CHICAGO’S NEW NET HOPE; Andrew Mason’s Groupon city’s best shot at tech glory.(NEWS)

Crain’s Chicago Business May 24, 2010 Byline: JOHN PLETZ Andrew Mason is sitting on the biggest venture-capital stash in Chicago at Groupon Inc., the business that married the new power of social networking and the age-old appeal of saving a buck.

The 29-year-old CEO has attracted $170 million from investors spanning Silicon Valley to Moscow who are betting Mr. Mason will continue to dominate the business he pioneered 16 months ago, offering Web users a daily deal from local businesses such as restaurants and nail salons.

“Groupon has the potential to be a category-defining company, like Google, says Kevin Efrusy, a Highland Park native and partner at Palo Alto, Calif.-based Accel Partners, which led a $30-million investment in Groupon last fall. “These types of companies don’t come along very often.

Mr. Mason must use the cash to ensure that Groupon becomes the Facebook of a niche he created, rather than the Friendster. The Internet is littered with early leadersCompuServe, Bebo, Netscapethat were eclipsed by innovators with momentum and cash on their side.

“There might be someone else like a Google or someone that comes from another angle and finds the best parts of our business and manages to do something we couldn’t think of, Mr. Mason says. “Hopefully we’re smart enough to anticipate that, but who knows?

It’s not just investors who have a stake in Mr. Mason. Groupon represents Chicago’s best hope of finally breaking into the Internet big timeand attracting the talent, investment and attention that have eluded the city for decades.

Founded by Mr. Mason in November 2008, Groupon jumped out to a fast start, spreading to 67 cities and signing up nearly 5 million users. Revenue is expected to hit $350 million this year. Headcount has grown nearly tenfold to about 350 employees, most of them at its offices in the old Montgomery Ward headquarters.

Consumers love the bargains Groupon offers, and small businesses see it as a way to bring in customers with no upfront costs.

PIONEER’S PERIL Groupon is at the center of what could be one of technology’s epic land grabs, comparable to the race to dominate Web browsers, online auctions and social networking. Like Google Inc., which used a search engine to build an ad business that didn’t exist before, Groupon stumbled on something new. this web site groupon atlanta

Eventually there will be room for just one or two players. Mr. Mason’s next moves will determine whether Groupon is one of them.

“Often the pioneer doesn’t win, says Jim Scheinman, CEO of venture-capital firm Maven Ventures in Los Altos Hills, Calif. He’s a veteran of Friendster and U.K.-based Bebo, two early leaders in social networking ultimately surpassed by Facebook. “The reality is the barriers to entry are extremely low in that business. I’m sure they’re worried every day about another little startup that can do something even more clever.

The group-buying space is fast approaching 100 competitorsfrom boot-strapped startups such as Chicago’s YouSwoop to Washington, D.C.-based LivingSocial, a site backed by more than $40 million in venture funding from the likes of America Online founder Steve Case. That’s just in the U.S. Others are cropping up in China, Russia and elsewhere.

“I’d bet Groupon remains the alpha dog in this space, says Matt McCall, a Northfield-based partner at venture-capital firms Draper Fisher Jurvetson and New World Ventures. “The reality is, there are scale advantages. Right now they’ve got the momentum.

Mr. Mason is willing to use his war chest to build or buy. On May 16, Groupon purchased European rival Citydeal, which nearly tripled Groupon’s reach, adding 80 cities and 600 employees. Terms weren’t disclosed.

Groupon has attracted unprecedented outside investment for a Chicago-based tech company, even though it’s a low-cost business that turned profitable early and doesn’t need a lot of cash. Much of the $165 million raised since last fall went into the wallets of the founders, including Mr. Mason and Chicago tech entrepreneurs Eric Lefkofsky and Brad Keywell, who provided the initial $1 million to bankroll what became Groupon. go to website groupon atlanta

“The company kept a good chunk of cash on hand for expansion and advertising, Mr. Lefkofsky says, noting the founders “still own the vast majority of Groupon.

“We’re OK with the founders keeping a major stake, says Roger Lee, a partner at California’s Battery Ventures, which joined Russian investor Digital Sky Technologies Ltd. on a $135-million investment last month. “If this gives them a chance to take money off the table and really go for it, building a big category-defining business, that’s great.

Groupon must outthink rivals as well as outmuscle them. It’s experimenting with carving up metro areas of Washington, D.C., and Los Angeles and offering “hyperlocal deals, something it plans to try in the Chicago area soon.

It may be hard to turn merchants, especially established businesses, into repeat customers. Manny’s Cafeteria & Delicatessen, the popular Near South Side restaurant, used Groupon to help launch a new dinner menu last year. “It worked: We got a lot of new faces, says Dan Raskin, a co-owner. “But you don’t make money on the deal. The biggest challenge for us is we don’t want to start a pattern of having customers waiting for the discounts.

There’s also price pressure. Groupon generally splits sales generated by its groups with merchants on a 50-50 basis. Rivals have undercut Groupon, offering to take as little as 30%.

LEARNING CURVE Perhaps the biggest challenge for Mr. Mason will be the steep entrepreneurial learning curve. He has to learn how to manage a much larger, fast-growing company. Many entrepreneurs who can’t make that leap lose control of their companies.

Mr. Mason, a Pittsburgh native, attended Northwestern University, where he studied music, in the 1990s. He was a Web developer before going to graduate school at the University of Chicago to study public policy.

Groupon grew out of Mr. Mason’s interest in community organizing. It evolved into an actual revenue model at the Point, a site that helps users organize and find support for community actions such as petition drives, demonstrations, fundraising efforts and more.

Mr. Mason’s backers seem to have little doubt that he can continue to guide Groupon as his creation grows.

“The most important thing was Andrew Mason, Mr. Efrusy says of Accel’s decision to invest in Groupon. He’s “someone who’s creative, stubborn in a good way, with this really strong customer voice in his head.

Groupon’s backers have brought in help, including Rob Solomon, a former Yahoo executive who became Groupon’s president in March. He is overseeing hiring, helping shape strategy and putting the infrastructure in place to keep growth from overwhelming the company. He’s also mentoring Mr. Mason.

“Every once in a while there’s a special, first-time entrepreneur who embodies the opportunity, says Mr. Solomon, mentioning Facebook’s Mark Zuckerberg, Amazon’s Jeff Bezos and Apple’s Steve Jobs. “They’re rare. Andrew has the potential to be one of those types of entrepreneurs.

Says Mr. Mason: “The fundamental concept of Groupon is here to stay. The real question is whether we screw it up somehow and somebody else ends up out-innovating us.