The May Report: 6/11/2011: Thank goodness my headline writer is not on strike after all: Saturday Switchup – Pt. II delivered before Pt. I; I can see clearly now: “Lets get funky. Lets announce everything. Take a trip in Eric P. Lefkofsky’s time machine: “Lets be WILDLY positive in our forecasts,” he told his Ha-Lo colleagues, even as that business was falling apart. “if we get wacked on the ride down- who gives a sh*t. Is it going to worse than today? is our market cap going to fall to 200N, 100M who the f**k cares.” — so wrote Eric P. Lefkofsky years ago and this email was revealed in the Jan. 2007 Barrons article but the media is just now catching on; The Grabowsky Groupon predictions: The IPO will be pulled in a month, the valuation will wilt to $2B from $20B; Brad and Eric will be shown the door at ChicagoBooth and so will Professor Steve Kaplan; Rahm and Quinn will disassociate themselves; Andrew Mason will leave Groupon soon, realizing he does not want another Divine or marchFIRST on his head and at 30 he’s more mature than Eric is at 41! Additionally cats will lay down with dogs, Jim Eiden will get a job and Gary Slack’s nose will stop growing (caveat: only SOME of these predictions will come true).
The May Report: 6/11/2011: Thank goodness my headline writer is not on strike after all: Saturday Switchup – Pt. II delivered before Pt. I; I can see clearly now: “Lets get funky. Lets announce everything. Take a trip in Eric P. Lefkofsky’s time machine: “Lets be WILDLY positive in our forecasts,” he told his Ha-Lo colleagues, even as that business was falling apart. “if we get wacked on the ride down- who gives a sh*t. Is it going to worse than today? is our market cap going to fall to 200N, 100M who the f**k cares.” — so wrote Eric P. Lefkofsky years ago and this email was revealed in the Jan. 2007 Barrons article but the media is just now catching on; The Grabowsky Groupon predictions: The IPO will be pulled in a month, the valuation will wilt to $2B from $20B; Brad and Eric will be shown the door at ChicagoBooth and so will Professor Steve Kaplan; Rahm and Quinn will disassociate themselves; Andrew Mason will leave Groupon soon, realizing he does not want another Divine or marchFIRST on his head and at 30 he’s more mature than Eric is at 41! Additionally cats will lay down with dogs, Jim Eiden will get a job and Gary Slack’s nose will stop growing (caveat: only SOME of these predictions will come true).
Editor and publisher: ron@themayreport.com, ronaldmay@aol.com, www.themayreport.com , 773-525-3944.
Assistant editor: Melanie Adcock, iPHONE: 312-259-0610, melanie_adcock@msn.com
If you missed an article, go here: www.tmronline.com/A55951/tmrarticles.nsf/vwFullNewsletter
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TABLE OF CONTENTS
The Scoop section:
_________________
Part I
– From TMR, 1/23/2007: A reprint of the Barron’s article about Eric Lefkofsky and InnerWorkings with the now infamous “funky” quote
– June 6, 2011: Wall Street Journal, Robert Frank: How to Earn $4 Billion on Coupons
– The Register in the UK: Inside the ‘funky’ history of Groupon’s biggest shareholder by Cade Metz
– The checkered past of Groupon’s chairman, Kevin Kelleher, contributor
– OK, I’m confused: This appears to be the same as the article above but with some more things added and it is listed under Andrew Mason, not Eric Lefkofsky
– Melanie Adcock: TechCrunch Publishes Negative Story about Groupon (that the May Report covered last year) Is Public Opinion Changing Toward Groupon?
– Briefly noted, by Ron May
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Part II
– While Mike Rhodes fiddles with some project in the West Loop, Jess Loren Popov brings us up to date on what some ex-Sync partners are doing and where they’ve gone
– Bob Geras: Three corrections to what Ron wrote about the Driehaus affair — sounds like cloak and dagger to me
– Ron and Bob exchange a few more barbs
– Melanie Adcock: Orbitz Does the Right Thing — Let’s Keep It Going
– Cards Ron collected at midVentures on 12/16/2010
– Cards Ron collected at the Executives’ Club conference on June 1, 2011
– Cards Ron collected at the MEF Holiday Networking event on 12/6/2010
– Ashley Dennison: Cable Show – Items of Interest
– Jeff Gilbert on the Cable Show
– Safety Engineers to Unveil Fed Bill at Chicago June 12 Conference Aimed at Improving Work Safety
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_____________________________
Part I
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From TMR, 1/23/2007: A reprint of the Barron’s article about Eric Lefkofsky and InnerWorkings with the now infamous “funky” quote
01/31/2007
Scoop
[Actually 1/23/07]: A must read: Barron’s, Jan. 15, 2007: InnerWorkings and Eric P. Lefkowsky who also used to run Starbelly
A must read: Barron’s, Jan. 15, 2007: InnerWorkings and Eric P. Lefkowsky [sic: Lefkofsky] who also used to run Starbelly
Barron’s. New York, N.Y.: Jan 15, 2007.Vol.87, Iss. 3; pg. 47, 1 pgs
InnerWorkings claim that its proprietary software is radically changing how American companies procure print jobs. In just the five months since their initial offering, InnerWorkings shares have risen a radical 80%, with a recent print of 16.20. But, InnerWorkings goes to great lengths to obscure its ownership and control by a chap named Eric P. Lefkofsky who has a history of busting investors after promising to radically transform bricks-and-mortar industries. The last-reported 12 months’ profits amounted to a paltry $5.7 million. So the current stock market valuation of $700 million is 125-times those trailing profits. Unwilling to wait even until the Feb 11 expiration of InnerWorkings’s IPO lockup agreement, Lefkofsky and other insiders would unload 6.2 million shares in the follow-on offering that Morgan Stanley reportedly wants to price this week. That would net insiders $100 million.
The key figure in a software company selling stock has left a trail of unhappy investors.
IN A ROAD SHOW CONTINUING THIS week, Morgan Stanley hopes to persuade investors to part with $150 million for the follow-on stock offering of a company called InnerWorkings. This Chicago-based company claims that its proprietary software is radically changing how American companies procure print jobs. In just the five months since their initial offering, InnerWorkings shares (ticker: INWK) have risen a radical 80%, with a recent print of 16.20.
But those reading the prospectus should also re-read the Dr. Seuss story about the Sneetches, who paid a huckster to change their plain bellies into star bellies, and vice versa. The chap ends up leaving town with all their money, while laughing: “They never will learn…You can’t teach a Sneeteh!”
You see, InnerWorkings goes to great lengths to obscure its ownership and control by a chap named Eric P. Lefkofsky who has a history of busting investors after promising to radically transform bricks-and-mortar industries. He seems to identify with Dr. Seuss’s huckster: he called his last business Starbelly.com, a venture that rapidly went into bankruptcy and provoked fraud suits by investors alleging that Starbelly’s software was never what Lefkofsky promised. The current InnerWorkings road show and stock-offering is, in part, aimed at cashing out much of Lefkofsky’s stock while InnerWorkings shares teeter at stilted levels.
Eerily like Starbelly, there’s less than meets the eye to the company’s touted “PPM4″ software, say some InnerWorkings ex-employees. In the weeks before Morgan Stanley’s eagle-eyed due diligence team toured InnerWorkings for its August 2006 initial underwriting, workers stayed late padding the company’s off-the-shelf FileMaker Pro database with an impressive-looking list of suppliers. Then they dummied up some screen-shots of the software for the inside cover of the prospectus. Citing the quiet period prior to its stock offering, the company declined to answer my questions.
Despite its Potemkin technology trappings, InnerWorkings is a glorified broker of print jobs. Like others of its ilk, it beats up on printers on behalf of corporate clients and splits any savings it extracts. Much of its sales growth has come through roll-up acquisitions of other print brokers. And a related-party transaction in the months before the IPO seems to have produced a big part of InnerWorkings’ profits. Even so, the last-reported 12 months’ profits amounted to a paltry $5.7 million. So the current stock market valuation of $700 million is 125-times those trailing profits.
That’s a ridiculous valuation for a company in the mundane print brokerage business. And I suspect that fact isn’t lost on the 37-year-old Lefkofsky who, with his wife and others, controls 35% of InnerWorkings shares via some holding companies. Unwilling to wait even until the Feb. 11 expiration of InnerWorkings’s IPO lockup agreement, Lefkofsky and other insiders would unload 62 million shares in the follow-on offering that Morgan Stanley reportedly wants to price this week. That would net insiders $100 million.
InnerWorkings’ prospectus makes only passing mention of Lefkofsky, with a sentence buried on page 54 describing him as someone “instrumental in the formation and development of our company” who served as a director until May 2006 and also as a consultant. When I asked InnerWorkings about him last week, a company spokesman said Lefkofsky consulting had stopped back in June 2006.
So I thought it generous of Lefkofsky to be still laboring at InnerWorkings on Friday, while the firm’s title-bearing leaders junketed on Morgan Stanley’s road show. The InnerWorkings phone directory doesn’t list Lefkofsky, but the company operator quickly put me through to his office, where a friendly-sounding lady told me he was running a meeting. He did not return repeated voice-mails and e-mails.
