How They Started Page 9

  Groupon quickly added New York, San Francisco and Washington, DC, and second-quarter revenue shot to $1.2 million. Another dozen markets were opened in the third quarter, the subscriber base grew to 600,000, and sales leapt to $4 million. The pace continued in the fourth quarter, with another 13 markets opening. Groupon would close out the year with a total of $14.5 million in revenue.

  The company was a venture capitalist’s dream: an almost endlessly replicable model that promised good profit margins once each market was established. At year-end, the company raised nearly $30 million from Accel Partners and NEA to fuel yet more growth.

  As it grew, Groupon asserted a fun, wacky corporate personality. The company hired squadrons of copywriters to create amusing ad copy for the deals. Corporate missives were often playful, as in a blog post noting that the black background of the Groupon logo “symbolizes the constant darkness that would plague a world bereft of daily deals.”

  Beneath the levity, growing like a weed taxed the limits of Groupon’s executive team. Ostensibly an investor, Eric found himself sucked into the day-to-day operations, reporting on his blog that he served as de facto chief financial officer for nearly a year until Jason Child was hired at the end of 2010.

  One big problem was employee pay. The sales staff was on a commission program initially premised on modest sales. Instead, some Groupon offers sold in the thousands, and salespeople could earn as much as $300,000 a year. This enraged some salaried support staff, many of whom were working long hours as well. After one staffer sued for equitable pay, some raises were given.

  On the tech side, the company was constantly scrambling to bring on enough talent. Andrew says his biggest mistake was not opening a branch office in Silicon Valley until 2010. Chicago was not a tech hub, and it was hard to lure Californians to the Midwest.

  Merchant backlash

  By 2010, more than 2,500 merchants had participated in Groupon deals. As each market could only do 365 offers a year, most cities had long waiting lists. While the majority of merchants were happy and often signed up again, a distinct minority were displeased.

  Reports surfaced of merchants who lost money after offering a Groupon. In a widely circulated blog post, Posies Café owner Jessie Burke in Portland, Oregon, said she had to pay $8,000 in payroll out of savings after throngs of customers bought her half-price Groupon deal, which was a money-loser.

  In a Rice University study, 40 percent of Groupon merchants said they wouldn’t do another offer. Groupon countered that the vast majority of merchants were happy, and the number of participating merchants continued to climb. It became clear that offers needed to be carefully structured, though, to avoid burning the merchant.

  International explosion

  In 2010, Groupon continued its stiff pace of entering new US markets, adding 13 more in the first quarter alone. The company began acquiring small competitors to add more markets quickly, along with tech companies to build out the platform. But the year’s defining event was the acquisition of CityDeal, for a reported $100 million.

  Forbes magazine would proclaim Groupon “the fastest-growing company … ever.”

  Overnight, Groupon was a global brand, adding major European markets including London and Berlin. Groupon was able to scale these markets at a breathtaking pace, taking the London market from $1.7 million to $27 million in revenue just over a year later, for example. Masterminding much of the overseas expansion were CityDeal’s owners, brothers Marc, Oliver and Alexander Samwer, savvy Germans with a history of creating acquisition-worthy European clones of US companies.

  A screenshot of Groupon’s website today.

  In all, Groupon entered 45 new countries in 16 months flat, a boggling feat. Eighty markets were added in the second quarter alone, taking Groupon from zero to more than $100 million in overseas business in 2010. Investors liked what they saw. In April, Groupon raised $135 million, from Accel, NEA, Battery Ventures, and Russian tech mogul Yuri Milner’s Digital Sky Technologies. In August, Forbes magazine would proclaim Groupon “the fastest-growing company … ever.”

  Besides its overseas expansion, Groupon broke new ground by offering its first national deal. An offer for $50 worth of clothes for $25 from apparel chain Gap sold 433,000 Groupons for $10.8 million. The Gap deal generated tons of press, and better yet, 200,000 new subscribers.

  With small imitators springing up in many cities, Groupon differentiated itself by introducing a “Preferences” feature, enabling subscribers to receive offers in categories of interest only. The company also introduced a Groupon Rewards program, in which customers earn more discounts by shopping a merchant more frequently.

  No sale

  By now, Groupon had grown successful enough to attract not just media attention, imitators, and investors, but also buyout offers. But the team wasn’t keen to sell, preferring to continue growing the company themselves.

  In mid-2010, Yahoo! made an offer rumored to be between $3 billion and $4 billion, only to be quickly rebuffed. The struggling search engine had its own problems, and the Groupon team wasn’t interested in an alliance.

  The next offer was harder to turn down. It was from Google, for a whopping $5.75 billion. But reports were that antitrust concerns shot the deal down. Instead, Groupon turned to private-equity investors again, raising $450 million at the end of the year, which dwarfed 2010’s $313 million in revenue.

