Nov. 6 (Bloomberg) -- Chegg Inc., seeking to be the Netflix Inc. of textbook rentals, may reach $100 million in annual sales faster than Netflix did in the DVD market.

Chegg, which started in 2005 and went national two years later, lets students rent books through the mail for between 60 and 125 days. The closely held company will probably top $100 million in sales next year, up from about $10 million in 2008, according to two people familiar with the situation. They declined to be named because the numbers aren’t public.

The company, based in Santa Clara, California, serves students at about 8,000 campuses, who receive and return books in orange boxes, Chegg co-founder and Chairman Osman Rashid said in an interview. Netflix, founded in 1997, took five years to surpass the $100 million mark. It recorded sales of $1.36 billion last year.

“Parents are telling other parents that you can save a lot of money renting,” Rashid said. “Forever they’ve been looking for a solution to higher textbook prices.”

Rashid declined to comment on sales. Chegg, which is profitable, is not looking to be acquired or sell shares to the public in the immediate future, he said.

Rashid, 39, started Chegg with Aayush Phumbhra, 30. They built the company around a Web Site at Iowa State University, where Phumbhra was a graduate student.

Chicken or Egg

The site, derived from the phrase “the chicken or the egg,” served as a Craigslist for students, allowing them to buy and sell goods from one another, Rashid said. As they studied the textbook market, they saw a bigger opportunity in helping students save money.

“Chegg is adding innovation to a thousand-year-old industry,” said Paul Holland, a general partner at Menlo Park, California-based Foundation Capital, an early investor in Netflix and Chegg. “It’s the most competent company I’ve seen in harnessing the power of viral growth.”

Competitors are also targeting the textbook market. Campbell, California-based Bookrenter.com Inc., founded in 2006, offers textbook rentals at 5,000 campuses across the U.S. Amazon.com Inc., the largest Internet retailer, started a pilot project with five universities this year to put digital textbooks on its Kindle electronic reader.

A “small portion” of the textbook market will be electronic books in three to five years, Rashid said. Chegg is also testing an electronic-book model, he said.

Wine Sippers

Mike Maples, founder of Maples Investments in Menlo Park, met Rashid over coffee in 2006 and became one of Chegg’s first investors. It was difficult getting other Silicon Valley venture capitalists excited about Chegg because they thought of textbooks as a “moribund, boring business,” said Maples, who also backed Twitter Inc. At the time, Chegg was his biggest investment.

“There are consumer Internet companies that people who drink wine like and the there are consumer Internet projects that people who slam beer like,” Maples said. “Silicon Valley has a lot more wine sippers than beer slammers.”

As sales took off and demand for books outstripped supply, Maples introduced the company to Foundation’s Holland and Chi- Hua Chien at Kleiner Perkins Caufield & Byers in Menlo Park. In December, those firms led a $25 million investment in Chegg. Kleiner’s Ted Schlein, who joined Chegg’s board, said the business model makes sense to anyone who remembers how much they spent on textbooks -- and how few of those books they kept.

Big Purchase

“After tuition and room and board, textbook purchases are the largest economic purchase of a student’s life,” said Schlein, who joined Kleiner in 1996 from security software maker Symantec Corp. “It becomes the perfect product to not own, both economically as well as practically.”

Rashid said Chegg is looking at different strategies to raise additional capital, which may include equity and debt, as the company builds its inventory of books and hires more people.

Chegg buys books wholesale from publishers and on the open market, and rents them at less than their bookstore price. The company has built an inventory of 2.4 million titles. The service saves students as much as 80 percent per semester on textbook bills, Chegg says.

Customers receive books within four to seven business days through the mail. Books that aren’t returned by the end of the rental term are charged to the customer’s credit card at the retail price. A book can be rented at least three to four times in its lifetime, Rashid estimates.

McGraw-Hill

In August, textbook publisher McGraw-Hill Cos. announced an agreement with Chegg to provide 25 titles and share in the rental revenue. Typically, New York-based McGraw-Hill only makes money when it sells a new book, letting used booksellers capture the sales of future purchases. In January, the company will expand its test program with Chegg by adding more titles, said McGraw-Hill Senior Vice President Jim Kourmadas.

Peter Appert, a Piper Jaffray & Co. analyst in San Francisco, said that while Chegg has only captured a small piece of what he estimates to be an $11 billion educational publishing market in 2010, the model “makes plenty of sense.”

“Rental textbooks seems to me to be a very logical extension of the way this industry has been going for the last bunch of years,” Appert said.

To contact the reporter on this story: Ari Levy in San Francisco at alevy5@bloomberg.net

Last Updated: November 6, 2009 11:47 EST