Ex-employees tell me that the company’s disclosures hardly do justice to Lefkofsky’s daily role at the company, where he has remained a foul-mouthed, coffee-chugging boss who micro-manages InnerWorkings by force of his strong personality and his group’s 35% control position. On the other hand, it’s easy to see why the company and its underwriters would want him to remain behind the curtain. He’s left a trail of burned investors and fraud allegations. Just out of law school in 1994, Lefkofsky got the city of Columbus, Wisc., to back his takeover of a local clothing maker where he promised to create jobs making apparel branded by major-league sports teams. After laying off the workers, the firm sought bankruptcy protection, with its bankers alleging in a state suit that Lefkofsky applied the business’s resources to starting his next venture, Starbelly.
Business-to-business procurement Websites were hot in 1999, and Starbelly.com held itself out as a marketplace where companies could arrange to put their logos on promotional items of clothing and hard goods like coffee mugs. Through some family connections, Lefkofsky and his partners attracted the “eye of a Chicago-based promotional items vendor named Ha-Lo Industries. A due diligence investigation by Ernst & Young warned Ha-Lo that Starbelly’s software was not as proprietary-or even as functional-as Starbelly claimed, according to Ha-Lo documents discovered in subsequent shareholder suits. The publicly-held Ha-Lo nevertheless bought Starbelly for $240 million in cash and stock in May 2000, saying that Starbelly’s website would bring in $1 billion in revenues.
Lefkofsky and his Starbelly pals quickly assumed control of Ha-Lo, according to lawsuit records. But the software fizzled and the website was a flop. In scarcely a year, Ha-Lo wrote off Starbelly completely. It entered bankruptcy court in July 2001. Class action fraud suits against Lefkofsky and others were ultimately settled, but not before turning up vulgar, reckless Lefkofsky e-mails (one of which is reproduced verbatim below) that might bring shudders to any public investor entrusting her savings to his latest venture.
“Lets get funky. Lets announce everything. Lets be WILDLY positive in our forecasts,” he told his Ha-Lo colleagues, even as that business was falling apart. “if we get wacked on the ride down- who gives a sh*t. Is it going to worse than today? is our market cap going to fall to 200N, 100M who the f**k cares.”
No wonder he’s taken a low public profile since starting Inner Workings with Richard A. Heise, Jr.-another promoter hounded himself by the fraud suits of investors who said he never delivered his promised Internet software for managing executive benefit plans.
Numerous ex-employees of InnerWorkings told me that its vaunted software also doesn’t work as claimed. A century ago, there was an investor named Mark Twain who lost a bundle investing in ersatz printing technologies. He said that history doesn’t repeat itself, but sometimes it rhymes.
_________________________________
June 6, 2011: Wall Street Journal, Robert Frank: How to Earn $4 Billion on Coupons
finance.yahoo.com/career-work/article/112867/how-to-earn-4-billion-on-coupons-wsj
How to Earn $4 Billion on Coupons
by Robert Frank
Monday, June 6, 2011
provided by
wsjlogo.gif
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.
GroupOn
Known for vests, Eric Lefkofsky will make
a fortune.
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.
[More from WSJ.com: Games as a Recruitment Tool]
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.”
[More from WSJ.com: Here's One Way to Beat the Market]
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.
[More from WSJ.com: Does Busier Job Equal Happier Marriage]
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.”
________________________________
May here. Notice the whitewash job on past mistakes. No mention explicitly of HA-LO, just a firm that “happened” to go bankrupt as though the Starbelly deal and the HA-LO bankruptcy were not connected. Does the name Bob Zocco mean anything to anyone? How about Linden Nelson and his wife who is Brad’s wife’s cousin? Another article in this report has Eric at 22% stock in Groupon, Andrew at 8%, and Brad at 7%. I assume that they are including Eric’s wife and Brad’s wife and kids. I’ll get into the relatively little coverage of Brad Keywell in Briefly noted and also the curious unevenness and variability in coverage of Andrew and Eric, sometimes and some places more on one and in other times and places, more on the other.
________________________________
The Register in the UK: Inside the ‘funky’ history of Groupon’s biggest shareholder by Cade Metz
www.theregister.co.uk/2011/06/11/eric_lefkofsky_of_groupon/
Inside the ‘funky’ history of Groupon’s biggest shareholder
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By Cade Metz in San Francisco • Get more from this author
Posted in Financial News, 11th June 2011 00:03 GMT
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A decade before he helped found Groupon – the online daily-deals site that turned so many heads last week when it filed for an IPO valuing itself at $30bn – Eric Lefkofsky ran a startup called Starbelly.com. In the lingo of the day, the Chicago-based Starbelly was billed as a “B2B” outfit, offering a marketplace where businesses could arrange to distribute promotional goods. In 2000, the company sold itself to old-school brick-and-mortar retailer Ha-Lo for $240 million.
Starbelly officers assumed lead positions within Ha-Lo – Lefkofsky was chief operating officier – and a little more than a year later, the company went bankrupt. Ha-Lo and Starbelly faced multiple class-action fraud lawsuits from shareholders, and one suit, which was eventually settled, turned up emails Lefkofsky had sent to his colleagues. “lets start having fun … lets get funky … lets announce everything … lets be WILDLY positive in our forecasts … lets take this thing to the extreme … if we get wacked on the ride down – who gives a shit … THE TIME TO GET RADICAL IS NOW … WE HAVE NOTHING TO LOSE…,” he said in one email, according to court documents.
Ten years on, as Groupon seeks an IPO, this email keeps popping up. The Financial Times alluded to it in a piece last week, and it has now turned up in reports from Bloomberg TV (YouTube video) and Fortune.
The email was echoed – at least in small part – by statements Lefkofsky made last week that seemed to break the SEC’s “quiet period” rule for IPOs.
“I’m going to be in technology for a long time,” Lefkofsky told Bloomberg on June 3 – a day after Groupon filed for an IPO – going on to refer to two other companies he founded, InnnerWorkings and Echo. “I’m going to start a lot of companies. These are not sham companies. These are great businesses. InnerWorkings is profitable. Echo is profitable. Groupon is going to be wildly profitable.”
Because Lefkofsky used such language during the quiet period, Groupon may be forced to re-file for its IPO. But separately, some have raised concerns over the similarity between the statement and that decade-old email – and, more generally, over the lawsuit-ridden business history of Lefkofsky and his old college buddy Brad Keywell, who co-founded Starbelly.com. Lefkosky, Groupon’s chairman, owns a nearly 22 per cent pre-IPO stake in the company. Keywell owns a 7 per cent stake.
Lefkofsky’s email is very much indicative of its time. in those days, many tech entrepreneurs were no doubt saying much the same thing. And yes, lawsuits are an unavoidable part of doing business in the modern world. But Mark Morgenstern, managing partner of San Francisco-based investment firm Blue Mesa Partners – and who is also a lawyer – tells The Register that potential Groupon investors should at least consider the business history of the company’s founders.
Eric Lefkofsky
“If I were an underwriter or a buyer of security, [Lefkosky's past] would strike a word of caution,” he says. “I would say ‘This may be a very talented guy, but does he really grasp what being a CEO post-Sarbains-Oxley means?’ This might give you some pause, but it’s not a show stopper. You would still evaluate the [entire] guy and the job he’s doing and the company – but [the history] would be something you take into the mix to consider.”
Groupon did not respond to requests for comments on Lefkofsky’s business history, and Lefskosky’s lawyer, Charles Sipkins, declined to comment.
“lets get funky … lets announce everything … lets be WILDLY positive in our forecasts … lets take this thing to the extreme … if we get wacked on the ride down – who gives a shit.” –Eric Lefkofsky during the last dot.com bubble
After Ha-Lo and Starbelly filled for bankruptcy, the companies faced multiple lawsuits from shareholders, including one that named Lefkosky and Keywell as defendants. According to a notice sent to anyone who purchased stock in Ha-Lo over a roughly two-year period starting in 1999, the suit alleged that Ha-Lo’s top officers and directors “knowingly, or at least recklessly, made grossly inaccurate statements concerning its agreement to acquire Starbelly.com“, and that they “repeatedly highlighted the extraordinary benefits of the acquisition” although it led, at least in part, to Ha-Lo’s bankruptcy.
It’s worth remembering that anyone can file a lawsuit. “We live in a relatively binary world: something either succeeds or it fails,” says Morgenstern. “This is a world in which everyone wants to put a Scarlet Letter F for failure on everyone and turn them into Hester Prynne. If there is a problem, somebody sues. Any time you see an earnings release that’s different from what’s expected, somebody sues. You consider everything about a person when considering investing in them, but … every case does truly need to stand on its own facts.”
But there are more than a few lawsuits in Lefkofsky’s past. Before founding Starbelly, Lefkofsky and Keywell purchased a children’s athletic-clothing company called Brandon Apparel. On his personal blog, Lefkofsky called Brandon a “huge failure. We over-leveraged the company and it eventually crumbled under the weight of that debt when the industry began to consolidate against us.”
After the company entered bankruptcy, there was a lawsuit from the company’s bank, according to a 2007 story from Barron’s, and in this suit, the bankers alleged that Lefkofsky used Brandon Apparel’s resources to start Starbelly and defrauded creditors by preventing them from recouping loans from the dot.com. Brandon was also sued by National Football League Properties, Major League Baseball Properties, and the former owner of Brandon.
