The New York Times November 17, 2010
A Business Creator Sees Big Returns From Social Media
By DARREN DAHL
Asked to name the world’s wealthiest entrepreneurs, few people would think of Eric Lefkofsky, who is 40 and keeps a deliberately low profile in his hometown of Chicago. But Mr. Lefkofsky has an impressive entrepreneurial track record, one that recently led Forbes to estimate his wealth at $750 million.
The first business Mr. Lefkofsky started, StarBelly, made tools for building Web sites; he sold it in 2000 for $240 million. He then started two companies that have since gone public — InnerWorkings, which provides printing capabilities over the Web, and Echo Global Logistics, a transportation and logistics outsourcing business he founded with a law school friend, Brad Keywell. He also founded MediaBank, which helps companies buy advertising. In each case, Mr. Lefkofsky used the power of technology and the Internet to update an industry.
And then came Groupon, the social-coupon Web site that he bankrolled and started in 2008 with Andrew Mason — a venture that has been called the fastest-growing company ever. Groupon offers its followers a deal-of-the-day coupon, sponsored by a local business, that the followers are encouraged to share with their social networks. The local business gets customers, and Groupon takes a share of the coupon proceeds — a business model that has led to talk that Groupon, still privately owned, could be worth as much as $3 billion. More recently, Mr. Lefkofsky and Mr. Keywell started an investment fund with $100 million of their earnings. It’s called Lightbank, and it invests only in early-stage technology companies that are built around social media. The following is a condensed version of a recent conversation with Mr. Lefkofsky.
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Q. Did you have any idea how big Groupon would be?
A. Not when we first launched. It’s nearly impossible to predict or even comprehend this level of growth. We have grown from a handful of employees to more than 2,700 over the past two years. This year alone we have expanded into 29 new countries.
Q. Was there a key decision or strategy that made Groupon a success?
A. ThePoint.com, the predecessor of Groupon, was a failure until we found the right recipe, which was to make buying a social experience. Now, Groupon is a very well-run business with great operational control and a metrics-driven culture. As a result we have revenue, profits and cash flow.
Q. Companies have been overwhelmed or even destroyed by running a Groupon special. How do you feel about that?
A. I find it almost absurd that the biggest complaint people have been able to levy against Groupon is that it actually delivers too many customers. More than 95 percent of all Groupon merchants want to run another Groupon discount. There is no greater evidence of value than that.
Q. There’s a study that indicates 42 percent of your customers wouldn’t run another promotion. What do you make of that?
A. The study is flawed. They chose an absurdly small and incomplete sample set and their thesis is largely inaccurate. First of all, we conduct regular surveys and our merchants are overwhelmingly happy. Secondly, we have featured about 5,000 merchants more than once, which would never occur if they weren’t making money off Groupon.
Q. Why have you decided to focus on social media with your investment fund?
A. We think that the most disruptive business models will take advantage of that social graph over the next five to 10 years. Take travel as an example. You should be able to plan your entire trip online, invite your friends to come with you and even interact with other friends who have already been to that location. Those people will provide you with content that will augment your experience.
Q. In what industries are you seeing similar changes?
A. Think about the way most companies currently hire. You post a job and then get blind résumés in response. This should be a social experience. If you took everyone and asked them to list everyone they knew, you could create an enormous social graph of several million people. There’s no reason to hire people that we can’t learn something about through some connection of our personal network. There’s no site today that takes advantage of the social graph in this way, yet.
Q. Doesn’t LinkedIn do that?
A. LinkedIn does part of it. It’s a great example of a company that is leveraging the social graph to grow and deliver value.
Q. What is it missing?
A. The site is missing some of the key social features that make Facebook so compelling. The ability to quickly understand someone based on whom they know, what they share and what others think of them, for example. To me, no one has fully cracked the code on social recruiting yet.
Q. Now that Lightbank exists, do you get inundated with business plans from entrepreneurs pitching ideas?
A. Absolutely. We have already invested in seven companies and we have a goal of doing a new one about once a month. For example, we invested in Watermelon Express, which is a test-preparation company. Studying doesn’t have to happen in a silo. It can be a social experience. You can engage with your friends and family to find out the answer to a tough question or have someone explain it to you. You can also study anywhere you happen to be and on any device.
Q. How is that a business?
A. They sell test-preparation applications for devices like the iPhone.
Q. What exactly do you want from a company with an idea to pitch?
A. That’s a tough question. Typically we want passionate entrepreneurs who have a great idea. Beyond that, there is no exact formula that guides us to invest or not. Part of this is gut instinct and part of it is based on experience.
Q. Do you think that every business needs to rethink what social media means to its future?
A. Today, I think that every business is again in serious flux because of the rise of all these social tools. Take telemarketing sales, for example. Why would your business ever make a cold call again?
Q. What’s the alternative?
A. Certainly businesses are using Facebook and Twitter to reach thousands of customers that historically they might have had to call or e-mail to reach. I think everything will begin with a person’s individual connection to the graph. That’s how small businesses will get customers, promote products and get feedback from their customers.
Q. Should dry cleaners have social media strategies?
A. Yes. Any business that is looking for new customers needs to understand the Internet and how to market their goods or services through it.
Q. Do you understand why a lot of business owners get the willies when they hear the term social media? Do you have any advice for them?
A. We just invested in a company called SproutSocial. If someone gets the willies, they should buy their product, which is designed to help people that don’t fully understand the social Web.
Q. What does it do?
A. SproutSocial creates a social media dashboard for businesses. It allows them to monitor their brand on the Web by monitoring things like tweets, reviews, blog posts and news. It helps businesses find their perfect customers by targeting the right buyers and those with influence while allowing them to manage their social contacts and connections. In essence, it’s a complete social customer relationship management tool for any business.
