When it launched in 2007, Chegg quickly became known as the Netflix (NFLX) for textbooks. Rather than spending $100 or so on a physics or biology tome used for one semester, students turned to Chegg to rent books for as much as 80 percent off the cover price. The startup’s bright orange boxes became as recognizable on college campuses as Netflix’s red envelopes are in living rooms. Chegg received glowing press coverage for disrupting a stodgy industry and saving students hundreds of dollars a year. Venture capitalists fell for the idea, putting more than $140 million into the company by early 2010.
That’s when Dan Rosensweig, the former head of Activision Blizzard’s (ATVI) Guitar Hero franchise and previously a Yahoo! (YHOO) executive, took the helm. He quickly realized that Chegg, for all the positive attention, was a money pit. The company was approaching $100 million in annual revenue but hemorrhaging cash. Chegg bought any book requested by a user, regardless of its likelihood of being rented again. It also spent heavily on shipping and on a warehouse in Kentucky. After a review of the business, Rosensweig found that Chegg was six months away from going broke. “The company was truly at risk, it just didn’t know it,” says Rosensweig. To fix things, he raised an additional $75 million, hired a new finance chief, and culled the textbook catalog, keeping only titles he knew could earn back their purchase price.
Then he turned to Chegg’s other, more existential threats. The iPad made its debut shortly after Rosensweig took charge, setting in motion a rapid shift toward digital consumption—including e-books. Around the same time, a number of young technology companies began reimagining education, building online platforms for student-teacher interaction and other services that displace the textbook as the nexus of the classroom. “There’s a huge opportunity for teaching oneself and a huge opportunity for learning online,” says Pooja Sankar, chief executive officer of Piazza, which is developing a question-and-answer forum for students and professors.
Though textbook rentals remain the source of most of the company’s $200 million in sales in 2011, Rosensweig is preparing for a time when students no longer buy—or rent—printed books. He’s spent around $50 million on six acquisitions over the past two years. His aim is to turn Chegg into a digital hub providing everything a college student needs, from homework help to discounts on dorm room decorations, and “to save them time, save them money, and make them smarter.”
To create what he calls “the largest connected network of students,” Rosensweig and his 350-person team plan to begin testing an enhanced Chegg.com on June 1, giving them the summer to work out kinks before the back-to-school traffic boom in August. The site weaves together all the services Chegg has bought or developed. Students can log in using their Facebook (FB) credentials, giving Chegg.com information about a user’s connections on the social network and where they go to school. A freshman interested in economics can see reviews of all the relevant classes offered by her university and the professors who teach them, information powered by CourseRank, a 2010 acquisition. Once she knows her schedule, Chegg offers her options to rent or buy the books on her syllabus, in digital or physical form. When classes begin, Chegg acquisitions including Cramster, Notehall, and Student of Fortune let her share notes with classmates, download study guides from professors, and contribute to Q&A forums offering homework help. Chegg is also following the lead of Apple (AAPL) and building an app store where third-party developers can sell their education-related software.
Some of the new services are marketplaces, where Chegg facilitates transactions between students. A person struggling through a biology assignment can pose a question about mitosis, and another student might volunteer to answer for free or charge a few bucks, with Chegg taking an undisclosed cut of the proceeds. Other products require a monthly subscription fee, and the site will also include daily-deal-type offers. Chegg also generates money from Zinch, a site acquired in 2011. It’s a free service that helps high school students narrow their college search and find their perfect university. College recruiters pay Chegg to connect with the students that show interest in their school. In total, Rosensweig estimates that Chegg’s non-textbook sales will double as a percentage of total revenue this year from last, though he won’t disclose specific numbers.
One area Chegg isn’t counting on for immediate growth: digital textbooks. The company recruited a small team of Israeli engineers to create an e-book reader built on the new Web standard HTML5, allowing customers to download texts to any device with a browser. It’s not Chegg’s main focus, however. Rosensweig says the digital textbook market will remain small for some time, and he prefers to steer clear of Apple and Amazon.com (AMZN), which sell proprietary textbooks for their own popular tablets. Chegg also passed up an opportunity to buy Kno, a company founded by former Chegg CEO Osman Rashid, which was building an education-focused tablet, according to three people involved in the discussions but who declined to be identified because the negotiations were private. Kno abandoned its tablet as the iPad gained popularity.
Chegg’s new website is like what Facebook might have become had it remained limited to universities, says Michelle Hummel, CEO of digital marketing agency Web Media Expert. Students and educators are “looking for something other than Facebook that’s more targeted to their needs,” she says.