With a reported net worth in the multi-billion dollar range, Groupon has made its original investors look like geniuses.
Now they are searching for their next big hit.
A few years ago Eric Lefkofsky and Brad Keywell put some seed funding behind 30-year-old Groupon founder Andrew Mason’s viral couponing concept. Today it’s one of the world’s hottest companies with annual revenue reportedly ranging from $500 million to $2 billion.
The investing duo are now trying to duplicate that success, starting their own Chicago-based venture firm—Lightbank—with $100 million of mostly their own money.
“We’re focused on investing not just for the sake of investing but really finding companies that we want to work on,” said Lefkofsky, who until recently held the unofficial title of Groupon’s CFO.
“We’re not constrained by outside capital,” added Keywell, who, along with Lefkofsky, declined comment on Groupon’s recent rejection of a buyout offer from Google in excess of $5 billion. “There is no pressure to return money to an outside investor.”
Since launching nearly a year ago, Lightbank has made nine investments, six of which have been disclosed, Keywell confirmed. All have been early-stage tech companies operating in the ecommerce and social media spaces. The firm’s holdings also include three companies the pair invested in prior to forming Lightbank, Keywell added.
The 41-year-old founders don’t disclose figures, but said the majority of Lightbank’s cash is yet to be deployed. Their portfolio companies range from Poggled, which gives users exclusive discounts at local bars, to Where I’ve Been, a social travel network that lets members chart trips and discover new destinations.
“The commonality is that they all play somewhat in the social Web space,” Keywell said.
After cementing a friendship at the University of Michigan Law School that began in their childhood, the two went on to buy into or start more than 20 businesses. In 2000, Lefkofsky and Keywell sold Web property Starbelly for $240 million.
Despite their entrepreneurial acumen, they said nothing prepared them for the global impact of Groupon, which has created a domino effect.
“The scale of Groupon and the success it has achieved and the manner in which it has changed commerce… is lasting and profound, and probably even bigger than the value of the company,” said Lefkofsky, who added it has almost single-handedly put Chicago on the map as a new technology hub. “It’s invented an entire industry that has spawned more than now nearly 2,000 clones worldwide.”
Lightbank’s plans to deploy capital locally is good news to many in the Windy City, which has never seen a tech phenomenon the likes of Groupon, recently deemed the fastest-growing company in the world by Forbes magazine. Whether its success is enough to draw serious interest away from tech hotbeds like California’s Silicon Valley remains to be seen.
“Traditionally it’s not been viewed as a good place to start a company,” said Stuart Wall, who previously worked in Chicago’s venture capital industry and is now the founder and CEO of New York-based startup Signpost, which received financial backing from Google Ventures and Spark Capital. “There are a lot of really talented people coming out of universities in the Midwest. The missing factor is the capital.”
But the track record of Lightbank’s founders has many local tech supporters betting on the city’s future. Among the joint successes of Lefkofsky and Keywell are Echo Global Logistics, a freight logistics firm that went public in 2009, and MediaBank, which has grown into one of the leading media planning and buying platforms in the advertising industry.
“When you look at Groupon it’s a real testament to exactly that set of experiences, the way they’ve been able to scale it,” said Matt Moog, a longtime Chicago Internet entrepreneur. He notes Chicago is already home to successful Web companies such as travel site Orbitz, grocery seller Peapod and community-centered apparel retailer Threadless.
We’re focused on investing not just for the sake of investing but really finding companies that we want to work on.”
“The venture capitalists, the entrepreneurs, the technology community feels like we’ve got to grab this opportunity and continue,” Moog said.
The Lightbank founders interact constantly with their investment companies, access facilitated by offices housed inside Groupon’s vast complex in downtown Chicago.
Even at Groupon, Lefkofsky and Keywell remain as hands on today as they were back in 2007 when they convinced Mason to abandon graduate school and pursue his entrepreneurial vision. At the time he was developing The Point, a Web platform whose aim was to get users to participate or contribute to a cause or goal. The most noteworthy was Mason’s campaign to raise $10 billion to build a dome over Chicago to eliminate the effects of the city’s harsh winters.