Funky déjà vu
The class-action fraud suits against Ha-Lo and Starbelly were eventually settled. Lefkofsky’s email urging colleagues to “get funky” was first turned up by that Barron’s story, which concerned his subsequent venture: InnerWorkings. As Fortune points out, the Barron’s piece raised many of the same concerns with InnerWorkings that are now being raised with Groupon, and it claimed that InnerWorkings has tried to hide Lefskofsky’s involvement.
“InnerWorkings goes to great lengths to obscure its ownership and control by a chap named Eric P. Lefkofsky who has a history of busting investors after promising to radically transform bricks-and-mortar industries,” the story said. “The current InnerWorkings road show and stock-offering is, in part, aimed at cashing out much of Lefkofsky’s stock while InnerWorkings shares teeter at stilted levels.”
At one point, InnerWorkings was sued by a company called Sports Publishing LLC. The suit accused Lefkofsky of billing Sports Publishing hundreds of times for fraudulent amounts from 2005 to 2007 and of “terrorist tactics to distract the company”. “All of these illegal activities were intended to and did deflect Sports Publishing away from the massive fraud Lefkofsky and the Defendants were engaged in,” the suit alleged. The suit was later withdrawn, and InnerWorklngs countersued.
$382 million pocketed. Before the IPO
Others have raised concerns over the Groupon IPO because Lefkofsky and his family have already received $382 million from Groupon – prior to the IPO filing. Similarly, Keywell and his family received $156 million, and thirty-year-old CEO Andrew Mason received $10 million. As AllThingsD points out, Groupon has raised $946 million, and $810 million was paid out to employees and investors as stock purchases.
According to its SEC filing, Groupon’s revenues have soared of late, but the company is still very much in the red. Its revenues topped $644.7m in the first quarter of 2011, up from $44.2m in the same quarter last year, but its losses reached $102.7 million as the company spent heavily on sales staff and marketing.
Groupon – which sells coupons for discounted goods and services from local merchants – has found a niche where it could bring in large sums of money in a very short amount of time. But it’s yet to be seen whether the business is sustainable in the long term. Some Groupon customers have started to complain that the coupon service is not a viable way for them to improve to their own sales.
Many, particularly in the tech press, have been strangely positive about Groupon’s prospects. The company became a kind of cause célèbre after it apparently rejected a $6bn acquisition from Google. The IPO filing puts its value significantly higher: an astounding $30bn. The next wave of web IPOs is well and truly upon us. In addition to Groupon’s filing, LinkedIn has already gone public, and Pandora has filed, as well. But as this wave hits, let’s not forget the last one. “Wild positivity” takes a company only so far. ®
_________________________________
The checkered past of Groupon’s chairman, Kevin Kelleher, contributor
tech.fortune.cnn.com/2011/06/10/groupon-eric-lefkofsky/
The checkered past of Groupon’s chairman
June 10, 2011: 5:00 AM ET Groupon’s largest shareholder and chairman, Eric Lefkofsky, has a back story investors might want to know.
By Kevin Kelleher, contributor
FORTUNE — “Lets start having fun… lets get funky… let’s announce everything… let’s be WILDLY positive in our forecasts… lets take this thing to the extreme… if we get wacked [sic] on the ride down-who gives a shit… THE TIME TO GET RADICAL IS NOW… WE HAVE NOTHING TO LOSE…”
Eric Lefkofsky, serial entrepreneur
This is a quote from the dot-com era. It’s pretty much what you’d expect a novice executive to say back then, when it was all about money and not at all about creating something good. It was written in an email by the co-founder of a company called Starbelly.com, which labeled itself a B2B provider — back when people greeted that phrase with a straight face.
In early 2000, Starbelly sold itself to another company called Ha-Lo Industries for $240 million, much of which went to the author of those words, a man named Eric Lefkofsky. Not long after that transaction, Ha-Lo declared bankruptcy. Shareholders and others blamed the Starbelly deal, and a series of lawsuits ensued.
Eric Lefkofsky is the co-founder and chairman of Groupon, which filed last week for an IPO valuing the company at $30 billion, as well as its largest shareholder, with a pre-IPO 22% stake in the company. The other co-founders include Andrew Mason (8% stake), the cherubic public face of Groupon; and Bradley Keywell (7% stake), who also co-founded Starbelly with Lefkofsky. Before Starbelly, Keywell and Lefkofsky founded a sportswear company called Brandon Apparel.
So why should such an old quote matter? Everyone remembers things they said a decade or more ago they may regret today. And failure is hardly something to be ashamed of in tech; usually it’s heralded as a mark of having shot for the moon, something to be prized and not frowned upon.
But Groupon’s IPO has brought an uncomfortable spotlight onto Lefkofsky. While some attention focuses on his ambitions as an investor in tech startups, others see a “spotty history” and draw parallels between the past and the present. Lefkofsky’s track record, reflecting failures and successes, bears certain hallmarks: rapid revenue growth accompanied by big losses, a penchant to sell stock early on, and lawsuits filed by investors, lenders or customers who feel they have been wronged.
Lefkofsky began his first venture, athletic-apparel maker Brandon Apparel, which he and Keywell bought after graduating law school together, in 1994. “It ended up being a huge failure,” Lefkofsky wrote on his blog. At first, the company — like Groupon — saw fast growth, with revenue rising from $2 million to $20 million. But not fast enough to repay debts. “We over-leveraged the company and it eventually crumbled under the weight of that debt,” Lefkofsky wrote.
Lawsuits unleashed
The risk of failure is inherent to entrepreneurialism. But Brandon Apparel’s tanking yielded a series of lawsuits. A lender, Johnson Bank, sued Lefkofsky and won a default judgment of $11 million. The former owner of Brandon reportedly sued the company, as did National Football League Properties and Major League Baseball Properties. The city of Columbus, Wisc., loaned Brandon $750,000 to create jobs in the city, but the company closed the plant not long after getting the loan and the city was forced to write off the loan. “They basically bailed out of Columbus, and that seems to be their ongoing tactic,” Columbus’s city attorney said at the time.
In March 1999, Lefkofsky and Keywell founded Starbelly.com, which sold promotional t-shirts and coffee mugs. In August 1999, Starbelly raised $8 million from Chase Capital and Flatiron Partners, a deal that valued it at $32 million — even though the company was on track to post a $2.5 million loss on $183,000 in revenues during its first six months of operation. In January 2000, Ha-Lo Industries, a promotional products company with five decades of experience, bought Starbelly — now ten months old — for $240 million. (Credit Suisse, one of Groupon’s underwriters, advised Ha-Lo on the deal.)
Lefkofsky and Keywell, who joined Ha-Lo as executives and directors, showed a knack for rapidly growing a company’s value despite significant losses. But again, it all came crashing down. Ha-Lo swung from a $1 million operating profit in 1999 to a $64 million operating loss in 2000, thanks to $8 million in payroll costs for Starbelly employees and $40 million in the amortization of goodwill from the Starbelly deal. In July 2001, Ha-Lo filed for bankruptcy (under a new management, the company later emerged from bankruptcy as Halo Branded Solutions). And again, lawsuits followed, including a class-action suit naming Lefkofsky as a defendant. Lefkofsky, it seems, is to lawsuits what Groupon is to coupons — he inspires groups into action.
Lefkofsky’s “funky” email surfaced in a shareholder lawsuit filed in the wake of Ha-Lo’s bankruptcy. It was first reported by Barron’s Bill Alpert in a 2007 column about the next company Lefkofsky founded, InnerWorkings. Alpert wrote a devastating piece that eerily prefigured the concerns surrounding Groupon’s IPO. He called InnerWorkings “a glorified broker of print jobs,” argued that Lefkofsky “has a history of busting investors after promising to radically transform bricks-and-mortar industries” and noted that InnerWorkings had tried to “obscure” Lefkofsky’s active involvement.
InnerWorkings (INWK), which provides print-procurement services for companies, went public in August 2006, selling 7 million shares at $9 a share. (The stock closed at $8.21 Wednesday.) Today, InnerWorkings is a company with annual revenue of $480 million. Echo Global Logistics (ECHO), a supply-chain management company Lefkofsky founded, went public in 2009 and trades slightly above its $14 a share offering price. Both companies are consistently profitable, both have operating margins of 3%. And both companies suggest Lefkofsky learned enough from his early missteps to build successful startups.
Yet InnerWorkings has two red flags that should concern Groupon investors.The first is InnerWorkings’ follow-on stock offering. In January 2007, when its stock was trading at 82% above its IPO price, InnerWorkings filed to sell another 8 million shares, but this time 5 million of the shares were being sold by insiders, with most of the shares sold by entities owned by and affiliated with Lefkofsky and his family. It was an unusual move: Most companies wait until a 6-month lockup period expires before offering more shares.
The other red flag for InnerWorkings involves a lawsuit filed by Sports Publishing LLC in 2008. Although the suit was withdrawn after InnerWorkings countersued, the complaint remains a bizarre read, accusing InnerWorkings and Lefkofsky of “racketeering” and “terrorist tactics.” Sports Publishing hired InnerWorkings to publish some 300 sports-themed titles and claimed it somehow ended up owing $2.5 million to its vendor.
