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October 21, 2011

Why Groupon (and other high-flying start-ups) Should Take a Page From Ayn Rand

Aynrand

Fountainhead is one of my all time top ten favorite books. The lead character, Howard Roark is an independent-minded architect who bucks conventional wisdom and delivers buildings with vision and verve in the face of criticism and doubt – in short, a true entrepreneur.

One of my favorite scenes is when his antagonist, Ellsworthy Toohey, an obsequious newspaper columnist, captures a private one-on-one moment with Roark and asks him: "Mr. Roark, we’re alone here. Why don’t you tell me what you think of me? In any words you wish. No one will hear us." Roark replies, “But I don’t think of you." The sentiment is simply delivered; no antagonism or emotion – Roark truly doesn’t even consider Toohey or other critics like him when embarking on his work.

As he embarks on his long-anticipated IPO road show, Groupon’s founder and CEO Andrew Mason will need to channel a bit of Howard Roark. Critics love to throw stones at the company, as they do for other high-flying start-ups. I admit, even I have my doubts about the daily deal model and how sustainable Groupon’s approach will be in the face of merchant and customer attrition over time. This week’s news that smaller daily deal rival, BuyWithMe, is retrenching and laying off half its staff is not a good omen.

Yet I really respect what Mason and the Groupon leadership have built and, in truth, I wish them well. I want more young companies to succeed, break through the IPO glass ceiling, and continue to prove out the venture capital-backed company-creation process can work. I want Groupon to settle in at a strong valuation that generates wealth and further fuels the Chicago entrepreneurial ecosystem while returning capital to liquidity-starved investors. And as a Boston-based venture capitalist and start-up cheerleader, I like that Groupon is proving that not all the good companies have to come out of Silicon Valley.

So why is it that so many people are so eager to tear the company down? I guess schadenfreude, that odd feeling of happiness humans feel when they see other people suffering, is not simply a German phenomenon. For whatever reason (too many type A competitive folks in one small Petri dish?), the start-up community is a very snarky one. VCs are famous for bragging about their portfolio companies and snidely putting down their rivals. I remember when I was an entrepreneur and my company, Upromise, was raising money, one VC heard I was talking to a famous partner at a rival firm and sniggered, “Really? Is he still in the business?”

Yet the best entrepreneurs (and VCs, I suppose) know to ignore the critics and naysayers. In fact, like Howard Roark, they don’t even think of them. They keep their head down and focus on building a great service that their customers love and creating a great culture that engenders loyalty and passion amongst their employees.

Good luck, Andrew.

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A leftist quoting the Fountainhead?

I Think these titles would really interest you

Christians against Christ
Anarchists for bigger government
Regulating your way to a Free Market
How to be a politically correct individual drone

You lefty's crack me up!


Great post, and the stark paradigm of Fountainhead has always been a favorite of mine to debate: whether there is absolute truth in this world or pure relativism. At any rate, the internal strength that must be mustered by the entrepreneur in the face of derision, doubt and dismissal is truly Herculean. But I suppose the best are fueled by the negativity, rather than conquered by it. Speaking of which, I'd like a second bite of the apple one of these days, as exciting things are cooking over here. Take care, and thanks for the always thoughtful posts!

Hamilton, of Paperlinks

This was a terrific post, and very well written, I enjoyed it. Thanks!

Also, Perry's ad hominem attack above should be dismissed. That's silly. Of course "Leftys" can find appreciation in Ayd Rand's work and that doesn't make them into objectivists (or libertarians, or what have you). It's similar to how the news media is so quick to call Obama a socialist just because he wants to cut taxes from the rich.

I think a little of it is that Andrew and Groupon had quite a bit of smugness and "aren't we clever" attitude as they were growing. It invites the snarkiness, and when things don't go perfectly, creates a feeding frenzy. That said, creating a company and consumer brand with personality is a hard thing and an important one and he deserves credit for risking the criticisms as part of this process.

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Thanks, Chris. Agreed!

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Getting through the derision and coming out stronger on the other side is definitely a trick in this business.

Great piece. True leadership is bold in the face of negativity.

