sounds so simple, doesn’t it?

The risk taker

In the months leading up to the Groupon float, Lefkofsky made a mistake when he declared Groupon would be “wildly profitable”; Groupon would later have to direct potential investors to ignore the statement.

For Lefkofsky’s critics – and there are plenty of them, perhaps most notably in a scathing piece in Fortune – it was a perfect example of the entrepreneur as a loose cannon.

But Lefkofsky is unlikely to have worried too much about his error – he understands failure has its value.

“I have never been afraid to act. It is one of my greatest strengths in business. When I have an idea or reach a conclusion, I act on it, immediately and without reservation. I don’t over-think the movement, I embrace it. You can’t always be right, so you have to get comfortable with the fact that you are often going to be wrong. You are often going to fail.”

Lefkofsky admits that two of his first big businesses, Brandon Apparel and Starbelly, were “two pretty big failures” but says he never allowed himself to slowdown.

“I never thought of stopping. I just put my head down and kept moving forward, kept working toward success. I knew that doing nothing would seal my fate far more decisively than any single action I could take.”

“Had we tossed in the towel after Brandon and Starbelly (which most people would have done), there would have been no InnerWorkings, no Echo, no MediaBank, and maybe no Groupon.”

Lefkofsky, like fellow tech investors Reid Hoffman and Peter Thiele, is one of the men to watch in the tech world. He’s clearly smart, connected and equipped with an eye for a great idea

And now he’s got plenty of cash to back as many great ideas as he can find.