Eric Lefkofsky is on track to be a billionaire — later

 In News

Here is a question most people have never been asked and even fewer have agonized over: Should you take a check for more than $5 billion?

Or walk away?

Incredibly, Chicagoans Eric Lefkofsky and Andrew Mason of the Internet sensation Groupon Inc. have decided to turn down a multibillion-dollar acquisition offer from Google, two sources with direct knowledge of the situation said Friday night. They have decided they would prefer to keep Groupon independent.

If they had chosen to sell now, Lefkofsky, a serial entrepreneur and Groupon’s largest shareholder, would have become a billionaire and one of Chicago’s richest people. He still has a good chance to do so, but only if the company keeps the momentum going and eventually sells shares to the public, a decision sources say Groupon isn’t expected to make until next year.

The risk involved in that kind of calculation — to turn down Google’s billions in an industry that changes with the wind because you think you can do better on your own — would take the breath away from most business owners. But Lefkofsky already has made a small fortune building two companies and taking them public, rather than selling. In that context, Google’s offer for a reported $5 billion to $6 billion can be seen more as validation of Groupon’s achievement than as an exit strategy.

“There comes a point where you reach a level of success, financial or otherwise, when you just kind of stop counting because, counting, it just doesn’t change things,” Lefkofsky said in an interview Thursday, before the decision to reject Google became known.

Groupon isn’t expected to publicly acknowledge its news until Monday, adding another extraordinary chapter to the story of a company that is only 2 years old but has been breathlessly described as the fastest-growing startup ever. Groupon offers “daily deals,” usually half off everything from a manicure to pizza to a boat cruise, when enough people commit to the purchase. Groupon typically takes a 50 percent cut of those sales.

But as recently as 2008, Lefkofsky says, he was being pressured to shut down the business. Back then it was called The Point, and it was designed to get people to use the Internet to pile on to social causes, such as charity fundraising campaigns. It was down to four employees, including Mason, the founder and visionary behind the concept.

“After we had The Point going now for almost two years, there was a lot of people who thought this thing wasn’t going to turn around and it was just consuming money,” Lefkofsky said. “There’s a point when you should just walk away, and we were already past that point. I think there was a lot of pressure to just close it up.”

But he had a feeling — a “faith” in the idea he says he still can’t explain. After six months of intense discussion and debate, The Point became Groupon in November 2008. Lefkofsky credits Mason, 30, with “the spark of the idea” to offer daily deals for local services. The company became profitable within eight months. It reportedly generates at least $500 million in annual revenue.

Lefkofsky, 41, has a long record — going back to his freshman year at the University of Michigan — of starting businesses. His first was literally built on scraps.

A high school friend had a father in the carpet business, who casually suggested to his son and his son’s friend that they sell leftover carpet pieces at school on move-in days. By their senior year, Lefkofsky and Noah Siegel had four Big 10 universities plus Notre Dame under contract.

But Lefkofsky calculated that even if they signed more than 100 universities, their annual sales would only be $10 million. And that was too small for Lefkofsky’s ambitions. So he moved on.

The next turning point came at the University of Michigan Law School, where he struck up a closer friendship with Brad Keywell. The two had known each other since they were 8, having both grown up in the Detroit suburbs, Keywell said.

Since finishing law school in the mid-1990s, the friends have started or invested in 14 businesses. All but two are still operating.

“I think what makes them work is that Eric is the business guy, head down, behind the scenes and Brad has always been the networker with an incredible talent at outreach and talking to people and getting out there,” said Lefkofsky’s wife, Liz.

That division of labor was necessary because Lefkofsky was afraid to fly for many years.

“Brad would get on a plane and fly to 14 places in two days,” she said.

Their first two ventures were far from revolutionary.

After graduating from law school, Keywell and Lefkofsky bought Brandon Apparel Group, a Wisconsin manufacturer of licensed apparel for children (i.e., a Michael Jordan jersey in a 10-year-old’s size). And they made the first of many mistakes Lefkofsky vows he’ll never repeat: They saddled the company with debt.

