On Groupon and its founder, Andrew Mason

THE REAL DEAL: Groupon, the social-media-driven shopping site, is the hottest Internet start-up in town. Can it become the city’s big high-tech breakthrough?

With Groupon, Andrew Mason has brought collective dealmaking to the computer. Photo: Taylor Castle

Sliding into a chair at Japonais for an early lunch, Andrew Mason does not look like a multimillionaire CEO. With an untucked sartorial style and a tendency to stare at the table rather than make eye contact, the tall, wholesome 29-year-old seems more like the boy next door than the next Steve Jobs or Jeff Bezos—tech superstars to whom Mason is being compared in the business press.

“I’m just not used to talking that much about myself,” he says. “It feels strange.”

He doesn’t have the CEO patter down, either. That is part of his charm. Currently, as founder and chief executive of Groupon Inc.—the Chicago-based Internet business that has partnered social networking with bargain hunting—Mason has pulled together the biggest venture capital deal in the city. In April, Groupon announced that it had attracted $135 million from venture capitalists as widespread as Battery Ventures in Menlo Park, California, and Digital Sky Technologies in Moscow. The recent influx of funds places a $1.35 billion value on Groupon, according to TechCrunch, the online news source that reports on startup companies, products, and websites. ChicagoBusiness.com stated: “Groupon represents Chicago’s best hope of finally breaking into the internet big time—and attracting the talent, investment and attention that have eluded the city for decades.”

Each day, Groupon—the name is a mash-up of “group” and “coupon”—offers one localized “unbeatable” deal to more than six million Americans in 67 cities (plus deals in 14 other countries) who have signed up to receive its e-mail promotions. Recent Chicago offerings included $25 for a Segway tour of the lakefront ($49 value), $11 for a hand car wash ($27 value), and $55 for a hot stone massage ($220 value). For the deal to go through, a certain number of people have to buy in—if the number isn’t reached, the deal is off. (See “How Groupon Works.”)

The premise is “dead-simple value that you can comprehend by looking at one page in three seconds,” says Mason. While Mason declines to disclose specific revenue numbers, Groupon’s website states that since its beginning in November 2008, Groupon has sold more than six million deals. With Groupon taking 50 percent of every deal, plus a small credit-card handling fee, revenue is expected to top $350 million by the end of this year—a number that Mason doesn’t actively dispute.

“Really, it’s a way to get out of the house, to explore the city—an expensive city—and to spend more time with your friends or loved ones,” says Mason, who lives in Ukrainian Village with his longtime girlfriend. Others take a less modest view. The Wall Street Journal called Groupon “today’s web darling,” and ChicagoBusiness.com placed Mason and Groupon in “one of technology’s epic land grabs comparable to the race to dominate Web browsers, online auctions, and social networking.” Matt McCall, a venture capitalist with the Chicago-based New World Ventures, says: “Groupon has created the most lucrative monetization engine for the Internet since Google Search, and they have cracked the code on local marketing. They have a lot of headroom for growth ahead of them.”

As for Mason, he doesn’t seem to be caught up in all of the hype. “I never thought of myself as an entrepreneur before this,” he has often said, “and I still really don’t. I just like to build things and do things.”

 

It all started in 2006 with a problem with Mason’s cell phone contract. “I had to cancel my contract, and it was such an ordeal,” he says. “I just thought, There has to be a large number of people with these same problems, and if we were united in some way, we could leverage our collective power.” That got him pondering the idea of an Internet-driven network similar to social networking sites like Facebook but aimed at organizing people to take collective action. “This broader platform would be for people to come together over problems they can’t solve alone—an ‘I’ll do something but only if I can get 150 other people to join me’ kind of thing.”

Growing up in Mount Lebanon, a suburb of Pittsburgh, Mason showed an early eye for creative organizing. At 15, he started a Saturday morning delivery service called Bagel Express. He came to Illinois to attend Northwestern University, and after graduating with a degree in music in 2003—he plays piano and used to be in a rock band—he worked in web design for companies started by the Chicago serial entrepreneur Eric Lefkofsky.

