Osman Rashid, co-founder and original CEO of Chegg, talks about how Chegg’s startup team of misfit rebels navigated through a crazy sequence of near-death experiences…one day at a time…and lived to tell the tale of achieving greatness.
Osman Rashid:
By this time, you got to remember that we are not from textbook industry. We're not from e-commerce. We have no idea how to run a warehouse. I've never been on the consumer side of customer service. We've all these things which we're learning on the fly.
Mike Maples:
That's Osman Rashid, co-founder and original CEO of Chegg. Osman and his co-founder, Aayush Phumbhra, faced a string of near-death experiences but ultimately found their path to greatness. Chegg today is a public company worth almost $4 billion as of this recording. This is Mike Maples Jr. of Floodgate, and it's go time with Osman Rashid.
Mike Maples:
Of all the startups I've worked with as an investor, Chegg was one of the wildest. From surviving early attempts by Facebook to squash them to running up millions of dollars of credit card expenses to buy textbooks on his Amex, Osman and his team overcame impossible one day at a time. Osman also found his inner MacGyver and never let the walls close in on him. And through it all, the tale reveals many important lessons about what it takes for a startup to achieve greatness and why antifragile startup teams have a huge edge. Let's talk to him.
Mike Maples:
Osman Rashid, welcome to the podcast.
Osman Rashid:
Thank you, Mike, for having me.
Mike Maples: It's great to see you again.
Osman Rashid: Same here.
Mike Maples: It's been a little bit of a while since some of those adventures at Chegg.
Osman Rashid: Yes.
Mike Maples:
This has been ... You know, sometimes we like to say that startups are like roller coasters and normal companies are like a merry-go-round. Chegg definitely had sort of its wild moments, right?
Osman Rashid:
Yup. Yeah.
Mike Maples:
Starting from the very beginning. So how did Chegg come into existence? What was the origin story of Chegg?
Osman Rashid:
Yeah, so Chegg started at Iowa State as a company called Cheggpost. And the whole notion was that it was going to be the Craigslist of colleges, where kids can buy and sell stuff from each other. They can find a roommate, they can look for textbooks, and all different kinds of things. Then it was, 'Wow. Why not build 6400 hyperlocal markets and then connect them together?' At that time, hyperlocal wasn't even a thing. We were trying to get the local ads going and local, you know, the retailers, giving coupons, and we're working very hard. I mean, we have a small team, literally five, six people. Then one day, the bomb drops.
Mike Maples:
Yup. I remember it. The name starts with an F.
Osman Rashid:
Starts with an F. Facebook decides to get into classifieds. And at that time, they were pretty much on campus. Oh my God.
Mike Maples:
Yeah.
Mike Maples:
And I remember thinking one of two things is going to happen. Either Facebook executes on classifieds, in which case we're out of business, or Facebook doesn't execute on classifieds, in which case nobody's going to believe we can.
Osman Rashid:
Yes. This is sometime, I think, May something like that. And we've got money until, I would say, August, September, because we're literally on, you know, on sales, we were on fumes. We weren't doing anything. Right?
Mike Maples:
Yeah. It was terrifying.
Osman Rashid:
Terrifying, right? So it was a lose-lose situation. If, as you said, if Facebook did it, we're screwed. If Facebook didn't do it, we're screwed. We're like, "Classified is done for us."
Mike Maples:
And good luck raising money.
Osman Rashid:
Yeah. No, no, no.
Mike Maples:
No VC is going to ...
Osman Rashid:
Everyone's frozen. They would just point to Facebook classifieds and the meeting would be over.
Mike Maples:
Yeah.
Osman Rashid:
You can't even start the meeting. God, the meeting would end before you started.
Mike Maples:
They wouldn't even take the meeting, right?
Osman Rashid:
Yeah, exactly. Right?
Mike Maples:
They'd look at our pitch deck and they'd be like, "Okay, Facebook classifieds. Done."
Osman Rashid:
Oh, yeah. And the biggest thing is it freezes people, right? Like, "Okay, we're going to wait for them to see what happens, right?"
Mike Maples:
Yeah.
Osman Rashid:
It was crazy. Then we said, "Okay, now Facebook is, you know, it's going crazy." It was the year of Facebook, like really launching. They just opened their API for partners to put stuff in it. Now, we're like, "Oh man. Why don't we make some app and see if we can fly on Facebook and do ... Because we're not trying crazy stuff." So the one first thing we made was a chat product.