  The funds kept flowing in, with Groupon raising another $492.5 million in early 2011. Interest from funders grew as the inevitable next step for the fast-growing phenomenon neared: a public offering.

  IPO or “disaster”?

  As the company prepped its IPO in early 2011, the executive team seemed to crack under the strain. First, President and Chief Operating Officer Robert Solomon quit in March after one year, followed by founding CTO Pelletier, who cited exhaustion. His replacement, former Google executive Margo Georgiadis, lasted only a few months. One communications head, Bradford Williams, lasted just two months. The C-suite turnover foreshadowed the rough waters ahead.

  After Groupon filed its IPO papers in June 2011, the company was criticized for both the form and content of its filing. It used unconventional financial-reporting methods, prompting restatement requests from the SEC. Eric and Andrew made statements that leaked to the media and were viewed as potential violations of SEC “quiet period” rules. An aura of suspicion enveloped the company.

  Groupon’s restated figures showed $1.1 billion in revenue for the first three quarters of 2011 and a $214.5 million loss—a surprise, as Andrew had said Groupon was profitable the prior year. Also news: over $940 million of the $1.2 billion in venture capital Groupon raised had been paid out already to its founders and a few early backers, rather than being used as working capital at Groupon. As a result, the company had more payables due than cash in hand. The filing also revealed that the number of US merchants placing Groupon deals had begun to decline in the second quarter, although the international merchant base continued to grow.

  Critics charged that Groupon’s daily-deal model was too easily replicated and would be outdone by competitors such as Google Offers, which launched in April 2011. Others opined that group coupons were a fading fad.

  “Groupon is a disaster,” proclaimed Forrester Research analyst Sucharita Mulpuru in one widely circulated article. Meanwhile, the US stock markets tanked in summer 2011 after Standard & Poor’s downgraded the nation’s credit rating, putting the IPO on hold.

  In the end, investors turned a deaf ear to the media din, as did Groupon subscribers, who continued to buy. Groupon’s IPO effort survived all the travails, and the company went public in November 2011. The IPO priced at $20 a share, above its planned $16–18 range, raising $700 million in the highest-valuation IPO since Google in 2004.

  Where are they now?

  At the time of its IPO, Groupon offered more than 33 million deals in a single quarter, to nearly 143 million subscribers in 175 cities across 45 countries. Sixty percent of Groupon’s
business is now international.

  In early 2010, Eric and Brad co-founded the venture fund LightBank, which focuses on disruptive technology startups. Eric also serves on the boards of several nonprofits. Brad serves on several company and nonprofit boards, and he and Eric teach at the University of Chicago’s Booth School of Business. Andrew continues as CEO of Groupon.

  In May 2011, the company introduced Groupon NOW, which enables merchants to implement short-term flash sales. In early 2012, the company reported it was nearing its break-even point.

  LinkedIn

  Connections are key

  Founder: Reid Hoffman

  Age of founder: 35

  Background: Technology and product development

  Founded in: 2003

  Headquarters: Mountain View, California

  Business type: Professional networking site

  There’s an old saying in business: it’s not what you know but who you know. LinkedIn set out to make this a reality in the online world, creating a site aimed at helping professionals connect with each other. Set up in 2003 in the wake of the dot-com crash, the business survived a harsh economic climate and became profitable four years after launch. Today the company has more than 51 million members in over 200 countries and says that someone joins LinkedIn every second.

  Technology guru

  Reid Hoffman grew up in Berkeley, California, and it seems ironic now that during his childhood his father never let him have a computer, thinking it was irrelevant. It wasn’t until Reid went to college, where he studied artificial intelligence and cognitive science, that he got one. In the early 1990s, he won a scholarship to study philosophy at Oxford University, but after a year he realized that the world of academia was not for him. Instead, he had a few ideas for technology-based businesses, one of which was a personal information manager for a hand-held device. Convinced his idea had potential, he networked his way to meeting two venture capitalists. They didn’t turn him down flat but advised him to get some experience producing and selling products, and then come back.

  Following their advice, Reid sought a job at a high-profile technology company. He landed his first job at Apple in 1994, again using his networking skills (he heard about an opening in software development through the roommate of a college friend and applied to the company directly). Nearly two years later, he left Apple for a job at Fujitsu, this time in product management and business development.

  During this time, Reid always planned to work for himself one day. His aim was to build up experience, skills and confidence and prove to the venture capitalists that he was taking them at their word. At both companies, he set himself a strict timeline and mapped out the areas he needed to master before he could strike out on his own, including design and product management, building a team, and producing and selling products successfully.

  Reid always planned to work for himself one day. His aim was to build up experience, skills and confidence and prove to the venture capitalists that he was taking them at their word.

  In July 1997, Reid quit his job at Fujitsu to set up Socialnet, one of the earliest versions of a social networking site. He’d thought up the concept of social networking long before most people had started using the Internet at all. The aim of Socialnet was to build on the kinds of relationships that people have, as a way to identify potential dates, roommates or even tennis partners. The idea was to put users “near” the people they’d be interested in, but online. The right person for you could be in the next building, but you’d never know it: everyone would be connected online, so physical locations did not matter.

