Monday, June 6, 2011
How to Earn $4 Billion on Coupons
The man who could make more than $4 billion from the initial public offering of Groupon Inc. is an 41-year-old, unassuming Midwesterner who got his start selling carpets on the street.
Eric Lefkofsky, who seeded Groupon with its first $1 million in 2008, shot to business fame this week when the e-commerce company filed for one of the most hotly-anticipated IPOs of the year. Mr. Lefkofsky was listed as Groupon's largest shareholder, with 21% of the shares--three times as much as Andrew Mason, the CEO and public face of the company.
If Groupon, which offers daily deals on goods and services to consumers in partnership with local merchants, is valued at the expected $20 billion or more, Mr. Lefkofsky's $1 million investment will be worth about $4 billion.
Yet for Mr. Lefkofsky, Groupon wasn't a one-off in the lottery of high-tech wealth. It was an extension of a lifetime of starting and selling companies-- sometimes with mixed results. The process has led him to a set of guiding business principles: Enter big, fast-growing markets, change course when things aren't working and use data as your guide.
"In our current environment, business and customers are changing so much faster than in the old days," he said in an interview. "You need access to information to figure out what to do next."
Mr. Lefkofsky, executive chairman of Groupon's board, is a rare mix of Midwestern modesty and Silicon Valley obsessiveness. He lives just outside Chicago with his wife and kids, staying close to his roots in suburban Michigan. He hates flying and travels for business only four to six times a year. He doesn't own a vacation home. His sartorial signature is a sweater vest, which he wears every day for precisely seven months a year to shield him from the harsh Chicago winters. Between April 1 and November 1, he switches to button-downs.
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Unlike Apple Inc.'s Steve Jobs with his famous black mock turtlenecks, Mr. Lefkofsky varies the colors of his vests.
He and his wife collect contemporary art, including works by Cindy Sherman and Richard Prince. He arrives at work every day at 6 a.m. and is home at around 6 p.m., rarely if ever, working on weekends or evenings. His office, in a former Montgomery Ward warehouse with exposed concrete walls, is one flight up from Groupon's.
Friends say Mr. Lefkofsky analyzes and de-constructs everything--sometimes to a comical degree.
"When you sit down with Eric, you know that within 10 minutes, he'll stand up, grab a magic marker and start writing on the white board," said Ted Leonsis, the former AOL executive, who is a Groupon board member and friend of Mr. Lefkofsky's. "It doesn't matter what the subject is. He could be talking about what we're going to have for dessert, he'd say 'Well, we could have cake, or we could have pie, and here are the issues,' and he'd write it on the board."
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Mr. Lefkofsky grew up in what he calls a "Brady Bunch" world, in a harmonious, middle-class family in Southfield, Mich. His father was an engineer, his mother was a school teacher. He was a unremarkable student in high-school and showed little interest in technology or business, he said.
"I was your typical confused high-school student, lost and insecure," he said.
In his freshman year at the University of Michigan, where he majored in history, he was dumped by his girlfriend. Searching for a distraction, he started selling carpet discarded by a company owned by a friend's father. The buyers were mostly students looking for cheap furnishing for their dorm rooms. He discovered his "fascination with money" and business, he said. He expanded to other universities, making $100,000 a year while still in college.
"I realized I had this propensity and knack for business," he said.
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After college, he and a friend, Brad Keywell, took advantage of the booming leveraged buyout business to borrow millions and buy Brandon Apparel Group, which made licensed children's clothing. The company eventually shut down under heavy debt and poor sales. Their second venture, an Internet firm called StarBelly, a promotional products company, was sold to a company that later went bankrupt.
Mr. Lefkofsky and Mr. Keywell went on to three companies after 2001: InnerWorkings, a print outsourcing company, Echo Global Logistics, which manages transportation systems for companies, and MediaBank, which helps buyers manage ad spending.
Mr. Lefkofsky can't talk about Groupon, given regulatory restrictions during the IPO process. His role in the company started when Mr. Mason, the founder, was a young tech whiz working at InnerWorkings. Mr. Lefkofsky became Mr. Mason's mentor and friend.
When Mr. Mason had an idea for a company that could organize group actions around social or political causes, Mr. Lefkofsky and Mr. Keywell invested $1 million to launch the company, which morphed into Groupon.
Mr. Lefkofsky made millions when Innerworkings and Echo went public, and he has already cashed out more than $300 million of Groupon stock as the company sold shares to outside investors. Because of his existing wealth, he said, the Groupon IPO windfall won't bring big changes to his life.
"Once you've reached a level where you're able to do the things you want to do, you stop focusing on the number," he said. "At some point, you just stop counting."
He says his focus is on Groupon and the more than 20 companies he and Mr. Keywell have funded through their $100 million fund, called Lightbank. While he's hopeful about their prospects, he said the chances of scoring another Groupon are slim.
"For that to happen, I would have to find another Andrew Mason," he said. "I've needed the magic of Andrew to create this kind of value."