Mike Maples:
I remember. Panda.
Osman Rashid:
Panda. Panda, and we built it so it would be a bar that would appear at the bottom of Facebook because we said, you know, it kind of sucks to have to flip back and forth. Why don't we chat at the bottom so you can still have the Facebook page up at the top so you can chat while you're browsing. And then in the process, we had built a relationship with their technical team. They were like, "Hey, you're building something nice." And one day, I went for a meeting and I walked into a conference room. Then I saw somebody had forgotten to raise kind of Facebook's future plans on some of the things they were building. And on the board, it said banner-like chat.
Osman Rashid:
I was sitting there. Meeting's had not even started. I'm like, "Man, we're screwed." We were like, "Okay, what is it that we have to do to make it through?" Right? I mean, here's my team and I built this awesome team, because our hiring strategy was that we would hire these little startups on campuses who were trying to do classifieds, and we'd hire their founders as employees, acquire their little company as part of ... So I had this crazy batch of people. Really committed.
Mike Maples:
Yeah. They were awesome.
Osman Rashid:
They were just crazy.
Mike Maples:
They had no fear.
Osman Rashid:
I don't think we would be here if I didn't have those guys, because I would just throw a problem at them and they were like, "All right, let's go figure this out."
Mike Maples:
Let's go get it. Yeah. You know, it's interesting. One of the lessons that I learned, actually, in talking to Keith Rabois about this from the PayPal days, was that Peter Thiel had this view that when you're a startup that's not established and the founders aren't that established, you have to become great at finding great people before they're known to be great. Nobody at Google or Facebook or Amazon or Apple that is already known to be great is going to want to come work at your startup and make no money and take crazy risk. So how do you find people who are someday going to be acknowledged, great, but nobody in the world knows about it yet?
Osman Rashid:
Exactly, exactly. I mean, for me, it was what they had shown as entrepreneurs on campus trying to hustle. Hustle is the biggest thing that you got to really look for in people at that early stage. Because no matter what happens, they're like, "Keep moving to the next target. Something bad happened? Okay, next target." Right?
Mike Maples:
Yup.
Osman Rashid:
I mean, that takes a special person. Frankly, it's not easy for people to have that mentality, because that's where a lot of people fail and question themselves and they bow out.
Mike Maples:
Okay, so you've got all these warriors. Facebook has basically taken your two ideas. It doesn't sound like the situation's any better necessarily.
Osman Rashid:
No, because we're now in summer. We don't have any time left.
Mike Maples:
It's like a brutal summer.
Osman Rashid:
It's brutal summer. That's when you and I had a very important conversation, and that's, you know, one of the most important conversations in the company, in the history of Chegg. I'd been looking at numbers on what is it that people are doing within Cheggpost. It was all 80% textbooks.
Mike Maples:
Yup.
Osman Rashid:
Right? And you and I had been talking about all about textbooks and, you know, Netflix was now going crazy. And I remember the conversation standing outside my car with my phone in my hand, you and I talking. You were like, "You know, why not do a Netflix type thing?" That's when the Netflix ... Well, if people can rent DVDs, why can't they rent their books? And then figure, 'Okay.'.
Osman Rashid:
I mean, I knew at the [inaudible 00:07:39] student, a book lasts at least two, three years. And I knew, as a college student, how screwed I used to get when I would buy the book, take it back, they would give me nothing for it. My standing there, my anger came back up. I'm like, "Oh my God. They used to pull that thing on us. And it's gotten worse than ever before."
Mike Maples:
Yeah. The bookstores would, they'd take a used book and way overcharge for it. And then I also remember these textbook companies would change the edition every few ... I mean, it was such a racket.
Osman Rashid:
Yeah, absolutely.
Mike Maples:
And in the meantime, you got these students who can hardly even afford to go to college and they're racking up student loans and debt so that they can buy these overpriced ...
Osman Rashid:
Exactly.
Mike Maples:
It was ridiculous.
Osman Rashid:
Absolutely. And then, you know, right on the phone, I told you, "Come tomorrow at 10:00."
Mike Maples:
Yep. I remember.
Osman Rashid:
I stayed up all night, build a model.
Mike Maples:
I think you called it Textbookflix at the time.
Osman Rashid:
Yes. Yes. Now, we still had Cheggpost. We couldn't pull the plug on it because again, we had investors and we just couldn't suddenly ...