I want to see daily deal companies LTV is for their first few cohorts! Have you ever come across those figures?

The comparison between Mason and Roark is an interesting one. Will Andrew Mason turn out to be a such a genius that we can't appreciate him yet? I hope so.

The one think Roark never did was make his buildings out as something their not. I think the whole world thought Mason did when he invented the Adjusted CSOI. This invented number was superfluous to the product and created for the benefit of people's wallets.

I'd personally see a much closer tie between Jobs and Roark. Jobs gave two shits what other people thought. He built amazing products he knew were amazing because he thought like no one else could.

Jeff - Love the Fountainhead too. In the case of Groupon, I think there are several reasons people like to bash it. First, the company has received sky high valuations while the previous investors have kept hundreds of millions of dollars for themselves even though the company continued to lose hundreds of millions. Co-founder Eric Lefkofsky took $319 million while the company lost $223 million in cash the first half of 2011 alone. $946 million has already been cashed out by insiders. Groupon is perceived as fleecing local business owners by keeping 50% of the discount for themselves leaving businesses with only a quarter of the normal retail price. They've had some "unconventional" accounting to make top line revenue appear a lot bigger. Finally, they spend so much money on marketing without having proving that their model is sustainable over a significant period of time. I wish the company luck and have used a few Groupons myself. Will be interesting to see how everything plays out in this space with the recent BuyWithMe news about massive layoffs.

Entrepreneurs get lots of feedback during all phases of Gartner's hype cycle (http://en.wikipedia.org/wiki/Hype_cycle). The counterpart to "ignore the critics" on the way down the cycle, when approaching the trough of disillusionment, is "ignore the fans" on the way up, when approaching the peak of inflated expectations earlier in the cycle.

Successful entrepreneurs get lots of adulation as their startups gain traction. But it's hard to ignore this praise; stoking it drives traffic, helps with recruiting, and attracts investors at high valuations. The key is not letting the praise go to your head. When you spin a story about great momentum and a dazzling value proposition over and over, it takes real discipline to stay open to signals that things may be going off track.

Likewise, when the backlash sets in, there are better and worse ways to ignore the critics. The key is to guard against what the late Yale psychologist Irving Janis called "groupthink" (http://en.wikipedia.org/wiki/Groupthink). According to Janis, when a decision making group faces an external threat, there's a tendency to rally around a strong leader and suppress any opinions or data that run contrary to the leader's chosen path. There's real danger in getting your counsel from a reflecting mirror. So, entrepreneurs should probably listen to critics but not overreact to them.

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Tom - good comment. The hype cycle is definitely a good framework which helps hammer that old adage home - you are never as good as they think you are...and never as bad either!

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The amount of cash taken out is certainly a factor in the bashing - no question.

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No, but I calculated a proxy for this in my earlier blog post about Groupon, which you may have seen. 

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Yes – beating your chest is never a good way to endear yourself when things go sideways.  That said, Steve Jobs wasn’t shy about bragging about the superiority of Apple’s products! 

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Indeed, the more biography I read about Steve Jobs, the more I see shades of Howard Roark. 

Interesting post. The following, in Ayn's own words, sheds some light on why Roark does not consider Toohey, "Roark could have been the ideal man, and was. Ellsworth was not the ideal man and knew it," she contines, "Wynand, was not but could have been. Keating was not the ideal man, and did not know it."

We could all benefit from channeling a little of Roark.

You can stick a hole in a blown up balloon, but so it can rise only if it is inflated / Alina

One other Groupon factor -- many folks have signed up and never activate deals (presumably b/c they are not impressed). I think Groupon disclosed that something in the order of 80% of all people on their lists fit this criteria. Essentially spamming people.

So it's an unusual public company in this regard. LinkedIn may not be able to monetize, but hard to characterize as spam.

Today GRPN got a $6/share pop. Investment bankers, take a bow, exactly what they were going for. I'm betting it trades below $5 within 2 years.

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Good point. HomeAway is one example of an email-driven company as well (fueled by my portfolio company, Click Squared, who powers their email marketing.

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