That’s when things got weird. The complaint alleges,
Lefkofsky effectively began to control Sports Publishing’s operations. He decided what “allowance” the company would have to run its operations, made constant threatening phone calls and threatened to force the company into bankruptcy if the company did not meet his demands. Lefkofsky went so far as to threaten to have [Sports Publishing CEO] Mr. Bannon shot. Having effectively almost destroyed the company, Lefkofsky then offered to buy them.
InnerWorkings called these allegations “wildly absurd and fanciful.” And like the “funky” email Lefkofsky wrote at Ha-Lo, or the loan-and-leave action in Columbus,Wisc., you could say this is just one unfortunate incident in Lefkofsky’s pre-Groupon past. But it’s clear that lenders, investors and customers have at times been so convinced that Lefkofsky dealt with them in bad ways that it led them to seek remedy in court. That pattern is much darker than the typical stories of young entrepreneurs blowing up their ventures because of inexperience.
Cashing out
Yet even after Lefkofsky’s 18 years of experience as an entrepreneur, he still stumbled last week. After Bloomberg TV dug up some old dirt, Lefkofsky responded that Groupon would be “wildly profitable.” Now Groupon may need to refile its prospectus to clarify that heady prediction.
A new filing would also serve shareholders by clarifying Lefkofsky’s role at Groupon. If nothing else, the Sports Publishing lawsuit reveals that Lefkofsky may have been far more involved with InnerWorkings than its SEC filings indicated. In Groupon’s IPO filing, CEO Andrew Mason confessed he only created Groupon “to get Eric to stop bugging me.” Groupon may be thriving because of Mason’s management skills, but it’s still not clear how much control Lefkofsky has over the company.
That question should concern investors because Lefkofsky and his family have already cashed out $382 million from Groupon before the IPO filing. (Keywell and his family cashed out $156 million, Andrew Mason, $10 million). The risk is that Groupon will follow in InnerWorkings’ footsteps and start trading with a small float. Then a few months later, after demand has pushed up the stock price, insiders will unload more shares in a follow-on offering. That could weigh down Groupon’s longer term price, by putting more shares into the market than demand can meet. Lefkofsky and other insiders control voting rights, so any investors who don’t like it will have little power to agitate for change.
In the debate that has arisen around the Groupon IPO, bulls and bears are arguing over whether Groupon is another Amazon, which took on years of massive losses to build a big “moat” that fended off competition. But there is another key difference between Amazon and Groupon: Amazon (AMZN) founder Jeff Bezos has a brilliant instinct for navigating risk, as he made clear in comments during Amazon’s shareholder meeting on Tuesday. Few Amazon shareholders are angry with Bezos: the stock has returned 12,400% since its 1997 IPO.
Lefkofsky, who like Bezos began his entrepreneurial adventures in 1994, is equally intimate with risk, but with a track record nowhere nearly as impressive. He knows how to generate big revenue through even bigger losses, often to destructive effect. Lefkofsky summarizes his credo as “you might as well fail fast.” And, apparently, cash out fast.
That ethic may be fine in the world of private equity, where investors usually have enough net worth and sophistication to stomach such risk. But it’s another matter entirely in the public markets, where middle class investors can be seduced by the allure of a hot tech IPO.
A close look Lefkofsky’s track record shows that, while he’s learned from early failures, he’s not the new Bezos. Groupon’s IPO prospectus should raise several red flags in a sensible investor’s mind. Factor in Lefkofsky’s checkered past, and this IPO is waving more red flags than a May Day parade.
Clarification: An earlier version of this story incorrectly stated that insider selling in a follow-on offering could dilute existing shareholders.
Posted in: Andrew Mason, Business, Credit Suisse, Echo Global Logistics, Eric Lefkofsky, Groupon, Initial public offering, IPO
____________________________________
OK, I’m confused: This appears to be the same as the article above but with some more things added and it is listed under Andrew Mason, not Eric Lefkofsky
Andrew Mason18comments The checkered past of Groupon’s chairman
June 10, 2011: 5:00 AM ET Groupon’s largest shareholder and chairman, Eric Lefkofsky, has a back story investors might want to know.
By Kevin Kelleher, contributor
FORTUNE — “Lets start having fun… lets get funky… let’s announce everything… let’s be WILDLY positive in our forecasts… lets take this thing to the extreme… if we get wacked [sic] on the ride down-who gives a shit… THE TIME TO GET RADICAL IS NOW… WE HAVE NOTHING TO LOSE…”
Eric Lefkofsky, serial entrepreneur
This is a quote from the dot-com era. It’s pretty much what you’d expect a novice executive to say back then, when it was all about money and not at all about creating something good. It was written in an email by the co-founder of a company called Starbelly.com, which labeled itself a B2B provider — back when people greeted that phrase with a straight face.
In early 2000, Starbelly sold itself to another company called Ha-Lo Industries for $240 million, much of which went to the author of those words, a man named Eric Lefkofsky. Not long after that transaction, Ha-Lo declared bankruptcy. Shareholders and others blamed the Starbelly deal, and a series of lawsuits ensued.
Eric Lefkofsky is the co-founder and chairman of Groupon, which filed last week for an IPO valuing the company at $30 billion, as well as its largest shareholder, with a pre-IPO 22% stake in the company. The other co-founders include Andrew Mason (8% stake), the cherubic public face of Groupon; and Bradley Keywell (7% stake), who also co-founded Starbelly with Lefkofsky. Before Starbelly, Keywell and Lefkofsky founded a sportswear company called Brandon Apparel.
So why should such an old quote matter? Everyone remembers things they said a decade or more ago they may regret today. And failure is hardly something to be ashamed of in tech; usually it’s heralded as a mark of having shot for the moon, something to be prized and not frowned upon.
But Groupon’s IPO has brought an uncomfortable spotlight onto Lefkofsky. While some attention focuses on his ambitions as an investor in tech startups, others see a “spotty history” and draw parallels between the past and the present. Lefkofsky’s track record, reflecting failures and successes, bears certain hallmarks: rapid revenue growth accompanied by big losses, a penchant to sell stock early on, and lawsuits filed by investors, lenders or customers who feel they have been wronged.
Lefkofsky began his first venture, athletic-apparel maker Brandon Apparel, which he and Keywell bought after graduating law school together, in 1994. “It ended up being a huge failure,” Lefkofsky wrote on his blog. At first, the company — like Groupon — saw fast growth, with revenue rising from $2 million to $20 million. But not fast enough to repay debts. “We over-leveraged the company and it eventually crumbled under the weight of that debt,” Lefkofsky wrote.
Lawsuits unleashed
The risk of failure is inherent to entrepreneurialism. But Brandon Apparel’s tanking yielded a series of lawsuits. A lender, Johnson Bank, sued Lefkofsky and won a default judgment of $11 million. The former owner of Brandon reportedly sued the company, as did National Football League Properties and Major League Baseball Properties. The city of Columbus, Wisc., loaned Brandon $750,000 to create jobs in the city, but the company closed the plant not long after getting the loan and the city was forced to write off the loan. “They basically bailed out of Columbus, and that seems to be their ongoing tactic,” Columbus’s city attorney said at the time.
In March 1999, Lefkofsky and Keywell founded Starbelly.com, which sold promotional t-shirts and coffee mugs. In August 1999, Starbelly raised $8 million from Chase Capital and Flatiron Partners, a deal that valued it at $32 million — even though the company was on track to post a $2.5 million loss on $183,000 in revenues during its first six months of operation. In January 2000, Ha-Lo Industries, a promotional products company with five decades of experience, bought Starbelly — now ten months old — for $240 million. (Credit Suisse, one of Groupon’s underwriters, advised Ha-Lo on the deal.)
Lefkofsky and Keywell, who joined Ha-Lo as executives and directors, showed a knack for rapidly growing a company’s value despite significant losses. But again, it all came crashing down. Ha-Lo swung from a $1 million operating profit in 1999 to a $64 million operating loss in 2000, thanks to $8 million in payroll costs for Starbelly employees and $40 million in the amortization of goodwill from the Starbelly deal. In July 2001, Ha-Lo filed for bankruptcy (under a new management, the company later emerged from bankruptcy as Halo Branded Solutions). And again, lawsuits followed, including a class-action suit naming Lefkofsky as a defendant. Lefkofsky, it seems, is to lawsuits what Groupon is to coupons — he inspires groups into action.
Lefkofsky’s “funky” email surfaced in a shareholder lawsuit filed in the wake of Ha-Lo’s bankruptcy. It was first reported by Barron’s Bill Alpert in a 2007 column about the next company Lefkofsky founded, InnerWorkings. Alpert wrote a devastating piece that eerily prefigured the concerns surrounding Groupon’s IPO. He called InnerWorkings “a glorified broker of print jobs,” argued that Lefkofsky “has a history of busting investors after promising to radically transform bricks-and-mortar industries” and noted that InnerWorkings had tried to “obscure” Lefkofsky’s active involvement.