Mike Maples:
Yeah. It was your business. Yeah.
Osman Rashid:
Right? It was our business. And we're like, "All right, we got to test this thing out." Right? But even before we did the Textbookflix brand, we said, "All right, how do we even know students want to really do this?" There's a really funny story here. At Cheggpost ... So there's a college right here in the valley called, I think it's West Valley College in Saratoga or something. So I would go for research. And one day, you know, I'm walking in there and I've got my, you know, I'm asking a freshman girl, "Okay, so where do you buy your stuff?" and this and that. But then, you know, I had that moment where I'm looking at myself, you know, the third eye, you know?
Mike Maples:
Yup, yup.
Osman Rashid:
From the corner way. I'm like, "All right, dude. You are 38 years old, and you're talking to this 19-year-old girl on campus. You look weird."
Mike Maples:
Yeah. She's probably not going to be super open.
Osman Rashid:
"What if somebody's looking and saying, "Is this guy really up to something? Is he using this as a way to get to someone?"
Mike Maples:
Yeah.
Osman Rashid:
I was horrified. The mental image of myself, of even people thinking that about me. Right? And that's when I'd gone back and went back to the office. One of my developers was 24. He had flaming red hair, real red hair. I picked him. I say, "All right, you're coming back to me. You're going to ask these questions. You can do it, and I'll sit back on the bench and I'll see you do it."
Osman Rashid:
That's when, you know, I said, "Aayush, go to campus and talk to 10 kids and say, "Hey, we're going to let you rent your textbooks. And don't worry. I'll first give you the textbook, then you can give me the money. Obviously, for $100 books, you're only giving me 33, $35."" But they were like, "What do you mean I can rent my textbook? Seriously? I'm only going to use it for one semester." And before we knew it, instead of 10, there were 30, 40 kids showing up. "Hey, can I rent from you?" We're like, "We don't have the money to buy all these books." We did the test and that's when we were like, "Hey, Mike. We think we have a tiger bite. Still, kids really want to do that."
Mike Maples:
So this was probably, what? About August timeframe? August, September?
Osman Rashid:
August timeframe, in the first couple of weeks.
Mike Maples:
It's like 2007?
Osman Rashid:
Yeah. We are basically on fumes. Right?
Mike Maples:
Yeah. One of the most important lessons I've learned about pivots is that part of why they're so hard is you've worked like crazy and written all this code and built something, and now you just have to be willing to just throw it away. Right?
Osman Rashid:
Yeah. Absolutely
Mike Maples:
Just completely, because like any ERGs of energy you spend questioning that just injects confusion in the strategy about what you really need to be.
Osman Rashid:
Yeah, exactly. Because, you know, as an entrepreneur, you can fit in both sides. What if I'm wrong about being wrong? Because you also go through that. I could be wrong about being wrong. Maybe I haven't given it enough time, or maybe I haven't done a good enough job to market it properly. Right? Because you're also going through that thing. Yes, it's failing, but how much of it is my fault? Because you're also concerned about being wrong about being wrong, so you've got to live with that, too.
Mike Maples:
But, you know, it's funny. It's almost, in hindsight, a blessing that Facebook came into the classifieds market because Facebook shutting the door on classifieds kind of really gave ... It just focuses the mind, right? when you have no other business.
Osman Rashid:
Yeah. The interesting thing is we knew, by the way, as being in the business, based on what students had told us. It was very funny, because when Facebook was going public, we're like, "Hey, we should make a social network off Cheggpost as well." And the kid said, "I don't want my friends to know I'm selling my fridge, because they'll ask it for free." So we knew that, look, that thing is never going to work because kids don't want other friends to know they're selling something because then the friends want a deal. They want to sell to someone who they don't know. The core inherent of what Facebook was doing was fundamentally flawed. Aayush and I were like, "Man, we've got to do something about it. How do we get it to the next level?"
Osman Rashid:
Then what we did is we said, "Okay, we got to put a brand next to it, Textbookflix." People like, "Are you crazy? Flicks means movies. Are you giving textbook movies?" I'm like, "No, dude. When people hear the word text with Netflix ..."
Mike Maples:
They'll just get it. Yeah.
Osman Rashid:
" ... they just think you going to rent something on the internet."
Mike Maples:
Yeah, and we know Netflix isn't going to exactly like this. But we'll cross that bridge when we come to it. We have to survive a few months.