Described by a former colleague as “hyperkinetic” and “a tough negotiator,” Lefkofsky has helped start a number of Chicago businesses over the last two de-cades, including Starbelly, an online-only promotional product company. In January 2000, just before the dot-com bubble burst, Lefkofsky and his partner sold Starbelly to Ha-Lo Industries for $240 million. Opinions about Lefkofsky vary. In 2009, the Chicago Sun-Times stated that since the sale of Starbelly, Lefkofsky had emerged as arguably “the most successful and prolific internet entrepreneur in Chicago.” Yet, in 2007, Barron’s described him as someone “who has a history of busting investors after promising to radically transform bricks-and-mortar industries.”

“I’ve just found Eric to be a great mentor,” says Mason. In September 2006, Mason left Lefkofsky’s employ to attend the University of Chicago’s Harris School of Public Policy on a scholarship. That was about the time he encountered problems with his cell phone contract. Following his interests, Mason started working on a web-based platform for organizing collective action based on the principal of a tipping point (the number at which many small individual items reach critical mass).

Word of the project reached Lefkofsky. “I learned early on—when Andrew was working for me at Innerworkings—that he was super talented,” says Lefkofsky. “And there aren’t many brand-new Internet ideas. So I knew immediately that he was on to something.” Lefkofsky asked Mason to put together an outline about his business idea. Mason did, and then Lefkofsky offered $1 million to bankroll the venture. “I was beyond stunned,” says Mason. “I didn’t know people actually did things like this.” Seizing what he felt was a once-in-a-lifetime opportunity, Mason dropped out of school and started developing what would become The Point, a web platform that allowed anyone to write a campaign exhorting others either to do something (stage a demonstration, for example) or give money to a cause (say, make election day a national holiday). People could make a monetary pledge and enter their credit card numbers on the site, but they would be charged only if a predetermined tipping point—a campaign’s target number of people or money—was reached.

Launched in November 2007, The Point has drawn some esoteric causes, to say the least. Mason used the site to propose building a dome over Chicago, thus protecting the residents from winter weather. “And some people pledged $5,000 or $10,000 toward this goal,” he says. “If you think of the value of making winter obsolete in Chicago, it’s phenomenal. The Point offers an intriguing way for people to think about what something is worth. That’s the question that usually gets in the way of solving big problems.” (Ultimately, $234,395 was pledged toward the set goal of $10 billion.)

After about a year, Mason says, Lefkofsky “started prodding me to figure out how The Point was going to make money.” Mason identified three possible ways: selling advertising on the site, taking a piece of the fundraising, or collective buying. “Definitely, collective buying seemed the most interesting,” he says, “because it was the most unknown.”

KEEP READING

 

Groupon logoThe history of collective online buying is a storied affair that began in the 1990s and—in its first phase—ended with a whimper by early 2001. Some of the larger players included Mercata and MobShop. “I looked at those out-of-commission sites and, to me, the reason they failed was obvious,” says Mason. “They were selling consumer goods, like TV sets or cameras, but they were competing with places like Amazon. So they couldn’t really drive the price down enough. You could get whatever they were selling other places online, you could get it cheaper, and—because they needed a week or so to get the right number of people together—you could get it more quickly other places, too.”

Mason took what he gleaned from the failed collective buying sites, switched the concept from goods to services, and married it to the basic premise of The Point. In November 2008, Groupon opened for online business. One of its original twists: In describing the offers, Groupon embellishes with esoteric tidbits (a recent deal involving the classic Music Box Theatre featured quotes from the hallmark film directors Alfred Hitchcock, John Ford, and Orson Welles). The staff’s copywriting manual is inches thick and openly based on Chicago’s improv sense of humor. (But don’t believe everything—in spite of what his online bio says, Mason does not live with 20 cats.) Recently, the managing editor of Crain’s Chicago Business, Brandon Copple, left that job to become managing editor of Groupon, where he will manage and edit content and help oversee expansion.

In a year and a half, Groupon has expanded from a staff of several dozen to 350 employees, most of them working out of the old Montgomery Ward headquarters at 600 West Chicago Avenue. One of the site’s biggest successes: selling more than 14,000 tickets to the Chicago Auto Show ($6 for an $11 value). One of its largest failures: shipping live lobsters ($84 for a $137 value). “I don’t know why that didn’t work,” Mason says. “It still sounds good to me.” Statistics show that the average Groupon user is a single female between the ages of 18 and 34. More than half the fans have college degrees, and two-thirds of them make between $50,000 and $100,000. All of that adds up to an audience many businesses want to reach. An active sales force, working on commission, recruits businesses to make the daily deals.