It ended with Lefkofsky and Keywell handing the keys to the bank, followed by a series of lawsuits over unpaid bills.

As Brandon was failing, Keywell said he became “obsessed with the Internet.” They wrote an approximately 150-page business plan for, a Web site that sold promotional products, embroidered or screen-printed T-shirts, mugs, jackets, etc. It was March 1999, the height of the Internet boom.

“If you had a business plan on the Internet, you could like roll it down the street and people would just throw money at it,” Lefkofsky said.

Despite the fact that Starbelly didn’t have a fully functional product and was just 13 months old, Ha-Lo Industries Inc. bought it in a deal valued at $240 million, mainly in stock, in 2000 and named Lefkofsky and Keywell chief operating officer and president of Ha-Lo, respectively. By mid-2001, Lefkofsky and Keywell had resigned their posts and Ha-Lo had filed for bankruptcy.

Lawsuits and recriminations followed. The bad blood culminated in 2007 in a scathing column in Barron’s that described Lefkofsky as leaving “a trail of burned investors and fraud allegations.”

After the Ha-Lo debacle, Keywell went to work evaluating deals for billionaire real estate investor Sam Zell, who is also chairman of Tribune Co., owner of the Chicago Tribune.

“Eric was alone,” his wife said. “I remember his office then. It was in a warehouse far west on Grand Avenue. He was borrowing space from someone he knew. It was a desk with a rotary phone and it was freezing cold in the bathroom. The glass in the bathroom’s window was broken.”

Lefkofsky marched on with the support of Rich Heise Jr., who sold his Internet radio startup in 1998 for $34 million and had invested in Starbelly. Heise ignored the lawsuits and the failures.

“What I saw in him — I knew that none of (the criticism) was deserved and none of it was accurate, and I told him, ‘Let’s just keep on going,'” Heise said.

Lefkofsky started a company that took off, and Keywell rejoined the team for the next one and stayed. Those two companies, InnerWorkings and Echo Global Logistics, went public, which is how Lefkofsky and Keywell came into their wealth. The third is still privately held.

The initial technology at all three involved nothing more than customizing off-the-shelf software, which wasn’t replaced until each company became profitable. This strategy helped them avoid debt — and a repeat of their earlier failures.

From the beginning, The Point was unlike anything they had tried before. Mason, then in his mid-20s, pitched the idea to Lefkofsky in a phone call while in graduate school at the University of Chicago. (Mason had previously worked for Lefkofsky and Keywell.) And on little more than instinct, Lefkofsky promised he would invest $1 million if Mason dropped out of graduate school to focus on it.

“Eric’s creative and unbelievably smart and if I’d never met him, I’d never been able to be the CEO of a lemonade stand,” Mason said.

If Groupon is taken public, Mason would become a multimillionaire. Early investors Keywell, Heise, former R.R. Donnelley & Sons Co. CEO John Walter, and venture capital firm New Enterprise Associates would become even richer.

But only Lefkofsky stands to be catapulted into the ranks of the nation’s richest people, a fact he says doesn’t impress him.

“I had a lot of success with InnerWorkings that kind of materially changed my life,” Lefkofsky said. “That was really in ’05. It’s now been five years of this. You kind of at some point stop counting and stop paying attention.”

Lefkofsky shows up at his desk at 7 a.m. every day and works nonstop until about 5 to 5:30 p.m., when he leaves to spend time with his wife and kids, Heise said. He also teaches a business class with Keywell at the University of Chicago.

He prefers not working nights and weekends. But for a long time, he kept an extra cell phone plugged in next to his bed.

But he and his wife said only one person would ever call at night: Andrew Mason.

Tribune reporters Mary Ellen Podmolik and Wailin Wong contributed to this story.

Source: Chicago Tribune

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