Crunch Time At A Web Startup

Fast-growing Meebo has VC backing, great ideas, and rivals nipping at its heels

It's Tuesday in Mountain View, Calif., and that means Seth Sternberg, Sandy Jen, and Elaine Wherry have retreated to Fiesta Del Mar to hold their weekly founders' lunch. But this is no ordinary week for the three friends who 21 months ago started Meebo, a new type of instant-messaging service. Just a week from now, on May 15, they're launching a product called Meebo Rooms that could boost them into the big leagues of so-called Web 2.0 companies. And Sternberg, the 28-year-old CEO, is itching to pull out all the stops.

One of the Presidential campaigns is eager to use Meebo Rooms to stay in touch with supporters and news media. Knowing how much buzz this partnership would provide, the founders want to make it happen. But Meebo's technical staff is already going flat out just to get the basic product up and running; the 10 engineers, fueled by a steady stream of Malaysian, Mexican, and Japanese takeout, are clocking 14- to 16-hour days. Adapting Meebo Rooms for such a high-profile client would mean tying up Jen or another lead engineer when they're needed most.

"Can we wait for two weeks after the launch?" asks Jen, 26. "They're dying for it now, now, now," Sternberg responds. "I want it to be really solid," Jen says, her leg bouncing against the black vinyl of her chair. Sternberg thinks for a moment and comes up with a compromise: "I'll tell them we're shooting for a week, maybe two--that we want a quality product."

Meebo's challenge is the same one facing hundreds of Web-services startups in Silicon Valley and elsewhere. With a year or two under their belts, they're trying to move beyond early-adopter audiences and go mainstream. If they haven't been bought by Google (GOOG ), Yahoo! (YHOO ), or Microsoft (MSFT ) already or don't want to sell just yet, they must take serious steps toward becoming real businesses on their own. That means building sizable audiences and revenues.

It doesn't take much for a typical Web 2.0 media startup to reach breakeven--only around $2.8 million of revenues to cover expenses, estimates Jeremy Liew, a partner at Lightspeed Venture Partners. But to get a $500 million market capitalization--the kind of valuation that would justify a public offering and provide a good return to venture capitalists--revenues need to hit around $130 million.

Getting to that point has gotten tougher, and more expensive, over the past year or so. In part, that's because it's harder to stand out from the crowd. All it takes to start a Web company these days is a broadband connection and a few skilled and dedicated friends. In Meebo's category alone, a couple dozen rivals, including Yahoo, offer the same type of instant-messaging service. To scale up and figure out the right advertising model, startups must beef up engineering and distribution, hire their first sales staffers, and find space for their growing team. Otherwise, they'll fall by the wayside or miss out on additional rounds of financing.

Meebo is determined to make the jump. A lot is riding on the success of Meebo Rooms, which has been five months in the making. The startup's first product, Meebo Classic, broke down the barriers between the different instant-messaging services run by AOL (TWX ), Microsoft, and Yahoo. Subscribers can log into the Meebo Web site and chat with friends even if they use different IM services.

Meebo Rooms goes a step further. Individuals and media companies create pages around a topic--motorcycling, say, or Bollywood movies. Then visitors can step in to chat and post videos and photos. Like YouTube (GOOG ) videos, these "rooms" also can be posted on other sites and blogs. About 1.2 million people log in to chat for around 70 minutes every day on Meebo's instant-messaging service. Its user base is growing at a healthy 10%-to-14% monthly clip. But Sternberg muses that he's not sure how long the company can maintain that pace with instant messaging alone. He's betting Meebo Rooms will provide exponential growth.


The new product is also Meebo's first to attract media partners and open the door to advertising. Fourteen companies, from traditional media giants NBC Universal and Capitol Music Group (EMIPY ) to online media startups and Sugar Publishing, eagerly signed on to create rooms for their TV shows, magazines, blogs, and indie online video stars. "We'll be able to do special artist chats that fans will be excited to attend," says Syd Schwartz, senior vice-president for digital strategy at Capitol Music Group, who loves the new service. The videos and partners also promise a way to add advertising that pays many times more than typical social-networking ads.

Like many Valley startups, the Meebo founders occasionally fall back on advice from a virtual keiretsu of friends who are also twentysomething entrepreneurs. Sternberg grew up in Connecticut with Wherry's fiancé, J. Todd Masonis, co-founder of online address-book company Plaxo Inc. After deciding over dinner to work together, Sternberg and Wherry, 29, brought in Jen, whom Wherry knew from Stanford University. On weekends, Jen plays ultimate frisbee with Jia Shen, a co-founder of RockYou, a company that makes shareable tools, such as slide shows, for social networks; it's also distributing Meebo Rooms. Sternberg brought others into the circle, including Matt Sanchez, a fellow Yale University grad who founded video-sharing and ad service VideoEgg, and Zaw Thet, who started 4INFO, a mobile search service.

Right now the most hotly discussed topic among these friends is how to spend the money their companies have raised. Meebo has $12.5 million from two rounds of venture funding from Marc Andreessen, Sequoia Capital, and venture-capital firm Draper Fisher Jurvetson. That's about in line with the $15 million to $25 million some VCs estimate it costs to build a highly profitable Web-services company. For the moment, Meebo's fastest-growing expense is salaries. The company has 16 employees but expects to have 30 by yearend, with each new employee adding about $10,000 a month to costs.

Meebo's biggest bottleneck is finding the right people. The unemployment rate for engineers in the Valley is just 2%, so competition is fierce. Martin Green, who heads business development, estimates that it takes about 117 hours of work to hire a new employee, including 100 screening calls. That's too much time, he tells Sternberg; after the launch, they'll have to figure out how to do it faster.

In its bid to expand, Meebo has already tinkered with some features original users loved. Mixing in ads--Meebo's first stab at making money--was tricky. Although some advertisers suggested running 15-second spots before the videos or covering the background of the rooms with sponsors' logos, Meebo didn't want to risk alienating visitors with intrusive marketing. Instead, they're starting with an untried approach of running ads after a stream of videos stops playing. That may not work if viewers don't pay attention.

Throwing the community wide open with public chat rooms also created issues Meebo didn't anticipate. In the first two days, 10,000 rooms were created, with many luring the expected crowds. At the room for Cute Overload, a popular blog that publishes snapshots of kittens and dogs, chatters oohed and ahhed over photos of baby pandas. But other rooms were hit with spam and people looking to hook up. Two days after launch, a few chatters in the Batman Fan Club room bugged others for their ASL (age, sex, location). Another responded: "Does anyone here even like Batman?" A week after launch, Meebo tinkered with the design to try to prevent off-topic chatting and let visitors ban individuals they find offensive.

It's only one example of how Meebo is having to stretch. Sternberg says Meebo is probably more likely to get sold than to sell stock to the public. Until then, though, the success of Sternberg, Jen, and Wherry, like that of so many other Web startups, hinges on whether they can please more than a roomful of geeks.

By Heather Green

Before it's here, it's on the Bloomberg Terminal.