InnerWorkings (INWK), which provides print-procurement services for companies, went public in August 2006, selling 7 million shares at $9 a share. (The stock closed at $8.21 Wednesday.) Today, InnerWorkings is a company with annual revenue of $480 million. Echo Global Logistics (ECHO), a supply-chain management company Lefkofsky founded, went public in 2009 and trades slightly above its $14 a share offering price. Both companies are consistently profitable, both have operating margins of 3%. And both companies suggest Lefkofsky learned enough from his early missteps to build successful startups.
Yet InnerWorkings has two red flags that should concern Groupon investors.The first is InnerWorkings’ follow-on stock offering. In January 2007, when its stock was trading at 82% above its IPO price, InnerWorkings filed to sell another 8 million shares, but this time 5 million of the shares were being sold by insiders, with most of the shares sold by entities owned by and affiliated with Lefkofsky and his family. It was an unusual move: Most companies wait until a 6-month lockup period expires before offering more shares.
The other red flag for InnerWorkings involves a lawsuit filed by Sports Publishing LLC in 2008. Although the suit was withdrawn after InnerWorkings countersued, the complaint remains a bizarre read, accusing InnerWorkings and Lefkofsky of “racketeering” and “terrorist tactics.” Sports Publishing hired InnerWorkings to publish some 300 sports-themed titles and claimed it somehow ended up owing $2.5 million to its vendor.
That’s when things got weird. The complaint alleges,
Lefkofsky effectively began to control Sports Publishing’s operations. He decided what “allowance” the company would have to run its operations, made constant threatening phone calls and threatened to force the company into bankruptcy if the company did not meet his demands. Lefkofsky went so far as to threaten to have [Sports Publishing CEO] Mr. Bannon shot. Having effectively almost destroyed the company, Lefkofsky then offered to buy them.
InnerWorkings called these allegations “wildly absurd and fanciful.” And like the “funky” email Lefkofsky wrote at Ha-Lo, or the loan-and-leave action in Columbus,Wisc., you could say this is just one unfortunate incident in Lefkofsky’s pre-Groupon past. But it’s clear that lenders, investors and customers have at times been so convinced that Lefkofsky dealt with them in bad ways that it led them to seek remedy in court. That pattern is much darker than the typical stories of young entrepreneurs blowing up their ventures because of inexperience.
Cashing out
Yet even after Lefkofsky’s 18 years of experience as an entrepreneur, he still stumbled last week. After Bloomberg TV dug up some old dirt, Lefkofsky responded that Groupon would be “wildly profitable.” Now Groupon may need to refile its prospectus to clarify that heady prediction.
A new filing would also serve shareholders by clarifying Lefkofsky’s role at Groupon. If nothing else, the Sports Publishing lawsuit reveals that Lefkofsky may have been far more involved with InnerWorkings than its SEC filings indicated. In Groupon’s IPO filing, CEO Andrew Mason confessed he only created Groupon “to get Eric to stop bugging me.” Groupon may be thriving because of Mason’s management skills, but it’s still not clear how much control Lefkofsky has over the company.
That question should concern investors because Lefkofsky and his family have already cashed out $382 million from Groupon before the IPO filing. (Keywell and his family cashed out $156 million, Andrew Mason, $10 million). The risk is that Groupon will follow in InnerWorkings’ footsteps and start trading with a small float. Then a few months later, after demand has pushed up the stock price, insiders will unload more shares in a follow-on offering. That could weigh down Groupon’s longer term price, by putting more shares into the market than demand can meet. Lefkofsky and other insiders control voting rights, so any investors who don’t like it will have little power to agitate for change.
In the debate that has arisen around the Groupon IPO, bulls and bears are arguing over whether Groupon is another Amazon, which took on years of massive losses to build a big “moat” that fended off competition. But there is another key difference between Amazon and Groupon: Amazon (AMZN) founder Jeff Bezos has a brilliant instinct for navigating risk, as he made clear in comments during Amazon’s shareholder meeting on Tuesday. Few Amazon shareholders are angry with Bezos: the stock has returned 12,400% since its 1997 IPO.
Lefkofsky, who like Bezos began his entrepreneurial adventures in 1994, is equally intimate with risk, but with a track record nowhere nearly as impressive. He knows how to generate big revenue through even bigger losses, often to destructive effect. Lefkofsky summarizes his credo as “you might as well fail fast.” And, apparently, cash out fast.
That ethic may be fine in the world of private equity, where investors usually have enough net worth and sophistication to stomach such risk. But it’s another matter entirely in the public markets, where middle class investors can be seduced by the allure of a hot tech IPO.
A close look Lefkofsky’s track record shows that, while he’s learned from early failures, he’s not the new Bezos. Groupon’s IPO prospectus should raise several red flags in a sensible investor’s mind. Factor in Lefkofsky’s checkered past, and this IPO is waving more red flags than a May Day parade.
Clarification: An earlier version of this story incorrectly stated that insider selling in a follow-on offering could dilute existing shareholders.
Posted in: Andrew Mason, Business, Credit Suisse, Echo Global Logistics, Eric Lefkofsky, Groupon, Initial public offering, IPO
Does Mason want to get out of Groupon?
By Kevin Kelleher, contributor
Troubling financials and an offering letter full of mixed messages should make investors wary about buying into Groupon’s IPO.
Groupon founder Andrew Mason
FORTUNE — Dear Potential Groupon Shareholder,
I’m writing this letter to provide some insight into the Groupon IPO that was omitted from the cheery, twee “Letter from Andrew D. Mason” that prefaced the prospectus filed by the group-buying startup.
You get the feeling that the original draft MORE
32018Jun 6, 2011 11:35 AM ET
Posted in: Andrew Mason, Credit Suisse, Goldman Sachs, Google, Groupon, Initial public offering, Morgan Stanley, Wall Street Today in Tech: The Groupon brouhaha
Fortune’s curated selection of the weekend’s most newsworthy tech stories from all over the Web. Sign up to get the newsletter delivered to you every day.
*
Groupon CEO and founder Andrew Mason
* With 7,000 employees and a recently-filed initial public offering (IPO), Groupon is one of the fastest growing companies in tech right now, but it’s business model remains a mystery to most. Here’s a primer, and for further reading, check out two opposing MORE
130JP Mangalindan, Writer-Reporter – Jun 6, 2011 6:30 AM ET
Posted in: Andrew Mason, Anthony Weiner, Apple, Facebook, Google, Groupon, Initial public offering, iPhone, Nihon Keizai Shimbun, Nintendo, Silicon Alley Insider Today in Tech: Groupon’s $25 billion IPO
A curated selection of the day’s most newsworthy tech stories from all over the Web. Sign up to get the newsletter delivered to you everyday.
Groupon CEO and founder Andrew Mason. Photo: Bloomberg
Groupon is reportedly in talks with various banks over an initial public offering (IPO) that would value the daily deals site for as much as $25 billion, roughly half of what Facebook is currently worth. Given Groupon’s recent actions — MORE
JP Mangalindan, Writer-Reporter – Mar 17, 2011 9:55 AM ET
Posted in: Andreesen Horowitz, Andrew Mason, Android Market, Ben Horowitz, CrunchGear, Google, Groupon, Initial public offering, Seth Weintraub, SlashGear Today in Tech: Microsoft’s exec shake-up, Groupon’s Tibet ad
A curated selection of the day’s most newsworthy tech stories from all over the Web.
Microsoft CEO Steve Ballmer is planning even more executive management changes at the Redmond-based software giant to add senior product executives with an engineering background and with experience executing product plans. So far, four top execs have left the company since May, including 23- year company veteran Bob Muglia. (Bloomberg Businessweek)
After temporarily halting shipments of its Sandy MORE
JP Mangalindan, Writer-Reporter – Feb 8, 2011 6:00 AM ET
Posted in: Andrew Mason, Android, Bob Muglia, Google, Groupon, HTC, Intel, Kindle, Microsoft, Mobile, OnLive, Saffron Digital, Sandy Bridge, Steve Ballmer, Tibet, Wael Ghonim Today in Tech: RIM PlayBook, Groupon, Facebook
A curated selection of the day’s most newsworthy tech stories, posts, and reviews from all over the Web.
GroupOn founder & CEO Andrew Mason. Photo: Bloomberg
Groupon reportedly turned down Google’s rumored $6 billion buyout offer because its board was concerned about anti-trust scrutiny from regulators. (Google is already knee-deep in two anti-trust investigations.) CEO Andrew Mason also says he wants the company to stay independent in the near future. MORE
JP Mangalindan, Writer-Reporter – Dec 9, 2010 7:51 AM ET
Posted in: Andrew Mason, Boy Genius Report, Cameron Winklevoss, Enterprise, Financial, Google, Groupon, iPad, iPhone, Mark Zuckerberg, Mastercard, Mobile, RadioShack, Tablet, WikiLeaks, YouTube Google’s Groupon groping reveals the shifting power in the web world
First Yelp, now Groupon: Why hot startups — especially those holding the key to “local” — keep slipping through the search giant’s fingers.
Image via Wikipedia
While the official confirmations have yet to land (and my colleague Dan Primack is following up on Groupon CEO Andrew Mason’s hopefully tongue-in-cheek offer to discuss the finer points of his affection for miniature dollhouses), it’s looking like talks between Google and Groupon have fallen MORE
Paul Smalera, Senior Editor – Dec 4, 2010 2:09 PM ET
Posted in: Facebook, New York Times, YouTube, Zynga, Groupon, Yelp, Jeremy Stoppelman, Google, Social, Initial public offering, Searching, Search Engines, Dennis Crowley, Andrew Mason, Chicago, HotBot, Yahoo Search Three reasons Google wants Groupon
Is $5.3 billion an astronomical amount to get the popular deal-a-day web site? Not really. Here’s why.
If Google’s $5.3 billion offer goes through later this week as suggested, it could be Groupon’s lucky day.