Osman Rashid:
And we're like, "Hey, if we have their attention, something must be going right."
Mike Maples:
Yeah, that's right.
Osman Rashid:
Right?
Mike Maples:
Yeah.
Osman Rashid:
And it's not like we said, "We are textbook Netflix." [inaudible 00:12:39] textbook flicks was a word. Right?
Mike Maples:
Yup.
Osman Rashid:
One of our guys was Osama. Osama had some skills in web design. You know, coming out of college, you just pick your skills, right? So I said, "Okay, Osama. Here's this site called Netflix." Yeah? Okay, we know it. "I want you to copy everything." I'm going to say it. I'm going to say it. We're going to copy everything, because they have spent millions of dollars understanding how people want to rent. I'm not going to go learn that stuff. They want a three-step process? We'll have a three-step process. They have a green button? We'll have a green button. They have just 20 words? We'll have 20 words. He's going to call it Textbookflix. It'll be blue. We won't go with red.
Mike Maples:
Instead of red.
Osman Rashid:
We'll go with a different color. I'm telling you, a lot of stuff was done out of pure laziness because we're, "Let's not keep doing this again and again."
Mike Maples:
Yup. Minimum viable product in every sense of the world.
Osman Rashid:
Exactly. Right? Yeah, yeah. So then we did Textbookflix, and we used that in January. And now suddenly we had got like, you know, a thousand orders from students. We're like, "Uh-oh."
Mike Maples:
We need to buy some textbooks.
Osman Rashid:
"Great, but we don't have the money." Right? That's when my credit cards started to show up. My wife was like, "You're sure you want to put everything on your credit?" I'm like, "Yeah, we'll be fine."
Mike Maples:
Yeah, so it's funny. I think one of the most fun tales about Chegg that not many people know is this thing with your credit cards. Could you just tell us that insane story about all the bills that you racked up on these Amex cards?
Osman Rashid:
Yeah, yeah, yeah. Chegg itself had no credit, right?
Mike Maples:
Yeah.
Osman Rashid:
I mean, everywhere I was signing, I was signing my own social security number.
Mike Maples:
You're a startup with no money. You can't raise money.
Osman Rashid:
Yeah. It was always my social security number. You know, Aayush was young. He was building his credit. And so, you know, I had the American Express, which didn't have a limit on it. The credit cards came in because we said, "Okay, we don't have the money to buy the books because we don't know what books to buy because how do we know what books are trending where in the country. Orders are coming from everywhere. What we should do is we should do just-in-time ordering." They're like, "What the hell does that mean?" We're like, "We'll take the order and then we'll ship the book." They're like, "What do you mean? How can you say you have a book when you don't have a book?" I'm like, "I'm not saying I don't have a book. I'm saying I'm going to get you the book." Right? [inaudible 00:14:59] was like, "Yay. Does this like a little bit wrong?" I'm like, "No, we're not saying it's coming from our warehouse."
Osman Rashid:
I'm like, "No, we're not saying it's coming from a warehouse. We saying we're going to get you the book."
Mike Maples:
Yeah, or say we're going to let you rent a book.
Osman Rashid:
We're going to rent a book. I'm going to rent you a book, and dammit, I'll find it from anywhere we need to find it on the internet and ship it. So now, when the orders have come in and now we're sitting at late at night, the books we have given them, it'll ship in 72 hours. Now, we got to get these orders in. So now, I have one credit card, and now we put it into Amazon. We open an account, we put it into Barnes & Noble. We open accounts everywhere with the same credit card, because we also knew if we ordered the same credit card on one side for too long, they would shut it down.
Mike Maples:
Uh-huh (affirmative).
Osman Rashid:
So we are dealing with-
Mike Maples:
They'd think it was fraud.
Osman Rashid:
Fraud. We had all these different things we had to worry about. And then, so we began to then manually order these books from Amazon and all these sites. And the card bill begin to rack up.
Mike Maples:
So, how much are we talking?
Osman Rashid:
So, in the first month, we are looking at $50,000.
Mike Maples:
Let me get this straight: you don't have any books yourself.
Osman Rashid:
Yes.
Mike Maples:
People say, "I want to rent a book." You have no warehouse, so you just find somebody who's got one, and you just order it on their site and ship it straight to the-
Osman Rashid:
And we ship it straight to the student, and we put the return label on there in their account to ship it, put the sticker on, ship it back to us.
