Chegg CEO Rashid applies Netflix concept to textbooks

SANTA CLARA, Calif. -- Osman Rashid knows what it means to be a cash-strapped college student. He gave blood and cleaned toilets for money when he was one.

Now, Rashid is building a business that challenges the $10 billion college textbook industry and cuts costs for students. The company he co-founded, Chegg, is a leader in the burgeoning arena of college textbook rentals. The business model? Rent out college textbooks via a website, deliver them to students via UPS and save them 50% to 70% off the cost of buying used or new books.

The 18-month-old service has hundreds of thousands of customers on 4,000 U.S. campuses, says Rashid, 38. While financing has tightened for businesses, Chegg just landed $25 million from venture-capital firms led by heavyweight Kleiner Perkins Caufield & Byers. Even a recession doesn't dampen Chegg's outlook. More people look to save money or return to school when jobs are scarce.

"We are literally blazing a trail," says Rashid, Chegg's CEO. Growth has outrun projections. Profitability is probable in a couple of years, he says. Rental prices are based on a book's cost, popularity, age and condition. A book costing $100 new or $65 used costs about $32 to rent.

The simplicity of the idea, modeled after online movie rental pioneer Netflix, attracted Kleiner Perkins. "When you describe this idea to someone, they immediately get it," managing partner Ted Schlein says. "Chegg is one of those typical Silicon Valley stories. Let's create a new business to solve an old problem."

A busy place

Chegg is headquartered in a four-story building in an office park where some rents are half what they were in headier days.

At 11 a.m. on a recent Monday, the building's hallways and elevators are empty. But step through the doors of Chegg, and the place literally hums with the sounds of clicking computer keys, ringing phones and snippets of conversations.

On one side, a dozen employees sit almost shoulder to shoulder fielding calls from customers in New Jersey, Michigan, California. Across the room, engineers ponder how to make the mechanics of the website easier, the service faster, the pricing more attractive.

Boxes of computers and chairs fill nooks and hallways. Trash bins burst with soft-drink cans, paper plates and discarded snacks. A can of Lysol rests near the front door so that the customer service manager can easily grab it to disinfect phones between shifts, keeping Chegg's 55 customer-service reps from sickening each other. The lunchroom resembles a college frat house, with a Ping-Pong table doubling as a serving area and dirty dishes in the sink. There's even a cat: Mongo.

Rashid's office is part of the 8,500-square-foot space. His 9 a.m. to 9 p.m. workday is so packed he's yet to put more than a picture of his two daughters on the wall. But settling in isn't Rashid's style. Chegg is the third start-up he's launched. He expects to be replaced. "I do not want to be a long-term CEO. My passion is solving the problem and getting the company to a place where it can be taken to the next step," he says.

Born in London and raised in Pakistan, Rashid came to the U.S. in 1990 to study electrical engineering at the University of Minnesota. Like generations of immigrants before him, he chose his location because friends had done so before him.

Rashid's diplomat father encouraged his kids to think for themselves: "If I had a construction set, he would say, 'Design something yourself. Don't just do what's on the box.' " His mother cared for seven children and cultivated their spirits. "She would climb a tree when you're not supposed to," he says. "I got that from her, that spirit."

Rashid's parents paid for college but underestimated the cost of U.S. living. So Rashid, who had spent his afternoons playing cricket with friends in a middle-class neighborhood in Islamabad, cleaned toilets to make ends meet. "It showed me I could do anything," he says.

Eighteen months out of college, Rashid launched eBot.com, an e-mail management company. It was sold less than a year later. In 2000, he founded Gravitywell, a software company. It collapsed after 16 months during the dot-com bust. Between start-ups, Rashid honed skills in business development and marketing at two larger technology firms, including Chordiant Software.

An outlet for his experience

Rashid uses all of his training at Chegg. He consults with marketing about how to spread Chegg's name. He builds relationships with publishers. He hears what customers are saying because on busy days when other workspace is occupied, employees make calls from his office.

Rashid won't reveal revenue figures, but he says Chegg leads its space. Competitors include BookRenter.com and CampusBookRentals.com.

Chegg, which also sells books, employs 40 full-timers and 40 part-timers. It grew out of Cheggpost, which started as an online classifieds service for college students to buy and sell cars, bikes and other goods. Books made up 70% of the traffic. When Cheggpost didn't attract enough ad revenue, Rashid and Aayush Phumbhra, Chegg's co-founder, recast it as "a Netflix for books," Rashid says.

Orders at Chegg are placed online. Books are mailed in orange boxes. At the end of the term, students send their rented books back to Chegg in the same box, although more than one has come back in a pizza box.

Shipping runs $4 to $7 a book. Late fees bump up costs. Writing in books isn't allowed but reasonable highlighting is. Customer surveys show that students like highlighted books. "They want somebody else to do the work," Rashid says. For every rental, Chegg donates money to have a tree planted.

Chegg's books, numbering more than 1 million, are warehoused in Louisville, 2 miles from a UPS hub. Chegg can fill most orders for popular books, Rashid says.

Despite the demands of running a start-up, Rashid stays fit by hiking a small peak near his home. He also uses the 6:30 a.m. jaunt to mull a business problem. On a recent hike, he got the idea to ask every employee to suggest the one best way to improve Chegg. In two days, he had 30 ideas, including one to simplify Chegg's telephone menu choices.

"That's the best meeting I have," he says.