  Reid realized that the only way he would get the business off the ground was to bite the bullet and go for it. He looked at financing opportunities and went back to the original venture capitalists he had contacted years before. This time, they were impressed by his background and his ambitions for Socialnet, and he raised $5 million at the end of 1997.

  PayPal and beyond

  Just over two years later, however, Reid resigned from Socialnet because he wasn’t convinced that the company was going in the right direction. The business’s strategy had been to partner with newspapers and magazines to encourage subscriptions to the site, but it soon became clear that this was not viable and would not give them the user numbers they needed. Reid had a difference of opinion with the board and left soon after. He had learned a valuable lesson: you can have a brilliant product but unless you know how to reach tens of millions of people, the product will count for nothing.

  “There are three words people use for retail: location, location, location. For the Internet, it’s distribution, distribution, distribution,” Reid said. “If you don’t get this, the value of your site is zero. I hadn’t realized this when working at Apple and Fujitsu as they worked with big channels of established customers.”

  He told a friend, Peter Thiel, who had studied with him at Stanford, of his intentions to start another company. Peter was one of the founders of Internet payment system PayPal, and at the time was its chief executive. Reid had been one of its board members since its launch in 1998, and Peter persuaded him to join the company as executive vice president in charge of business development instead of starting another business.

  At PayPal, Reid was responsible for external relations including corporate development, banking, and international development. All the while, he continued to be fascinated by how the Internet (then in the early stages of its commercialization) accelerated the rate at which people did business. He was particularly interested in how individuals could use the Internet to promote their business profile and skills and what influence this would have on their careers.

  “There are three words people use for retail: location, location, location. For the Internet, it’s distribution, distribution, distribution.”

  It wasn’t until a few years later that Reid capitalized on his online networking ideas, since he believed that it wasn’t possible to perfect his business plan while still in another job. In 2002, PayPal was acquired by Internet auction site eBay for $1.5 billion, and Reid received $10 million for his share in the business. He planned to take a year’s sabbatical, but just three months later was back on the business trail, too tempted by his desire to start another online business. Even after the dot-com bubble burst, Reid was adamant that there was still potential for online success.

  Thriving in a harsh climate

  Reid saw nothing but advantages in the harsh economic climate of the early 2000s. He wanted to create a business that would only be possible via the Internet and that would change people’s lives. He reasoned that in the current climate there would be less competition and therefore a greater chance that his venture would succeed. Reid had several ideas, including a worldwide online computer game, but rejected them in favor of revisiting his passion for how people could be brought together online. He wanted to start a business that would let professional people establish profiles online so that other people could find them, effectively creating a network to enhance and further their careers.

  Even after the dot-com bubble burst, Reid was adamant that there was still potential for online success.

  In these years, it was harder than before to raise money for an Internet venture. Not wishing to waste any time before launching his idea—after all, it had effectively been brewing for several years—he decided to use the money from the sale of PayPal to start the business.

  For Reid, having enough capital wasn’t the big issue at the start—his main concern was making sure that he had the right team. He gathered a team of people he had previously worked with and known from his college days, whose experience and opinions he valued. The group included Allen Blue, Jean-Luc Vaillant, Eric Ly, and Konstantin Guericke. Konstantin had been a fellow classmate at Stanford; Jean-Luc had worked for Matchnet, an online dating business that had acquired Socialnet; Allen and Eric had worked at PayPal. Over several months they met in Reid’s living room and hatched the plan that was to become LinkedIn.


  Preparing for launch

  As the US officially entered a recession, the founders worked on the business plan for LinkedIn for several months before launch. Having witnessed the collapse of the dot-com bubble, they knew they needed to prove that the business could grow at a low cost, make money and be sustainable.

  In the face of a gloomy economy, Reid continued to believe that starting in a time of recession gave LinkedIn a competitive advantage. Even as consumer Internet ventures were no longer the next best thing, LinkedIn now had the opportunity to stand out with a fantastic idea. Investors were interested only in startups that could offer a solid, long-term business strategy, something that LinkedIn was determined to prove it possessed. The team wanted to show it had a sustainable business model based on a number of revenue streams, such as subscriptions, and at its core, a valuable proposition for prospective members.

  Reid continued to believe that starting in a time of recession gave LinkedIn a competitive advantage. Even as consumer Internet ventures were no longer the next best thing, LinkedIn now had the opportunity to stand out with a fantastic idea.

  The business continued to be funded by the proceeds of Reid’s PayPal shares, as the founders held off seeking additional funding until they were sure they could prove the value of LinkedIn’s business model. By early May 2003, the founders felt confident enough to launch the site. But it was to take several months of hard work for the idea to catch on.

  Word of mouth