Not that luck has been really necessary for the Chicago-based, deal-a-day e-commerce site, which delivers daily discounts and deals from local businesses to 30 million users across 500 markets in 30 countries. Since CEO Andrew Mason launched MORE
JP Mangalindan, Writer-Reporter – Nov 30, 2010 3:52 PM ET
Posted in: Accel Partners, Andrew Mason, Battery Ventures, Daylight Saving Time, Facebook, Facebook features, Google, Groupon, Yelp
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Melanie Adcock: TechCrunch Publishes Negative Story about Groupon (that the May Report covered last year) Is Public Opinion Changing Toward Groupon?
Subject: TechCrunch Publishes Negative Story about Groupon (that the May Report covered last year) Is Public Opinion Changing Toward Groupon?
Date: 6/10/2011 11:48:51 A.M. Central Daylight Time
From: melanie_adcock@msn.com
To: ron@themayreport.com, ronaldmay@aol.com
TechCrunch Publishes Negative Story about Groupon (that the May Report covered last year) Is Public Opinion Changing Toward Groupon?
Melanie Adcock
It’s almost impossible to attend any meeting in the tech industry here in Chicago without the word Groupon being spoken in reference to success. They are the darling of the Midwest Tech community. Last Fall The May Report republished the story written by Jessie Burke and her negative experience with Groupon: posiescafe.com/wp/?p=316 I find it interesting that TechCrunch is only now covering this story in more detail. Maybe the tide is turning in favor of pointing out the cracks in Groupon’s system? Also, there is a lively discussion going on in the comment section of Facebook where this article is posted. The comments are copied below for you to read. They are a good indication of the public sentiment toward the company and just how easy it is for the average person on the street to poke holes in their business model. One of the things people say about Ron May is that he might be negative, and he might be unpopular, but a lot of the time he is right. Could Ron’s healthy skepticism toward Groupon end up being the attitude adopted by the general public and the national press? We here at The May Report will be watching, waiting and scrutinizing for your reading pleasure. -Melanie
TechCrunch
A story about a business owner calling her Groupon experience “the single worst decision I have ever made as a business owner thus far.”
Groupon Was “The Single Worst Decision I Have Ever Made As A Business Owner”
Groupon Was “The Single Worst Decision I Have Ever Made As A Business Owner”
Rocky Agrawal
10 hours ago
Editor’s note:This guest post was written by Rocky Agrawal, an entrepreneur who has worked on local products since 1995. He blogs at reDesign and Tweets @rakeshlobster.
“How much is your average sale here?”
“It’s about five dollars.”
That one question told me Jessie Burke had been sold an unsuitable product. Her average sale was $5 and her Groupon rep had convinced her to run a Groupon for $13.
I already knew how the story ended. Jessie had posted about her experience running a Groupon for Posies Cafe on her blog. She calls running a Groupon “the single worst decision I have ever made as a business owner thus far.” You can read the story in Jessie’s own words.
I wanted to drill deeper and get at the why. I sat with her for an extended conversation. This is only one business owner’s experience, but it is a story worth retelling.
YouTube Links to interview with Jessie Burke:
Part 1: youtu.be/hXG1AxSKa0M
Part 2: youtu.be/1H5Gd3lFtfg
Part 3: youtu.be/eBTVtj4KEt4
Part 4: youtu.be/dilE2MXh55U
Part 5: youtu.be/qGPjyILu_-I
Some of the key takeaways:
Jessie found about Groupon from a friend who saw that the pizza place across the street was full after running a Groupon. Seeing that “success”, she wanted to give it a try.
There is very little information on which merchants can make decisions. Merchants are primarily reliant on the information and recommendations of the sales reps, which can often conflict with the business’ best interest. In a conversation with Groupon CEO Andrew Mason after her blog post went viral, she said “This isn’t a newspaper ad where most people know how to do that. You’ve revolutionized marketing. So nobody knows the parameters unless you tell them. No one told me the parameters.”
The sales process seemed like buying a car. Initially, the rep asked for 100% of the revenue. He eventually “settled” for 50% “Understanding that your business is newer, I decided to split the revenue with you,” he wrote. At one point, Jessie was told that she could only ever run one Groupon over the life of the business.
Tracking and infrastructure was a really difficult problem. At the time, she didn’t have a computer, so she was reliant on a binder with 900 names in it. It was an inefficient way to track the deal. This also resulted in a lot of fraud as people redeemed coupons multiple times.
Groupon controls scheduling of deals, which in this case turned out to be bad for her. Deals are scheduled based on factors that optimize the deal for Groupon, not the merchant. Her deal launched the weekend that the neighborhood library opened. It was the opposite of yield management. She got more traffic when she least needed it. Between the two events, there was a line out the door the whole weekend.
The customers she attracted weren’t likely to be regulars. One customer tried to use three Groupons at once. “What are you going to get for $39? Do you want the whole shop? And they were really offended.” “Most people took a trek here. This is definitely a neighborhood shop. People don’t come here from other parts of town just to get coffee.” Some were abusive to staff and didn’t tip.
Most customers didn’t spend much more than the deal value. Groupon told her that something like 98% spent more than the value of the Groupon. “You think maybe like $5 above the value, not like 10 cents.” It’s in Groupon’s interests to make the deal value as high as possible because they get a cut of that. They don’t get a cut of anything extra that someone spends at the business.
There was minimal training on what to expect. Groupon sent her a link to a video. There was no explanation of how to handle things like expired coupons. “The onus of responsibility shouldn’t be entirely on this little business that doesn’t know the laws in the first place.”
Jessie didn’t do anything to convert Groupon customers into regulars, like asking them to follow her on Twitter or Facebook.
She would like to see more transparency. “I think it’s helpful for people to know that you’re not actually giving someone $6, you’re giving someone $3 in our case.”
Her Yelp ratings sank after the Groupon as Groupon customers complained about the business.
One of the things I’ve really struggled with in writing this is the potential for readers to view Jessie as ignorant or worse by the Silicon Valley elite. “She doesn’t know what an open rate is? Or what yield management is? Moron.”
That couldn’t be farther from the truth. From our conversation, I could tell that she’s clearly sharp. She shared an email she sent to Mason suggesting ways that he could improve Groupon and her suggestions were on the mark. Her online presence, including a blog, Facebook and Twitter is well above average for a local business. She’s even claimed her Facebook Places page and is running a Facebook Deal, which is relatively rare.
She tried reading through Groupon’s merchant agreement, but it had too much legalese for her to understand.
Jessie says she tried to do research on other people’s experiences, but there wasn’t much on the Web. (Which is why she wrote the blog post.)
Since she wrote the post, she’s heard from other businesses who have had similar experiences. “What was the saddest part of it for me was that this had had happened to a lot of businesses but because no one had ever said anything we all just assumed (and myself included) we just assumed we were bad business people. That we just didn’t know what we were doing. If everyone loves Groupon so much, we must be wrong.” She estimates that she lost $10,000 in hard costs. Other businesses she heard from claim far greater losses.
The Groupon experience has soured her on similar forms of marketing. “Our most successful advertising is through Facebook. And that’s free. Even offering deals through Facebook, which is also free.”
She gets calls regularly from companies trying to sell her on marketing, including LivingSocial and Google Offers.
A Groupon rep called last week. She suggested that he Google “Posies Cafe.” The rep responded a few hours later with, “A simple Google search showed that I’m an idiot. I’m really sorry.”
The pizza place across the street from Posies has now run a second Groupon. Something worked for them in a way that didn’t work for Posies. I left a message for the owner. If she calls me back, I’ll share her story. And if you’re a merchant who has run a deal and wants to share your story, email me at dailydeals@agrawals.org.
Shayan Samujjal Purkayastha Guess Living Social is sponsoring Techcrunch now huh? 
10 hours ago · Like · 6 people
Dean Blackburn Groupon is definitely on the outs. Should’ve taken their Google offer when they had the chance. I just don’t see how you can systematically repair so much bad blood, when your company is composed of 90% sales people.10 hours ago · Like · 8 people
Rica Palomo-Espiritu wow….thank you for this article.10 hours ago · Like · 1 person
Deborah Katz I know a few businesses who have regretted Groupon. But the margins are clearly problematic. Seller beware.10 hours ago · Like · 1 person
Prince Bhojwani A few months later a similar article will come out and it’ll be called: “about an investor owning Groupon shares ‘the single worst decision i have ever made’” HAHA9 hours ago · Like · 7 people
Ruma Samdani Wow this is awful! Have read other bad experiences chicago merchants have had with groupon where they lost money. Just google it.9 hours ago · Like
Kevin Krejca strange thing is, i don’t think any of you have actually ‘researched’ their business. like most new things, there is going to be some growing pains, but Groupon will be around for your childrens children.9 hours ago · Like