Mike Maples:
And so, were you worried at all that some student would say, "Wait a second here. I thought I'm renting a textbook, but it's like it shipped from Amazon, but it says a Chegg return label." Like, "What's up with that?"
Osman Rashid:
We had students actually message us, "Hey, I got a book, but it didn't come from you." We're like, "Yeah, we had so much demand that we ran out of books. So we got your book from them."
Mike Maples:
Yeah, so...
Osman Rashid:
So they're like, "You are great guys! Instead of canceling on me, you took care of me." I'm like, "Yeah, exactly. That's exactly right." We do whatever it takes to get you the book, which we did, right? There was nothing wrong with it because we made sure they got the book.
Mike Maples:
But how do we know they're going to ship them back?
Osman Rashid:
Exactly, right? And now, but we don't have a warehouse, right? So the first books all came back to our office.
Mike Maples:
But it filled up the whole room pretty soon?
Osman Rashid:
Yeah, yeah, yeah. We were like, "Okay, great. Now what do we do?" And we're like, "Oh, my God, we've got to ... " And this is now December, and we're like, "We've got to ship it in first week of January. How are it going to do this?" So we again, we figured-
Mike Maples:
That's right, because you don't know how to do drop shipping.
Osman Rashid:
No, no, no. Absolutely. The only time I'd use things like UPS was clicking on a button on Amazon or something like that.
Mike Maples:
Yeah, what are you going to do, walk up to the UPS office with a truck full of books?
Osman Rashid:
Exactly. So now, we are trying to get boxes, put books in, getting other, orders are starting to come in for the next semester. And now, we are like, "All right, we've got to get these books out."
Osman Rashid:
Now, are at the point where we are expecting in May to have 5,000 books coming back, because we, I think the [inaudible 00:17:40] guys gave us a little bit more money to get more books.
Mike Maples:
Yep.
Osman Rashid:
May is coming, and there's no, we're like [inaudible 00:17:47] the books are going to come back. We are they going to come back, right?
Mike Maples:
Yep.
Osman Rashid:
5,000 books-
Mike Maples:
And are they going to come back in good shape or-
Osman Rashid:
Yeah. And now it's a year's money. That's when we found a partner. Now we're getting to know the people in the industry.
Mike Maples:
Yep.
Osman Rashid:
Because we were like, "What the hell is this thing, man? You're renting books? How is that going to work." People are asking us questions, trying to figure out ... It was like, man, we're taking a lot of losses, and this and that, right? So he said, "Okay, but where's your warehouse?" I'm like, "Look, can we put this, half the books come to your place?"
Osman Rashid:
So initially, it was our address, then we sent another label out online. Thank god, nothing shipping. That okay, now they're going to come to this warehouse in Kentucky. So we got introduced to the world of Kentucky-
Mike Maples:
Okay.
Osman Rashid:
... which is a central hub for UPS and Amazon shipping. We never knew there was a whole system behind this thing. By this time, you got to remember that we are not from the textbook industry.
Mike Maples:
Yep.
Osman Rashid:
We're not from e-commerce, we have no idea how to run a warehouse. In fact, I don't think we'd been in a warehouse.
Mike Maples:
You've never done a supply chain.
Osman Rashid:
Never done a supply chain.
Mike Maples:
You've never done a consumer product.
Osman Rashid:
Absolutely. I've never been on the consumer side of customer service.
Mike Maples:
Yep.
Osman Rashid:
That is a different ballgame, right? We have all these things which we are learning on the fly. Our thing was, "Okay, what is the right thing to do? Let's just do that." That became our kind of a thing to do.
Mike Maples:
Mm-hmm (affirmative). Just live to fight another day?
Osman Rashid:
Live to fight another day, at the end of the semester, right? But okay, so if customers are complaining about this, let's just do the right thing. Let's not try to overthink it.
Mike Maples:
By now, your Amex bill is probably a little more than 50K.
Osman Rashid:
Yeah, yeah, yeah. So now, the bills are piling up, but we have enough money. We are paying, and it's still not gone crazy. It went crazy in August.
Mike Maples:
Okay.
Osman Rashid:
It went crazy in August.
Mike Maples:
Yeah, what was the big change event?
Osman Rashid:
Two things happened. We hooked up with two search book engines who do textbook price comparison over the summer. And I still remember, I was driving ... Some of these moments have stuck in my head like you wouldn't believe, right? There was these two engines, one was BIGWORDS and the other was CampusBooks. And they would do price comparison across the internet.
