Under Fire From Shareholders, Groupon Founder Preaches Value of Failure
Self-described 'serial entrepreneur' Eric Lefkofsky speaks to Northbrook Chamber of Commerce.
Standing before a crowd of local business owners in Northbrook, Groupon founder and director Eric Lefkofsky extolled the value of failure.
“I can only learn by doing something and failing,” said Lefkofsky, who is 42. “You can’t tell me to avoid a pothole, I have to drive it.”
The Glencoe resident and Michigan native appeared at the Northbrook Chamber of Commerce’s annual dinner and meeting on Tuesday, the same day that a shareholder sued Groupon for misstating its profits, and four days after the company issued a restatement of its earnings, claiming a “material weakness” because it had not set aside enough money for customer refunds.
A self-described “serial entrepreneur,” Lefkofsky warmed up an audience of several hundred at the Renaissance North Shore by cracking a joke about how he prepared for his speech.
“Besides talking about financial revisions and what’s happening with Groupon, the second most exciting topic would be the Internet and Groupon,” he said.
Lefkofsky, who also serves as an adjunct professor at the University of Chicago’s Booth School of Business, told the audience that tech companies could be successful by identifying a point of “pain” and making it easier for customers. A good example is Google, he said, a company that took what could be a tedious and time-consuming search for information and turned it into a lightning fast operation involving just a few clicks on the web.
“When you want people to change, you have to make it worth it,” he said. “The value of the change must be greater than the pain of the switch.”
Rebounds From Failure Define His Career
Chronicling his own career, Lefkofsky emphasized the importance of failure — and how a successful entrepreneur can learn from it. Following college and law school at the University of Michigan — where he started two successful businesses — Lefkofsky moved to Chicago, then bought his first company with partner Brad Keywell. The Wisconsin-based children’s clothing manufacturer eventually went bankrupt due to crippling debt.
“It was my first failure,” Lefkofsky said. But he also saw it as an opportunity for growth. Working out of an office in Rogers Park, he and Keywell decided that the Internet was the place to be for profit. They sketched a plan for a company called Starbelly, which would sell promotional products to businesses online. Then they raised $300 million in commitments before selling the company to a larger business called Halo.
At 29, Keywell and Lefkofsky went from a two-person team shepherding an idea into fruition to president and COO of a company with 8,000 employees.
“You can imagine how this story ended,” he said. “It ended as bad as you think it did.”
Halo filed for Chapter 11 bankruptcy, Keywell went to work for Sam Zell and Lefkofsky started another company, InnerWorkings. His goal was to do the opposite of what they had done at Starbelly, in hopes that a quicker launch and fewer staff would generate success.
The company aggregated bids from multiple different printers in order to help a business find the lowest price for a print job. In a model that presaged Groupon, printers tended to bid at lower prices when they didn’t have jobs lined up, Lefkofsky said.
“When you have open capacity, when you need customers, you will bring down prices to get them,” he explained.
InnerWorkings went public in 2006, and Lefkofsky founded another company called Echo, designed to help businesses find the right truck at the right time. That went public in 2009.
Both those initial public offerings took place in Chicago, an achievement that makes Lefkofsky proud.
“There are very few technology IPOs in the country in a given year. For Chicago to have one is a big deal,” he said. “I think it just speaks to the fact that you can build great companies in Chicago.”
“People Like to Save Money More Than They Like to Save the World”
Lefkofsky’s third public offering in Chicago was Groupon, an idea that came from a former employee at InnerWorkings, Andrew Mason. In 2006, the Northwestern alum was a graduate student at the University of Chicago’s Harris School of Public Policy and having trouble with his cell phone contract. He imagined a website based on the principle of the tipping point, where, if enough people got together, they could take collective action — on something as mundane as a cell phone contract or as large as social justice.
“I said, ‘Hey, why don’t you drop out of school and we’ll put some money in?’” Lefkofsky recalls. He committed $1 million to the project, and Mason started a website called The Point.
“It was a total failure,” Lefkofsky said. He pushed Mason to rethink the project and how it could make money, and in 2008, Groupon was born.
“It turns out people like to save money more than they like to save the world,” Lefkofsky said.
He described Groupon as an instant success in nearly every city, beginning with Chicago. Today, the company operates in 48 countries with 10,000 employees, and has been cloned thousands of times. Its biggest challenge, he said, is dealing with the inevitable side effects of the business’ rapid growth.
“Our main focus is trying to figure out how this model evolves and not consistently falling on our face in the public,” he said. “It’s like giving a 7-year-old a Ferrari; you’re going to get a certain amount of chaos.”
While Lefkofsky is still involved with Groupon as executive chairman of its board of directors, his main focus today is Lightbank, a company he founded with Keywell that launches and funds new tech companies. Getting companies off the ground — not running them once they’re established — is where he excels, Lefkofsky said.
“The goal is to become the great technology innovator in the Midwest,” he said, of Lightbank. “We think Chicago is a great place to start.”
“When Somebody Fails, We Kind of Beat Them Up”
While Lefkofsky did not specifically address the lawsuit against Groupon, he did say that he believed America, and the media in particular, could do a better job embracing risk-takers.
“When somebody fails … we kind of beat them up,” he told the audience. “Where were people celebrating them on the way up?”
When Patch asked whether he was referring to Groupon in particular, Lefkofsky said he was not being specific. But he, said, CEO Andrew Mason had a point when he talked to the Wall Street Journal in November 2011, after Groupon came under fire for some negative stories about its merchants’ experience.
“Nobody writes an article about the plane’s safe landing,” Lefkofsky said, paraphrasing Mason. “They write about the plane crash.”
Asked whether the dip in Groupon’s stock and the shareholder’s lawsuit were simply turbulence or a failure, Lefkofsky demurred.
“Do you think I could possibly answer that?” he told Patch.