Jeremy Rich ‎”Work for full price or work for free, never for cheap!” … that’s the motto of my business!!9 hours ago · Like · 7 people
Maximillian Jaffe Seth knows more about Groupon than Andrew Mason does.9 hours ago · Like


Randly Sepang Should’ve take that $6 billion from google and run ..9 hours ago · Like


Chinh T. Nguyen Groupon is just like yelp… They both suck in their own unique ways!9 hours ago · Like


David Abboud The value of groupon is not in the immediate sale for half off, that’s a marketing expense. The value is in thousands of people who do not buy getting exposed to your business AND the hundreds or thousands that do buy getting exposed to your business repeatedly as they browse the app contemplating which groupon to use.9 hours ago · Like · 3 people



Bahtiyar Khuja I myself also told to all of my customers not to get engaded in any Groupon alike services – we do value customers, but we need them to be always with us. I think this way we saved some money of our customers.9 hours ago · Like



Atley Bacchanalist Joseph If I’m correct the resturant.com coupons almost work the same. $20 worth of food for $5-10 and the restaurant only get money if the consumer spends more than $20. That’s how it was explained to me from a restaurant.com rep when they tried to get my aunt to put her business on there. That’s pretty much what they charge since they do all the advertising, etc.8 hours ago · Like · 1 person


Robbie Burns Groupon is working the biggest swindle this side of the 2000 bubble. They promise you all of these repeat customers and talk you into taking large losses to get into the program. Of course they won’t tell you it’s going to be a loss, they’ll sell you on the idea that everyone who walks in with a Groupon is going to spend double what the Groupon covers. This is completely false. The entire reason people use a Groupon is because they are savvy and deal shop. The likelihood of them coming back as a repeat customers is slim to none for a lot of businesses. They’ll be off looking for the next deal or bargain they can get their hands on and forget all about the tiny little business struggling to grab a customer base. This owner was spot on with all of the flaws of Groupon’s model of business. They’re overhead is too bulky to sustain. As more companies experience the service and turn to more streamlined and effective marketing techniques, Groupon will struggle to find willing participants without cutting better deals and letting the business in on some of the profits. Of course, they can’t do this because even now they can’t take enough of a percentage to break even. No one is ever going to pay them money and offer them 100% of the sale, and the client base to work from isn’t going to get any bigger than it is now. Only thing to do is to reconfigure the companies structure and find a way to do the same job cheaper. Much cheaper.8 hours ago · Like · 4 people


Robbie Burns The second part of the swindle, which is the most significant, is that they have actually been able to convince investors that one day there won’t be so much red ink on the fiscal graphics. It won’t happen. Especially not significantly enough to justify a $30+ billion valuation. I’m sure it will be the first domino to fall as all of these overvalued tech companies begin to fall because they can never cut a profit. Once they IPO they only have so much money to keep them afloat before things turn ugly. “Growth over profit” mentalities are never good and I would say that Groupon has one, since ya know, the more revenue they pull in, the more they seem to lose.8 hours ago · Like · 4 people


Robbie Burns ‎@Kevin I don’t see how Groupon can be around for our children’s children. Their entire model works against itself. The main idea of buying a Groupon is that it will help businesses grow their customer base. The typical business looking to grow it’s customer base is a new business. Imagine being a business in it’s first two years and signing up with Groupon for a single go around. You offer a Groupon for $20 worth of service for whatever number of dollars. It doesn’t really matter how many dollars, because typically Groupon takes all of that money anyway. If even just a thousand people buy into the Groupon you’re going to have to shell out $20,000 in services for free. Since every business has overhead, you’re not even given a chance to recoup costs. What new business can afford to do this? Very few. So that leaves existing businesses. Well, I don’t see that many existing businesses coming around for a second go. Granted some do, but that number is only going to get smaller as time goes on.8 hours ago · Like · 3 people


Tadhg Kelly Why exactly does Groupon need a huge sales force anyway? That strikes me as the failure point of the business, when it could probably be handled in a more web native way for 1/10th of the cost. It’s really just a mailing list in the end of the day.8 hours ago · Like · 2 people



Elison Manjobo just like any other online marketing campaign you have to evaluate of that strategy can be leveraged into your business model so as to get the most effective results profit wise. Its no longer about following the bandwagon. A thorough understanding of your market is fundamental when launching campaigns. What works for a pizza company online would be different from what works for a financial services provider.7 hours ago · Like · 1 person