Mike Maples:
Yep.
Osman Rashid: The students would go there and look the cheapest price, and then click on it and they would get paid on affiliate fees.
Mike Maples:
Yep.
Osman Rashid:
And I'd been trying to convince these guys to say, "Hey, will you let us, we are doing rental. It's good for the students, it's the cheapest price. You should do it." But they were not biting, and they were going back. They were like, "Yeah, but, " hemming and hawing.
Osman Rashid:
Finally, the guy said, "Okay, dude, I'm going to be real with you. When I sell $100 book, I make $10, all right? Or I make $7. If I want to rent the same book for $35, I'm going to make a buck. My boss would kill me, my owner would kill me. What kind of deal is this?"
Mike Maples:
So the guy running the search engine wants to make money at a commission of the book sold?
Osman Rashid:
And if he's selling a product for cheap, his commission is less by default. And that's when the light bulb went. I'm like, "Oh my God, that's why it's really not about the best prices for the student."
Mike Maples:
Right.
Osman Rashid:
It's really the what's best for me, and I understand it.
Mike Maples:
Yeah.
Osman Rashid:
But they were getting 3% commission. I remember now. I said, "I'll give you 10%, and if you do this much, I'll give you 12%." He's like, "Are you serious? Can you put that in writing?" I'm like, "Dude, no problem. You're going to put us at the top. You will make more money."
Mike Maples:
Yep.
Osman Rashid:
Right? And I still remember them like, "Oh, my ... " That was a turning point for the company, that one conversation.
Mike Maples:
So, I remember another one too, where the, about dropping the classes or something like that. Wasn't there-
Osman Rashid:
Yeah, yeah, yeah, yeah. Absolutely. So now, traffic is coming in.
Mike Maples:
Mm-hmm (affirmative).
Osman Rashid:
Traffic is coming in-
Mike Maples:
And the search engines are now getting you distribution.
Osman Rashid:
They're getting us distribution, and we're not seeing the, "You're giving $100 bill for $33." People should be all over it.
Mike Maples:
Yeah, it's a no-brainer.
Osman Rashid:
And just right then, Google Analytics had started to come out and they had showed you hotspots.
Mike Maples:
Uh-huh (affirmative).
Osman Rashid:
So we deployed that did. We were like, "Okay, what's going on?" And we would see people doing the search, getting the price. And it used to track the mouse on the screen, and we would see a red line around the button. They were going round and round and round the button, but not clicking on the button.
Mike Maples:
Mm-hmm (affirmative).
Osman Rashid:
Right? And we'd be like, "Oh my God, why?! It's such a great deal. Why are they hesitating?" And then again, there was more research we had done, we had to do on the fly. In the next 24 to 48 hours, got to a bunch of student and said, "Okay, so why? What is the issue?" What we learned was almost every student thinks they might drop the class-
Mike Maples:
Yep.
Osman Rashid:
... but only 2% actually drop the class.
Mike Maples:
Okay.
Osman Rashid:
Right? So we figured out, so they think, "You're going to ship me this box with a book, and I'm going to drop the class, and I then have to ship you back. Who's going to pay for it?" We didn't make stuff clear to them, because we were not thinking about dropping classes. We had to be like, we're like, "Yeah, the coupon will show up in a couple of weeks," because we were doing stuff manually, by the way.
Mike Maples:
Yep, yep.
Osman Rashid:
We were putting these coupons manually in their accounts, right?
Mike Maples:
Yeah.
Osman Rashid:
So we're like, "Oh my God, they're right! Why would somebody want to rent a book if they're going to not, they think they might not use it?" So we put right above the button, "Dropping a class? Returns free."
Mike Maples:
Wow. And yeah, what was the impact of that?
Osman Rashid:
And that's when it went insane.
Mike Maples:
That's when all hell broke loose?
Osman Rashid:
That's when we knew, "Holy shit, we've got a tiger by its tail," because we could not service 90% of incoming traffic. And we've also built these little systems in the back to handle the book buying, because we are still doing just in time, by the way.
Mike Maples:
So this thing is blowing up, you've got these credit cards, and you've literally got people manually buying books with credit cards when they get an order?
Osman Rashid:
Yes.
Mike Maples:
So how do you do this when you start to blow up but you're selling an insane amount of books? Or renting an insane amount of books?
