Chegg.Com Success Story

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Success in Silicon Valley often emerges through trial and error. Willingness to buck popular trends can help, too.

Just ask Osman Rashid and Aayush Phumbhra, the co-founders of Chegg.com, a company that rents textbooks to college students.

When the two entrepreneurs started Chegg, then called CheggPost, in 2003, they envisioned a sort of Craigslist for college campuses, a network of university-based Web sites where students would buy and sell everything from used mattresses to textbooks. Like most Internet start-ups of that time, the plan was to make money from advertising.

It didn’t turn out that way. CheggPost gained some traction on a handful of campuses but didn’t take off. Still, the experience offered a few valuable lessons.

Mr. Rashid noticed that a majority of the traffic on the site was from students looking for used textbooks. With textbooks being the largest expense for students, after tuition and room and board, and with their cost soaring, that wasn’t surprising.

Yet the Craigslist model didn’t work. When classes ended in the spring, sellers couldn’t find many buyers online and sold their used books to the college store, often for pennies on the dollar. By the time students migrated back to campus in the fall, willing online sellers were few and far between.

So, in 2007, Mr. Rashid and Mr. Phumbhra went back to the drawing board and came up with the idea of renting books. At the time, Silicon Valley venture capitalists were focused on content, social networks and other businesses that could be supported by advertising, so finding investors wasn’t easy.

“People thought we were crazy,” Mr. Rashid said.

Now, as Chegg prepares for its third academic year in the textbook rental business, the business is growing rapidly. Jim Safka, a former chief executive of Match.com and Ask.com who was recently recruited to run Chegg, said the company’s revenue in 2008 was more than $10 million. This year, Chegg surpassed that in January alone, Mr. Safka said.

Based on that kind of growth, the company was able to raise $25 million in December from some of Silicon Valley’s top venture capitalists, including Kleiner Perkins Caufield & Byers.

“The textbook business was wildly inefficient,” said Mike Maples Jr., managing partner at Maples Investments, a fund that invests in young start-ups; it was one of Chegg’s first outside investors.

With demand for good deals on textbooks running high, Chegg’s success comes in large part from being able to address those inefficiencies. While Chegg primarily rents books, it is also essentially acting as a kind of “market maker,” gathering books from sellers at the end of a semester and renting — or sometimes selling — them to other students at the start of a new one. That provides liquidity to the market, said Yannis Bakos, associate professor of management at the Stern School of Business at New York University.

“The model is clever,” Professor Bakos said. “If they execute well, it will be an accomplishment.”

E-commerce was all the rage with investors during the Internet boom of the late 1990s. Of course, many start-ups failed. In recent years, most of the successful ideas in e-commerce have been refinements or variations of models that had been tried before.

In the case of Chegg and some budding competitors, the inspiration was Netflix.

“We benefit from the comfort zone that people have with renting things online from Netflix,” said Colin Barceloux, the co-founder of BookRenter.com, a Chegg rival that is also based in Silicon Valley.

Alan Bradford, a senior at Arizona State University, read about Chegg in a campus newspaper in 2008 and calculated that his bill for books that semester would have been $334 with Chegg, far less than the $657 he paid. Since then, he has ordered about a dozen textbooks from Chegg.

“Nobody likes paying for textbooks,” he said.

CHEGG is shorthand for “chicken and egg,” a reference to what Mr. Rashid called students’ quandary after graduation: they need experience to get a job, but can’t get experience without having a job.

Before the company grew relatively flush from investors’ cash and hundreds of thousands of customers on more than 5,000 campuses, it had to resort to creative bootstrapping.

Chegg began renting books before it owned any, so when an order came in, its employees would surf the Web to find a cheap copy. They would buy the book using Mr. Rashid’s American Express card and have it shipped to the student. Eventually, Chegg automated the system.

But as the orders multiplied, Mr. Rashid said, so did the traffic on his credit card, leading American Express to suspect fraud and threaten to suspend the account. He said he persuaded American Express not only to keep the card active, but also to issue a couple of dozen more so Chegg could spread out the orders.

There is plenty of secret sauce to Chegg’s business, including logistics and software to determine the pricing and sourcing of books, as well as how many times a given book can be rented. The savings can vary from book to book. A macroeconomics textbook that retails for $122 was available on Chegg for $65 for one semester; an organic chemistry title retailing for $123 was offered for $33. (Round-trip shipping can add $4 to a book.)

Those kinds of savings are turning students into fans, Mr. Safka said. “Word of mouth,” he said, “has put wind in the company’s sails.”

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