62 GlobeAsia April 2013

Technology

arly last month, staff at the world’s largest daily deals website Groupon received an email from CEO An-drew Mason quite candid-

ly declaring that he was “fired.” Groupon stock is trading at less than a quarter of its listing price and the company has only posted a profit for a single quarter since it began trading.

While investors seemed by and large happy with the ouster (Groupon stock jumped 4% in extended trading), the company’s future remains bleak.

The brief rally could be attributed to the fact that many investors do not re-ally know much about Mason’s replace-ment. Indeed, the biggest challenge for Groupon going forward could well be summarized in one word (or rather name): Lefkofsky.

Specifically Eric Lefkofsky, the interim CEO of Groupon – he shares the post with former AOL President, Ted Leonsis. Lefkofsky has so far man-aged to stay behind the scenes. While most people know Andrew Mason as the face of Groupon, few have heard of

Eric Lefkofsky, the shadowy Emperor Palpatine-like figure who rules from the sidelines.

It might come as a surprise to some that Mason only owned 8% of the stock in comparison to Lefkofsky’s 22% prior to the Groupon IPO. Now that Mason is gone, however, there seems to be a spot-light pointed right at Lefkofsky and in-vestors hope that the company is now in better hands. If one were to shake their Magic 8 ball however, signs point to no.

Lefkofsky’s past record shows some troubling similarities with present day 5.

msh

cd

n.c

om

Just who is Groupon’s new interim CEO?

April 2013 GlobeAsia 63

By Jason Fernandes

Groupon. Starting his career in college as a carpet salesman, Lefkofsky sold mostly used carpet from trade shows to other students. He was apparently pret-ty successful at that and soon expanded to five college campuses.

Lefkofsky’s next venture involved the purchase of an apparel company in Wisconsin that he and partner Brad-ley Keywell (also a Groupon investor) grew from sales of $2 million to $20 million. Unfortunately, they did this through a massive expansion program that resulted in the collapse of the com-pany under its own debt. Where Lefkofsky goes, lawsuits tend to followBut it gets worse. Brandon Apparel was sued by almost everybody – its former owner (for non-payment), the National Football League properties, major league baseball properties and even the city of Columbus, Wisconsin for vari-ous alleged infractions.

If that wasn’t enough, in 2000, former lender Johnson Bank sued Lefkofsky and Keywell personally, as-serting that they had used resources from Brandon Apparel to start their next venture, Starbelly.com. The suit alleged that Lefkofsky and Keywell de-frauded creditors by creating a complex network of trusts and other vehicles to prevent investors from recouping their losses. The judge awarded the bank $11 million in a default judgment, but dismissed the other claims on jurisdic-tional grounds.

Starbelly.com made its money (and I use that term loosely) providing e-commerce for branded merchan-dise. It somehow managed to garner a valuation of $32 million from Chase Capital and Flatiron partners. All this (according to a June 2011 article in Fortune) while posting a $2.5 million loss on revenue of $183,000 within its

Lefkofsky and Keywell have developed a knack for growing a company’s valuation despite a lack of revenue and in some cases significant losses.

first six months of operation. The partners were soon able to

sell Starbelly.com to Ha-Lo Industries for $240 million, over seven times its previous valuation from just four months earlier. The acquisition worked out terribly for Ha-Lo Industries but excellently for Lefkofsky and Keywell.

The company, which had 50 years of experience in the industry and an operating profit of $1 million pre-acquisition, soon posted a $64 million dollar operating loss almost wholly as a result of the Starbelly.com acquisition. Ha-Lo Industries was forced to file for bankruptcy less than two years later. The deal made Lefkofsky and Keywell the largest shareholders of Ha-Lo In-dustries, together owning a combined $49 million in stock.

Again lawsuits followed. In an email from this period sent to col-leagues and unveiled in court docu-ments later, Lefkofsky is quoted as saying “let’s start having fun ... let’s get funky ... let’s announce everything ... let’s be WILDLY positive in our forecasts ... let’s take this thing to the extreme ... if we get wacked on the ride down – who gives a shit.” 

Ha Lo later emerged from bank-ruptcy as Halo Branded Solutions. Clearly Lefkofsky and Keywell have developed a knack for growing a company’s valuation despite a lack of revenue and in some cases significant losses. 

Lefkofsky’s subsequent venture InnerWorkings was also touched by controversy. Barron’s Bill Alpert wrote a damning piece in 2007 that seems to foreshadow Groupon’s later troubles. Alpert called InnerWorkings a “glori-fied broker of print jobs” and alleges that the company went to great lengths to hide its involvement with Lefkofsky who “has a history of busting investors after promising to radically transform bricks-and-mortar industries.”