Osman Rashid:
Yeah, so what happened was that in the last, before this rush, we still had a problem, because we had thousands of orders to do and we couldn't manually do it. Right? So Patrick, one of our developers, he had really figured out web services. And [inaudible 00:23:28], I'm like, "All right, out of my laziness," because we were all ordering books. We would sit for 18 hours a day, Ayush, me, the marketing person. The customer service people were dealing with the incoming calls and emails. Even engineers were helping us order books.
Mike Maples:
Uh-huh (affirmative).
Osman Rashid:
And then, we began to notice a pattern. When you're doing used book buying, you're looking at three, four things: the quality of the book, the price, does this merchant have a good rating-
Mike Maples:
Yep.
Osman Rashid:
... and where are you buying it for. A few very quantitative elements, because these are all ratings, rankings, and dollar amounts, right? And we're going crazy, then I ask Patrick, I'm like, "Patrick, dude, is there any way for you to do screen scraping?"
Mike Maples:
Mm-hmm (affirmative).
Osman Rashid:
Act like a user, but it's not web services, it's not ordering. Because we didn't know how to make the decision, right? We said, "Look, can we do this where you ... " I checked prices on four websites before I shipped one order, by the way. We were doing it properly.
Mike Maples:
Uh-huh (affirmative).
Osman Rashid:
All right? I'm like, "Can you bring these four to me in one screen in four columns, and show me the book, the rating of the seller, the price, the state of the book, and a button for me to hit order, and then pick up this order from the database and now screen scrape it back into the website?" Overnight, on the weekend, he built this thing for us, where suddenly, on a screen, I would get, I would enter an ISBN, something would happen for 10 seconds. It would come back with four columns, and I would click on one of the books, and done.
Osman Rashid:
And then, we began to notice, "Hey, we always accept a very good book from this merchant, from this website, every time."
Mike Maples:
So just make it automatic?
Osman Rashid:
Can you now auto click on their button? So now, we put five computers, and now they're running on their own, and you can see the mouse going, click, click, and doing all this stuff. That's what all the automated, just-in-time system, right? So now the orders are starting to pile up, and now the volume is going. Now we can service more customers.
Mike Maples:
Okay. So how big is your Amex bill now?
Osman Rashid:
Now, it's crossed $1 million. And now, I'm getting incoming from Amex, "Hey, what's going on?" They are calling us multiple times. "We are checking if you're a real business." And we're like, "Hey, yeah, we-
Mike Maples:
Because it's still Osman Rashid-
Osman Rashid:
Yeah, yeah, yeah.
Mike Maples:
... buying $1 million of textbooks on his Amex?
Osman Rashid:
Absolutely, absolutely. And so now, they-
Mike Maples:
Like, who is the Pakistani guy buying a million bucks worth of textbooks?
Osman Rashid:
Yeah, exactly. He's buying books, and they know books are good. It's not like he's going to take it and slam it on people. Like, "What is he doing with it, right?" One day, Ayush and I were in my room, and I was on the phone with Amex on my speaker phone. And she's like, "Okay, but we need to understand why are you buying all these books." Now, we didn't want to say we are a startup that's renting books at a loss.
Mike Maples:
Right.
Osman Rashid:
They would freak out.
Mike Maples:
Right.
Osman Rashid:
I'm sorry, we had to fib our way, I think. So Ayush was next to me and he came up with the idea. He goes, "Tell them you're opening a library." We're like, "I can convince myself that I've got a lot of books on a shelf in a warehouse. That's kind of like a library. Sure! They are cataloged, they got stickers on them. Hey, yeah, it's a library."
Mike Maples:
Technically.
Osman Rashid:
Technically. If you really went into details. I'm like, "We're opening a library."
Mike Maples:
...were checking them out and in. We've read them.
Osman Rashid:
Yeah. And then, they're like, "Oh man, that's really awesome! Where's the library?" We're like, "In California." We're not telling them where, because we don't want them to show up either, to send someone to check, because they would do it. But then I asked him, "Okay, we're buying from you, we is paying you on time, so what is the problem?" Right? Because I couldn't understand what the problem was, right?
Mike Maples:
Yeah.
Osman Rashid:
And they said, "Well, the issue is that, according to us law, anything on credit can be filed in a bankruptcy court, and all the creditors have to pay the money back to the bankruptcy court to give it to the creditors based on priority."
Mike Maples:
I see.