“As time progressed, and there was no revenue in that business, we basically made a decision,” Keywell recalled. “One road would have said shut it down, it’s not working. The other road [said] there’s something very special about the tipping point model, see if you can apply it to other things.”
In hindsight it was clearly the right decision.
“They’re both really good at trying to get you to look at things that you haven’t before,” Mason said, noting that without their relentless pushing, “Groupon would not exist.”
Fund: $100M, raised from the co-founder’s own pockets.
Team: Co-founders and managing directors Eric Lefkofsky and Brad Keywell.
Investments: Groupon, Echo Global Logistics, MediaBank, Sprout Social, Where I’ve Been, Poggled, InnerWorkings, Watermelon Express, Betterfly and Pawncho.
Did you know? “It’s not a traditional fund. We’re not out raising fundraising, we aren’t earning management fees. We’re just doing what we do best, creating kick-ass companies that change industries,” according to its website.
WIth Eric Lefkofsky and Brad Keywell
Q: On your site, you guys say you’re not a venture capital firm, you’re not seed capital. What is the philosophy?
When you look at Groupon it’s a real testament to exactly that set of experiences, the way they’ve been able to scale it.”
Matt MoogChicago Internet entrepreneur
Brad Keywell: The philosophy is what it is and what it’s not. 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.
Q: So what do you look for when you’re looking at somebody like an Andrew Mason?
Eric Lefkofsky: It’s tough. He’s super talented. You can see that kind of a mile away. Not everyone you bump into is going to be that talented. It doesn’t mean we won’t invest in that company. So we’re not looking for the next Andrew Mason. We’re looking for people who in their own right are hungry and smart, and have a passion for the business they’ve just launched, the kind of people that you’d think, hey if push comes to shove more often than not, this person is going to find a way to succeed. That’s the basic quality.
Keywell: I would say the most important aspect is resourcefulness, which is very tough to quantify or measure but that’s what we look for.
Q: One of the things you said was you wanted to put Chicago on the map. Why do you think you can do it?
Lefkofsky: We’ve already done it. Right now at the present moment one of the five hottest internet companies in the country is in Chicago. Far more than us putting it on the map, I think Groupon has put it on the map.
Q: Are you going to be a one hit wonder?
Lefkofsky: We already aren’t. We have media bank. And we have Innerworkings and we have Echo, so we have two public companies. Media Bank was No. 30 in the digital 100 so it and of itself is a remarkable business. So Chicago now has four really interesting technology companies. But the scale of Groupon and the success that it has achieved and the manner in which it has changed commerce, the effect it has had on the internet, the effect it’s had on social commerce is lasting and profound, and probably is even much bigger than the value of the company or what it’s worth or whatever financial success it delivers. It’s invented an entire industry that has spawned more than now nearly 2,000 clones worldwide.
Q: It’s your own money – how does that differ in terms of a hold strategy and end game?
Keywell: It’s a huge difference when you approach an investment as a partnership versus a portfolio investment. Form the strategic beginnings of a business where we’re involved to the execution of the later stage financing of a business where we’re also involved to an exit, to it and IPO or sale, every part of that think changes when your orientation is partnership versus portfolio investment. If you’re simply a passive investor that sits on a board versus an active operator that’s part of shaping the business, you can’t help but make different decisions.
Q: That makes it different to say no to an offer from Google?
Keywell: I can’t comment on anything in relation to Groupon.
Q: In peoples’ minds, in the eyes of the world, you will always be tied to Groupon. Does that bother you?
Keywell: Groupon is a great company that we are immensely proud to be part of. Before Groupon we had two public companies, we had this fabulous private company called MediaBank, but none of those touched the world in any real way. Those touched business. All of a sudden there’s Groupon, which on a global basis that brand recognized as the place where you can experience local social commerce. And anywhere we go, anywhere, people, they’ll just know Groupon that they love it. Hopefully we’re leveraging that to do more good things
Deborah L. Cohen