Groupon financiers sow next online crop

Even as Groupon Inc.’s original backers tease would-be investors with the prospect of an IPO, they’re wagering on a lengthening list of brand new dot-coms they think could be their next breakaway hits. And they’re doing it in their idiosyncratic way: taking business pitches on napkins or in tweets and writing checks within hours if they’re smitten.

Eric Lefkofsky and Brad Keywell, who extended the first $1 million to start Groupon, have made early-stage investments of $1 million on average in 10 ventures through their Chicago-based investment fund Lightbank. They say they could spend more than the $100 million they initially pledged. Money obviously isn’t an issue after cashing out some of their Groupon shares.

Lightbank founders Brad Keywell, left, and Eric Lefkofsky.

Their success and continued investments are raising hopes that Chicago can finally become Silicon Prairie, drawing money and talent for tech newcomers from around the country. “Venture-capital firms and banks are making a stop here now,” says Lon Chow, a general partner at Apex Venture Partners LLC, a Chicago venture-capital firm that five years ago hardly had any local investments but today has about 25% in Chicago.

Time increasingly is Messrs. Lefkofsky and Keywell’s restraint. The business partners of 15 years insist on taking hands-on roles in every investment. Groupon alone is a time sink: The coupon site is offering daily deals in 40 countries and ringing up more than $1 billion in annual revenue. Pile on 10 startups a year, and even showing up each weekday at 6 a.m., as they already do, may not be enough.
At some point, they’ll have to decide whether to become passive investors like conventional venture capitalists or to settle on staying small fish in a national pond.

“How do Eric and Brad get intimately involved in 90 companies?” asks Sam Yagan, co-founder of Excelerate LLC, a Chicago-based early-stage incubator venture firm, and CEO of New York-based online dating site OKCupid. “There’s two of them, one Groupon and 90 other companies. If they could clone themselves then, yes, I would give them all my money.”

Messrs. Lefkofsky and Keywell say they prefer their approach.

“We’re participants in the process vs. investors in the process, and that’s a huge distinction,” says Mr. Keywell, who has devoted more time to Lightbank while Mr. Lefkofsky has focused on Groupon, where he was acting chief financial officer until December.

“Groupon has increased dramatically both the volume and the quality of the technology deals that we’ve been seeing,” Mr. Lefkofsky says in a joint interview in Lightbank’s nook in Groupon’s headquarters on the Near North Side. “People have all of a sudden realized you can build a really world-famous and world-renowned technology company in Chicago, and so everyone is looking around under the rocks to figure out what else is happening.”

STARTING SMALL

While Messrs. Lefkofsky and Keywell built four companies before bankrolling Groupon, taking two of them public between them, their newest ventures are sometimes no more than a single employee with a captivating idea and no brand recognition. They bear hard-to-decipher names like 60MO Inc., Poggled and Sprout Social.

Mr. Lefkofsky and Mr. Keywell, both 41, are pursuing their own “no rules” approach to venture capital, investing only their own money without interference from partners, aside from a few friends and family and longtime collaborator New Enterprise Associates, of Timonium, Md. Also unlike most venture capitalists, they have stuck to just-hatched businesses, sometimes taking sweat equity for their advisory work. But they may invest as much as $5 million in bigger companies and be less involved.

The duo say they are attracted to ideas that can be scaled up fast, make use of the latest online technology and have a consumer or small-business twist. They see the next opportunities in such arenas as coupons, social travel, health care, consumer products and insurance.
To make a pitch, there’s no formal process. Messrs. Lefkofsky and Keywell say they don’t hold regular meetings or require entrepreneurs to fill out forms or even present a formal business plan. But notions have to be good enough to get past the eight “entrepreneurs in residence” they employ to filter through the 10 to 15 pitches they get a week.

When Edward Buchholz, 30, an entrepreneur in Wooster, Ohio, couldn’t reach anyone at Lightbank on the phone, he sent a note via Twitter on Oct. 11, saying: “Hey @lightbank, we should chat sometime. Mid-westerners gotta stick together, yo.”

That led to an invitation to meet with Lightbank’s screeners in person on Oct. 13 to explain his idea for 60MO, an online “financial dashboard” to help small businesses track cash on hand and make financial projections. Mr. Lefkofsky joined them several minutes later and, after hearing Mr. Buchholz’s pitch, made an offer then and there.

“They have an incredible track record for making things grow, and that’s what we want,” says Mr. Buchholz, whose company has 1,100 customers now and expectations for 20,000 by yearend.

Most of Lightbank’s money is going to Chicago companies. One is Poggled, which provides cocktail and beer discounts for bars and restaurants in Chicago and plans to expand to Miami and Las Vegas. Mr. Lefkofsky got involved in Poggled after Joe Matthews, a student who took his entrepreneur class at Northwestern University’s Kellogg School of Management, asked for advice.

Chicago-based Sprout Social, with 19 employees the biggest of Lightbank’s new ventures, helps businesses manage their online presence and turn connections from Facebook, Twitter and other social media into customers.

EGO BOOST

Messrs. Lefkofsky and Keywell started Lightbank after they struck it rich with now-publicly traded Chicago startups InnerWorkings Inc. and Echo Global Logistics Inc. Inquiries have skyrocketed since Groupon attracted—and without public comment rejected—a $6- billion takeover bid from Google Inc. last fall and then raised $950 million in private investments.

They are hopeful of setting off a spark in the city that will draw other venture capitalists, including perhaps those turned away from their fund, and keep Midwest technology talent and students here. The biggest thing the city’s business community lacks is the “ego” to take chances on entrepreneurs, who could create more jobs than the big businesses that have long dominated the city’s skyline, Mr. Lefkofsky says.
It’s easier to have that ego, of course, if you were the money behind Groupon.

Source: Crain’s Chicago Business