Groupon’s Biggest Deal Could Transform City’s Tech Start-Ups

Chicago has been home to far bigger transactions than the one being discussed between Google and Groupon. But few, if any, have had as much riding on it for the city as this $6 billion deal does.

Groupon, a Chicago company coveted for its ability to mobilize millions of people online to buy local products, offers steep daily discounts to consumers on an array of products and services. If the Google-Groupon deal is completed, Groupon will be one of the country’s biggest start-up success stories and one likely to spur a frenzy of new investment in Internet-based companies, including more in sometimes-overlooked Chicago.

For Google, based in Mountain View, Calif., the deal would be its biggest purchase, more than tripling what it paid for YouTube in 2006 and far richer than the $3.1 billion it spent in 2007 for DoubleClick, an online-advertising company.

For Chicago, the deal would represent something bigger than the price tag, which has been the buzz of venture capitalists, technology entrepreneurs and Wall Street investors for several weeks. The deal, tech executives say, could represent a game-changing moment for Chicago’s economy — a chance for the city to establish itself as a major tech hub that can grow talent and keep it here.

It is a large enough transaction to make a number of executives rich overnight, in much the same way the online payment company PayPal did when it was bought by eBay for $1.2 billion in 2002. The move attracted a host of angel investors who breathed life into more than 20 other start-ups, enhancing Silicon Valley’s reputation as the nation’s high-tech center.

Analysts say the ability of the Groupon deal to stimulate more high-technology investment in Chicago depends, in part, on whether the new Groupon millionaires — the second tier of managers who could gain big payouts as a result of the deal —will stick around the city and become investors in other local start-ups.

“As it spills down to lots of folks, that’s when it becomes powerful,” said Anand Sanwal, founder of CB Insights, which tracks high-growth and emerging companies.

But others warn that Chicago has been down this path before, with smaller successful start-ups that have failed to attract the investments needed to build a top-tier tech industry similar to hot spots in California, Texas and, recently, New York. In some instances, executives have left Chicago after a major buyout. After Google’s acquisition of Chicago-based FeedBurner in 2007, Dick Costolo, the founder, joined Twitter in San Francisco, and was recently named its chief executive.

“It really depends on what Google does,” said Adrian Holovaty, the Chicago founder of online company EveryBlock, which was sold to MSNBC.

Chicago’s emerging online industry has been criticized for being splintered and lacking a deep pool of talent, the so-called tech geeks who are the backbone of innovation. City executives hope the Groupon deal will change that.

“It’s a huge win, almost any way you look at it,” said Matt Moog, a Chicago tech pioneer who is now the president and chief executive of Viewpoints Network, which provides online reviews and allows companies to establish online communities. Moog, whose CoolSavings was one of the city’s early Web start-ups, said that, given the size of the deal and likelihood that many of the investors and managers would stay in Chicago, there is little doubt there will be a spillover effect for the city.

“It’s validation for the city that you can create, launch, scale and sell a world-class digital company in Chicago,” Mr. Moog said. “In another year or two you may see Groupon alumni investing in other start-ups here.”

“A lot of people stand to make a lot of money from this, and they are not all going to leave,” said Mr. Holovaty, who made sure to keep his company in Chicago.

Indeed, Andrew Mason, the Groupon co-founder and chief executive, and other co-founders like Eric Lefkofsky and Brad Keywell, have publicly talked about the need to reinvest in Chicago start-ups in order to help jump-start the industry here, along with the need for state and city tax help to simulate job creation.

“But probably the No. 1 thing missing in Chicago today is an ego,” Mr. Lefkofsky told Fortune magazine in an interview in October. Neither Mr. Lefkofsky nor Mr. Keywell could be reached for comment.

Groupon, which exploded onto the local scene barely two years ago, is this year’s tech-industry darling. Starting with fewer than 200 employees, Groupon, which offers those who sign up huge discounts on items like restaurant meals, boat tours and hotel stays, has relied heavily on the viral nature of its business, where friends pass along the daily deals to other friends.

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