Pick Your Founder/Co-Investors Carefully & Reflections on the Nature of Entrepreneurs [Updated]

[See Update below regarding Groupon’s IPO Crisis]

I know Charlie Sheen tried to redefine “winning” earlier this year but I’d like my say as well.  Fortune just published a really excellent piece of reporting by Kevin Kelleher on Groupon co-founder Eric Lefkofsky called The Checkered Past of Groupon’s Chairman.  Kind of a scary story, really.  Lefkofsky comes off looking very dodgy, which is quite troublesome when you consider that main street America is currently being sold a gazzillion dollars worth of stock in his company by Wall Street.

Kelleher takes a walk through Lefkofsky’s history and finds a very disturbing pattern which he summarizes as follows:

“Lefkofsky’s track record, reflecting failures and successes, bears certain hallmarks: rapid revenue growth accompanied by big losses, a penchant to sell stock early on, and lawsuits filed by investors, lenders or customers who feel they have been wronged.”

While nothing described in the story appears overtly illegal, there is lots that appears to be pretty icky.  The litany of examples is damning, including the the 2007 follow-on offering of one of his start-ups InnerWorkings, coming close on the heels of the IPO, which follow-on consisted almost entirely of secondary shares being sold by Lefkofsky himself (i.e. hurting the company and its investors by dumping stock onto the market and depressing the share price in order to pursue personal enrichment).  And there is a similar pattern more recently with Groupon; as Kelleher notes, Lefkofsky has already pulled out $382 million dollars personally from the large and well-publicized pre-IPO fund-raisings intended to fund Groupon’s growth until the IPO.

One of the other themes in the article, pursuit of blindingly-fast revenue growth at all costs, reminds me, with an almost eery similarity, of another high-flying entrepreneur of the moment, Mark Pincus, founder of Facebook gaming mega success, Zynga.  I happened to have been personally involved in a very small way with some business transactions of Pincus’ back in the 90s.  It was a classic dot.com cash-it-out-in-a-hurry deal where the acquirer over-paid for some relatively flimsy internet software assets, only to end up writing off the entire eight figure acquisition within months.  At that time Pincus struck me as singularly focused on the money side of the deal; both in terms of getting the deal done, and protecting his pay-out with special terms designed to firewall him off from any of the risk of failure or shared responsibility for his product or company after the deal.

That experience has left a bad taste in my mouth even after many years, so it has been with some head-shaking and sadness that I have watched Pincus treated like a hero while landing quote after quote in mainstream media outlets both with his early social networking company Tribe Networks, and more recently his social gaming company Zynga.  As a result of Zynga, he has had praise lavished all over him from all directions, including wet kisses from John Doerr of investor Kleiner Perkins, and being named CEO of the year for 2009 by VentureBeat.

Just as Lefkofsky and Groupon have been criticized for growing through the use of a controversial business model which some feel is predatory and others feel is a house of cards, Pincus was called out by many, including most loudly by Michael Arrington of TechCrunch, for growing his business and revenue by working with shady partners and taking what many people felt was unfair advantage of his customers.  In fact, he was recorded on camera admitting that he did “every horrible thing in the book to get revenues” and that those early revenues, along with some capitalization table tweaks where he created a special class of voting stock for himself, were key to allowing him to maximize his control and ownership in, and therefore personal enrichment through, Zynga.   (TechCrunch article here; YouTube video below).

Two seemingly icky guys, both taking repeated swings at creating the next big thing, both presently enjoying $10B+ start-up valuations and massive personal fortunes, both apparently sharing a maniacal focus on revenue growth at all cost, and both displaying an apparent indifference to the fates of their customers, partners and shareholders.

As someone who works with a lot of entrepreneurs, invests in start-ups, teaches entrepreneurship, and thinks a fair amount about what makes entrepreneurs successful, I can really understand the focus-on-revenue part of this.  In my experience, there is a very strong correlation between an entrepreneur’s early and unwavering focus on building a revenue and business model that works, and their ultimate commercial success.  So I get that part, and I don’t fault Lefkofsky and Pincus, up to a point.  It is a core skill of most successful entrepreneurs, and as I and others have noted, often a brilliant business model innovation ends up being as important as any technical innovation in lighting the fuse on a hot start-up.

And I guess there is nothing intrinsically wrong with that make-a-few-bucks mentality – it drives growth, it leads to innovation, it creates jobs.  Heck, Walter McDougall would probably argue that it is baked into the American DNA; that we are a nation of hustlers.

But when I think about Lefkofsky and Pincus as the poster-boys for the movement, I am left more than a bit uneasy, wondering at what cost does all that revenue come?  Is it possible to do things a little bit differently?  Or does everyone else have to get screwed for a supposedly great entrepreneur to win?

[UPDATE: Groupon and Lefkofsky’s sketchy business practices may be catching up with them in time to save potential IPO buyers from some heartburn.  The WSJ has just reported that:

Daily deals site Groupon said it was restating its financial results “to correct for an error in its presentation of revenue,” and said its chief operating officer was exiting after just five months. As a result of the restatement, Groupon’s revenue for 2010 fell by more than half from what was previously reported — to $312.9 million, down from $713.4 million. The news comes amidst an initial public offering that has brought intense speculation from investors over the viability of Groupon’s business model. The company cancelled a road show it had scheduled for early September and pulled back on plans to go public. It is still evaluating its options on a week-by-week basis.

Video of Pincus talking about deliberately ripping off early users:


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