But Groupon has its critics. Janet Paskin, the managing editor of Bundle, a website devoted to tracking consumers and their relationship with money, recently wrote about what she called “the cult of Groupon,” citing the addictive nature of the daily hit. Paskin also noted that some followers, herself included, end up buying coupons for services they don’t need just because a deal offers such savings. While businesses look at Groupon as an easy way to expand their customer base, some critics have noted the possibility of an erosion of customer loyalty (being swayed by a deal to move on to the next restaurant or hair salon) and the danger that small businesses could be buried by an overwhelming response. In the restaurant world—favorite coupon-offering territory for Groupon—the business draws a mixed reaction. For one thing, so many coupon users were basing their tips on the discounted price of the meal that Groupon has now started reminding customers to tip based on the menu price.

“It’s like a Super Bowl commercial, in that Groupon reaches a massive audience all at once,” says Ellen Malloy, founder and publisher of Restaurant Intelligence Agency, a website that provides press information on restaurants and lounges. “But that doesn’t mean everyone should—or needs to—do one.” Malloy acknowledges that some smaller restaurants might end up being swamped with coupon diners—and even lose money on the deal—but that isn’t her largest concern. “What bothers me is the belief [by some restaurant owners] that all these people who buy a coupon and come in once are going to convert to regular diners. That may work for chain dining or very small venues, but when it comes to fine dining establishments, it’s an expensive proposition for the actual return.”

Spring, a restaurant in Wicker Park, recently offered its second Groupon deal. “This time we had more control over our expenses,” says Fletcher Harrison, general manager, “and we were able to offer diners a more Spring-like experience.” The difference between their 2009 and 2010 coupons? The second time, Spring offered a specific three-course prix fixe menu ($30 for a $59 value) and capped the number of coupons sold at 7,600. “We had to set a limit because Groupon is that powerful an engine,” explains Harrison.

Wendella Boats recently sold 19,850 coupons for their Chicago River architectural boat tour ($12 for a $25 value). “The first few days, the phones would not stop ringing,” says Craig Wenokur, director of operations. “Because we’re a seasonal business, it really helped our cash flow to get our cut of the deal up front. Plus, I will have the money for several months before all the coupons are redeemed.”

Given the low barriers to entry on the Internet, sites like Groupon are booming. Currently there are an estimated 60 competitors (some of whom try to undercut Groupon with merchants by taking only a 30 percent cut of money raised), including Living Social, YouSwoop, Scoop St., and BuyWithMe. Living Social, based in Washington, D.C., and infused with $40 million and a recently honed connection with the AOL founder Steve Case, poses the biggest threat to Groupon. But, according to Crain’s, Groupon has the momentum.

In any case, Groupon has readied itself to do battle. In March, the company brought in Rob Solomon, former Yahoo executive president, to help shape and build infrastructure. And in May, Groupon bought European rival Citydeal, adding 80 cities, 16 countries, and 600 employees to the stable. (The amount Groupon paid for the five-month-old German company is undisclosed, but Citydeal saved members $5 million in April alone.) Also, Groupon is experimenting with splintering metro areas in large cities, offering “hyperlocal” deals to various neighborhoods—a practice it plans to bring to the Chicago area soon.

“It’s an exciting time, and even though it’s unbelievable to me, I’m enjoying it,” says Mason. “Not that long ago, I never imagined being involved in anything like this. But life is full of surprises.” For the foreseeable future, Mason says he is sticking with Groupon. As for The Point, his collective action website that started all this, Mason admits that he originally thought of Groupon “as the tail that would wag the dog,” meaning that Groupon would create enough revenue to allow him to keep The Point as his main focus. But his perspective has changed. He still thinks about The Point. But now fewer than ten employees—Mason not among them—work on it. “And that’s mainly for sentimental reasons,” he says. Groupon simply offered him a deal he couldn’t resist.

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