A subsequent 2008 lawsuit filed by Sports Publishing LLC alleged that InnerWorkings billed the company “hundreds of times” for fraudulent amounts during the years 2005 through 2007 and accused InnerWorkings and Lefkofsky of “racketeering” and “ter-rorist tactics.”  

In a weird twist, the suit alleged that Lefkofsky had personally threat-ened to “shoot” the CEO, Dr. Joe Ban-non, if Sports Publishing didn’t meet his demands. While the suit was later withdrawn, coupled with Lefkofsky’s previous history, it does seem like quite a bit of smoke for there to be no fire.

Get it while the going is good Most troubling perhaps, is the fact that Lefkofsky appears to be continuing his pattern of cashing out at just the right moment with Groupon. According to the Fortune article, Lefkofsky and his family were able to personally cash out to the tune of $382 million just before the IPO.

To put this in perspective, that rep-resents more than double what Keywell and his family were able to sell and 38 times what CEO Andrew Mason offloaded at the time. As website AllTh-ingsD.com pointed out in an article published in June 2011, Groupon was able to raise $950 million, of which $810 million went to pay out investors and employees, leaving the company

64 GlobeAsia April 2013

Technology

little in terms of operating capital. The insider selling was viewed by many to be a vote of no confidence by the management of the company.

The fact is that not only was Groupon los-ing money at the time, but it was desperately in need of the capital raised to remain relevant vis-a-vis its competitors. The money should’ve been spent on growing its subscriber list, rather than letting its founders and their cronies cash out. 

The icing on the cake is that, according to an article by Jim Edwards of Business Insider pub-lished earlier this year, Lefkofsky has “interests in several companies that have close relation-ships or contracts with Groupon that, for a long time, have represented a conflict of interest for the company...”  

The article goes on to list the conflicts point by point painting a pretty damning picture of the incestuous interplay between Lefkofsky’s business interests. As matter of fact Groupon admitted to possible conflicts of interest in a recent 10-Q SEC filing stating “(Lefkofsky’s) investments may be in areas that present con-flicts with, or involve businesses related to, our operations. There can be no assurance that our business will not be adversely affected as Mr. Lefkofsky devotes less time to our business in the future.”

Groupon’s filing with the SEC indicates that Groupon paid (Lefkofsky venture) InnerWork-ings approximately $3.8 million in just the last two years. Echo Global Logistics, another Lefkofsky-founded company, was paid over $600,000 just this year and a law firm owned by Lefkofsky’s brother Lefkofsky & Gorosh was paid $695,000 in 2011. The firm is expected to continue to represent Groupon in other matters going forward.

This coupled with Lefkofsky’s massive stock unloading pre-IPO, seems to indicate that his goal is to slowly extract as much as he can while Groupon still exists, then either sell or other-wise exit, as he did with Starbelly.com.

Groupon investors need to be very con-cerned that the fox is now guarding the hen house. Sure he had enormous influence before as the largest shareholder, but now as interim CEO he has operational power that cannot be ignored given his previous track record.

Shortly after Andrew Mason was let go, Lefkofsky spoke with FastCompany’s Elizabeth

Spiers in an interview where he essentially ad-mits to sleeping on the job. Lefkofsky says “For whatever reason in the first 12 to 15 months of us being public we did not do a very good job of controlling the process...It felt very often like the process was controlling us.”

This was somewhat of an odd statement be-cause, as Spiers points out, since he and his now co-CEO were responsible for board oversight, he does bear a fair bit of responsibility for what happened. Not surprisingly, Lefkofsky lays the blame solely at Andrew Mason’s feet, saying es-sentially that since Mason accepted responsibil-ity, he is to blame. Let’s hope that when a new CEO is finally hired, there still is a company left to run.

Subsequent to taking over Groupon, Lefkof-sky was quoted in the Chicago Tribune (March 3 2013), saying things like Groupon is “inches away from greatness” and “the long-term hori-zon of the company is fantastic.” Unfortunately in context of his history of making wildly posi-tive statements that were disingenuous at best, investors are not likely to take his word for it. 

Some might be wondering what Lefkofsky was doing when Andrew Mason was fired. The answer is probably instructive of Lefkofsky’s general view towards companies he is involved with. As it turns out, he was on a two-month long sabbatical in Southeast Asia. People say that Nero fiddled while Rome burned. Groupon might never conquer the world like Rome did, but Lefkofsky could just be the new Nero.

Jason Fernandes is a tech commentator and the

founder of smartKlock.

Groupon investors need to be very concerned that the fox is now guarding the hen house.

ww

w.d

ra

go

nfl

yef

fec

t.c

om