NEA’s Barris Turns Football Loss Into Gain From Groupon IPO

Nov. 4 (Bloomberg) — at a Northwestern University footballgame in October 2005, venture capitalist Peter Barris watchedhis alma mater suffer a 33-17 defeat to Michigan. The blow wassoftened by getting the best investment tip of his career.

A friend at the game told him about an entrepreneur namedEric Lefkofsky, and the two soon hit it off. Barris’s firm, NewEnterprise Associates, began investing in Lefkofsky’s endeavors,including a $4.8 million bet on a startup called The Point.

that company, started in 2007 with a vague idea about“group action” and no prospects of making money, morphed intoChicago-based Groupon inc. less than four years later, NEA’sstake has now increased more than 150-fold to $2.28 billion,thanks to Groupon’s initial public offering this week.

“We were fascinated by the concepts, but there reallywasn’t a way to monetize it,” Barris, 59, said in an interviewearlier this year — before Groupon entered its pre-IPO quietperiod. “We bet on the belief that the team could mine thepromising aspects of the model, and they did.”

NEA, one of the nation’s biggest venture-capital firms, canuse the returns. while it had a successful IPO this year withthe flash-memory startup Fusion-io inc., NEA missed out on manyof the top social-media companies, including Facebook inc.,LinkedIn Corp. and Zynga inc. Investments in that market havebolstered the portfolios of venture firms such as AccelPartners, Greylock Partners and Union Square Ventures.

Kate Barrett, a spokeswoman for NEA in Chevy Chase,Maryland, declined to comment for this story because of quiet-period restrictions.

while social networking has been a bright spot, mostventure firms have struggled to make money over the past decade.A drought of IPOs has made it harder to earn a payback oninvestments, and funds aren’t attracting as much money. U.S.venture fundraising fell to the lowest level in eight years inthe third quarter, when companies canceled $8.9 billion in IPOs,according to the National Venture Capital Association.

Groupon jumped $6.11, or 31 percent, to $26.11 in its firstday of trading. that gives the company a $16.7 billion marketcap and values NEA’s stake at $2.28 billion.

Groupon may help the IPO market regain some momentum, saidDixon Doll, co-founder of investing firm DCM and a 35-yeartechnology-industry veteran. that bodes well for other companiesregistered to go public.

“When the industry shuts down, it takes a strong companyto blaze the way forward and pry the door open again,” saidDoll, who has co-invested with Barris in the past. “We haveother good companies that are in registration that would like totake advantage of a reopening window.”

still, Groupon’s journey to an IPO hasn’t been smooth.Since filing to go public in June, the company has come underfire for its aggressive accounting, executive departures andcomments that company officers made about financial prospects.

Barris, who joined NEA in 1992 after a career intechnology, has worked with challenging startups before. He’s onthe board of Web-phone service provider Vonage Holdings Corp.,which had a disastrous IPO in 2006 because of competition frombigger competitors and a patent-infringement suit.

Vonage’s shares plunged in the weeks following their debut.after warning that bankruptcy was a possibility in 2008, Vonageis now profitable and the stock has regained some of its value.

Barris isn’t afraid to play a hands-on role at portfoliocompanies. in 2009, he had to make a critical decision atemployment site Jobfox inc., where he was an investor anddirector. The chief executive officer, Rob McGovern, was in acar accident that left him in a coma for two weeks.

Barris had backed McGovern at his previous company,CareerBuilder inc., and was committed to helping him while hewas hospitalized. Barris asked a fellow director to take the CEOrole on an interim basis, and McGovern fully recovered andreturned to the company about nine months later.

“Peter wanted to make sure the board wasn’t going to berash,” McGovern, 50, said in an interview. “He had the chanceto say, ‘Let’s go hire another CEO,’ and he didn’t do that. Hereally stayed with me.”

Barris has similar responsibilities at Groupon. As chairmanof the compensation committee, he’s charged with reviewingsuccession planning for management, as well as approvingexecutive compensation and change-of-control arrangements.

NEA is counting on him to protect its 13.7 percent stake inthe company. The firm invested a total of about $10 million inGroupon from 2008 to 2009. Groupon sold 35 million shares at $20a piece yesterday. that values the company at $12.7 billion.

Assuming the stock holds its value for six months, a periodduring which insiders can’t sell, it would make Groupon NEA’ssecond-biggest gain in the firm’s 35-year history. The largestwas computer-equipment maker Juniper Networks inc., which wentpublic in 1999. NEA made more than 500 times its money on thatdeal.

Prior to Groupon, NEA had invested in three other Lefkofskycompanies. they have so far produced less dramatic gains.

in 2001, Lefkofsky founded InnerWorkings inc., a providerof software to printing companies. NEA paid $40 million for 19percent of the company in January 2006, seven months before itwent public. The firm now owns a 15 percent stake valued at$66.4 million.

that year, Barris led NEA’s $13.1 million investment inEcho Global Logistics inc., a company started by Lefkofsky andhis friend from law school, Brad Keywell. Echo Global, whichprovides technology for the transportation industry, went publicin 2009, and NEA now owns an 11 percent stake worth $38.8million.

The third investment came in 2007, when NEA bought a stakein MediaBank LLC, a developer of advertising software that inSeptember announced plans to merge with another company to formMediaOcean.

in building Groupon, Lefkofsky and Keywell were joined byAndrew Mason, who had worked at InnerWorkings. they started ThePoint in 2007 to “solve collective action problems,” accordingto Lefkofsky’s website. NEA’s $4.8 million investment, thefollowing year, valued The Point at about $30 million. by 2010,as Groupon, the company generated more than $300 million inannual revenue and rebuffed a $6 billion takeover offer fromGoogle inc. Mason serves as Groupon’s CEO.

“It was the combination of the business savvy of Eric andBrad with the creative genius of Andrew Mason,” Barris said.

Barris keeps backing Lefkofsky and Keywell, looking formore Groupon-like returns. NEA is an investor in their seed-stage venture firm, Lightbank, which they started last year.Lightbank has invested in about 20 startups, including SproutSocial inc., which helps businesses bolster their presence onsocial networks.

Barris and his partner at NEA, Harry Weller, met the Sproutfounders on a trip to Chicago in 2010. The startup had received$1 million from Lightbank and wasn’t yet ready to raise anotherround. their meeting with the NEA partners went so well thatwhen it was time to bring in more capital, it was a quickdecision. NEA invested $10 million in February, and Barrisjoined the board.

“We had already talked about our business and brainstormedwith them,” said Justyn Howard, the 32-year-old CEO of Sprout.“they were excited and willing to help, so it made it reallyeasy to make the jump and actually do business with them.”

to contact the editor responsible for this story:Tom Giles at tgiles5@bloomberg.net

NEA’s Barris Turns Football Loss Into Gain From Groupon IPO

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