Robbie Burns They need the sales force because there is a lack of people willing to sign up without someone talking them into it. This is the problem with the company. If the venture sold itself, it would make money hand over first, but 9 out of every 10 guys they have are manning phones trying to talk people into participating, because otherwise, no one would. And, their huge salesforce has trouble explaining how it works, I can only imagine how bad it would be if they tried to explain their complicated system through their webpage. They would need more customer service reps than they have salesmen now, just to handle the mess.7 hours ago · Like · 1 person


Julian Salazar She’s not a very smart business person in general.7 hours ago · Like


Melanie A. Adcock Her original blog post was posted in Sept. 2010. We republished that awhile ago in our tech newsletter called The May Report. It wasn’t a very popular thing for us to publish at the time because we’re based in Chicago and everyone loves Groupon here. I find it interesting that TechCrunch has also shared it because it says a lot about public opinion and how it might be changing. I like the written piece and how it goes into further explanation.7 hours ago · Like · 2 people


Robbie Burns Public opinion is definitely changing. Read the comment section of this post. Five months ago you wouldn’t have seen more than one or two people say anything negative about the company.7 hours ago · Unlike · 2 people


Carmen Lane Well said, Robbie Burns.6 hours ago · Unlike · 1 person


Elison Manjobo true that, public opinion has certainly changed and business models with them too. whats hot today might not live to see the light of day tomorrow. search is largely turning social but who knows tomorrow we might wake up a facebook banking system.there is a rapid need to adapt else you’ll lose all your clients to a competitor who has just launched a massive social media campaign and taken it to where the people are.6 hours ago · Like


Betty Lovell Whoa…thanks for the article & insights from so many!5 hours ago · Like


Josh Aronoff I’ve heard groupon sale teams are agressive like sharks. Churn and burn style. Clearly we’re in the burn phase.5 hours ago · Like · 2 people


Jeff Durso We need more articles like this before the IPO – the sooner Groupon’s IPO fails, and the fewer the victims, the greater the chance the legitimate IPO market can continue. Please spread the word so Madoff, err, Mason and his cronies don’t get away with killing the tech markets!5 hours ago · Like · 1 person


Thomas Rector Been there…done that…got the T-shirt. GroupOn sucks for the sponsor.5 hours ago · Like


chocoBRAIN We also thought of trying out Groupon for our search engine optimized do-it-yourself websites atwww.chocoBRAIN.com. But probably we should think it over again. Is it similar with other services like Groupon? Anyone having experiences?5 hours ago · Like
Ciplex ‎@David Abboud Do you think that people who use Groupon miss the fact that there is more money on the back end and this comes from understanding LTV of a customer?5 hours ago · Like · 1 person
Saidy Smeenk mabye the worst decision is forgetting to educated herself4 hours ago · Like
Brian Gallegos People don’t talk about positive experiences – but you’ll always hear about negative experiences. I suspect that this case isn’t an exception for Groupon and we’ll all be saying “remember Groupon?” three years from now …3 hours ago · Like


Eileen Gunn this is the story investors rae inexpicably ignoring. What’s Groupon’s rate for return customers (on the retailler side). That’s the best barometer of how well it works for them. I bet it’s close to 0. THey have to make their deals more viable for their suppliers or the supply will dry up eventually.2 hours ago · Like · 2 people
Michael Kunitzky Groupon will be the poster child for the next crash of extremely overvalued companies. They don’t create enough repeat customers for the merchants who run the offers, certainly not enough to justify the cost/inconvenience of running a Groupon deal. Customers who are already loyal to a merchant get to take advantage of a Groupon discount – great for the customer, bad for the merchant. New customers get a discount but are unlikely to return (they follow “deals” wherever they go, few will remain loyal to any one merchant) – great for the deal chaser, bad for the merchant. The only real value in Groupon is all the data they are collecting from consumers. It’ll be interesting to see what they do with all that data when their current business model inevitably fails.


Ron Stack Merchants need to learn about alternatives to deep discount daily deals. They are fine for some businesses and a limited set of business objectives, but they aren’t for every business and don’t meet every need.2 hours ago · Like · 3 people
Tara L Sybrant The concept of groupon is one that appeals to both businesses and consumers- its a fast and easy way to get the word out there about businesses and for consumers to get a deal…which consumers love, but the ugly truth behind the numbers hasn’t really been shared. I think this is a good frank look at it that will help small businesses take a closer look at it to determine if its a good business decision for them.2 hours ago · Like
AbdulKarriem Ali Khan its official Groupon is RW trafficAuction meets Webvan en.wikipedia.org/wi
ki/Webvanabout an hour ago · Like


AbdulKarriem Ali Khan it Kills Per/$Check average $ Profit Margins ( I know This is THE SINGLE MOST IMPORTANT METRIC FOR RESTAURANTS! when I was younger My Family owner operated Franchise KFC, Mrs. Fields..& Independent Restaurants & Stores) someone should start a site called fg.com/ 4 FuckGroupon & let sellers schedule your deals, let customers buy $ in2 the deal based upon a customer auction bid & that guarantees Traffic & Margins!


Deborah Katz Every small business owner I’ve spoken to has acknowledged that Groupon does not provide enough repeat customers to validate the cost of the offer, and every one also stated that they regretted doing it (of course, they should’ve capped the number of offers, I think). Granted, I’ve only heard this from 7 businesses, but that still seems somewhat telling. The business owner only gets 10-25% of the typical value, since the deal offers a 50% discount, and Groupon keeps at least half of the paid amount. If you can afford to give your product away at a 75% discount without working out a cap to the number of offers, well, more power to you. But I don’t think that’s a model that actually works for many small businesses. The folks who take advantage of Groupons are people looking for deals…not necessarily people looking for businesses to patronize regularly.
Kelly Nitsche Great headline, true headline, but after reading the article I am left with a feeling that the business is equally responsible for the failure because of lack of due diligence on her part. The article is however a great learning tool for other business who might be considering a couponing site.about an hour ago · Like


John-James Sargent Wow. What a mess. Makes me want to boycott Groupon.21 minutes ago · Like
Jake Weisfeld “What are you going to get for $39? Do you want the whole shop? And they were really offended.”
Er, yeah. I imagine most customers would be offended when faced with such a reaction. And I wouldn’t blame them. “How dare you try to spend so much money at my business!?”10 minutes ago · Like
Melanie Adcock
Assistant Editor of The May Report
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_____________________________________
Briefly noted, by Ron May
* May here. It will take me at least 90 minutes or more to re-write this section. I can’t do it now at 8:47am. They are furious with me at dialysis since I continue to show up late. Today, I am supposed to be there at 9am and for the last four Saturdays, they have had me come on 2nd shift. That is fine with me for Saturdays, but Tuesdays and Thursdays I need to keep my first shift status which they may take away from me if I continue to come late.
BTW, here’s the more boring headline I wrote before the headline writer came back to work:
+++++++++++++++++++++++
The May Report: 6/11/2011: Part I of II: This is Part I and I still have to re-write the Briefly noted section but that has to wait until I get home from dialysis — you’ll have it later today: This was ready at about 7pm Fri. night when I got an important call at 7:17pm that added key info. and then just before 9:30pm — kaboom, the document for the report disappeared on me: I can see clearly now: “Lets get funky. Lets announce everything. Lets be WILDLY positive in our forecasts,” he told his Ha-Lo colleagues, even as that business was falling apart. “if we get wacked on the ride down- who gives a sh*t. Is it going to worse than today? is our market cap going to fall to 200N, 100M who the f**k cares.” — so wrote Eric P. Lefkofsky years ago and this email was revealed in the Jan. 2007 Barrons article but the media is just now catching on; I now realize how big of a mistake I’ve made since I knew this stuff & even made references to it but I was taken in by the idea that Brad and Eric had cleaned up their act and Lightbank’s funding of local firms when others were not doing so helped draw me in; but now I’ll go out on a limb with these predictions: The IPO will be pulled in a month, the valuation will wilt to $2B from $20B; Brad and Eric will be shown the door at ChicagoBooth and so will Professor Steve Kaplan; Rahm and Quinn will disassociate themselves; Andrew Mason will leave Groupon soon, realizing he does not want another Divine or marchFIRST on his head and at 30 he’s more mature than Eric is at 41; and I wrote this myself since mama’s boy Steve L. is vacationing in Florida
+++++++++++++++++++++++
You see why we need headline writers here at TMR? They add clarity, precision, snarkiness and spice.
_______________________________
END OF PART I, Briefly noted section still to come
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