Osman Rashid:
So she's like, "So if you run a $2 million bill with us and you go out of business, and the creditors show up, then we'll be required to pay the $2 million back to the bankruptcy court."
Mike Maples:
Right, right.
Osman Rashid:
"And we don't want to do that."
Mike Maples:
Right.
Osman Rashid:
Because we already shipped you [inaudible 00:27:24] took care-
Mike Maples:
And this already feels insane?
Osman Rashid:
Another thing that happened, we kept crashing the Amex system for one card. They kept calling us, "What are you doing?" Then we figured out that, "Okay, the way the Amex system is built is designed not for volume budgets, but for swipes."
Mike Maples:
Yep.
Osman Rashid:
You don't do a swipe every seven seconds. You physically can't.
Mike Maples:
Pretty soon, you're going to be doing swipes every half a second.
Osman Rashid:
Right? But because I had now put my card in this automated system ... You remember that computers I was talking about, they're from four, they'll go to 10. And all of them would click, click, click, click, click, click, charging books, right?
Osman Rashid:
So the same card began to fail. They were like, "How do you charge so fast?" We're like, "Look, we had a place-
Mike Maples:
It's a big library.
Osman Rashid:
And again, we're talking to a customer service rep, right? So they had never questioned on some of the logical things.
Mike Maples:
Yeah.
Osman Rashid:
We're like, "We're getting away with this?"
Mike Maples:
They just have to ask the questions in their playbook, and there's not a playbook for this?
Osman Rashid:
Exactly, right? And so, then they keep going on. Then they said, "Look, the bottom line is if you charge, then we're not talking to the Amex technical team."
Mike Maples:
Uh-huh (affirmative).
Osman Rashid:
Things were escalating, because we're like, "Hey, we want to charge. What's going on?" Now we're getting pissed.
Mike Maples:
Yep.
Osman Rashid:
Right? So they're like, "All right, we're going to figure this thing out." Then the guy goes, "Sir, you cannot do a transaction more than eight seconds. We need eight seconds to process everything and get it done right before the next transaction should come in."
Mike Maples:
Mm-hmm (affirmative).
Osman Rashid:
So you're like, "So how do we solve this?" I'm like, "Look, I have a business, and I have my employees buying stuff now, so I can't tell one employee to call someone, say, 'Do you have eight seconds,'" and then he's like, "Oh, I get what you're saying. So why don't you get 10 more cards underneath your account with different numbers, so now you can have 10 transactions a second for the next eight seconds." He's like, "I need eight names or 10 names." We have seven employees.
Osman Rashid:
I'm a sports fan, so what I did was I took a bunch of names, first names and last name of individuals from all over the place, and came up with the weirdest possible names. Mixed them up, half name here, first name there, last name here. Came up with names, I'd give him the names. Like, "All right, here's some names to give you." Right? Because now, we said, "But send me 15 cards."
Mike Maples:
Yep.
Osman Rashid:
So now, he put them in a round robin system, where they all go, click, click, click one by one, to so now we're ordering 15, 15 laptops now ordering at every eight seconds.
Mike Maples:
15 laptops ordering every eight seconds, so you're basically ordering a book roughly every half second?
Osman Rashid:
Absolutely.
Mike Maples:
Yeah.
Osman Rashid:
It was crazy.
Mike Maples:
What was the highest it ever got on Amex?
Osman Rashid:
It got to four and a half million. But by the way, I was sending payments ahead of time.
Mike Maples:
Yeah.
Osman Rashid:
The credit was not that they were sitting for. I would send them $1 million ahead of time, because now we had raised some money.
Mike Maples:
Yeah.
Osman Rashid:
Right?
Mike Maples:
But they just have no way to even think about this.
Osman Rashid:
Because for them it was clear that at the end of the year, if you filed bankruptcy, you have to send $4.5 million dollars back. That's the bottom line.
Mike Maples:
And it got bigger and bigger.
Osman Rashid:
Because legal had gotten involved.
Mike Maples:
Yeah.
Osman Rashid:
So, now we knew this was actually when to go away.
Mike Maples:
Let's imagine that AMEX had just said, sorry, it's mine. We're just turning you off or we're not going to work with you anymore. How close did you ever get to them just saying, sorry it's mine we can't do this.
Osman Rashid:
I mean, it was so bad that I was sleeping with the phone in my hand because if they called and I didn't answer they would shut off the card and-
Mike Maples:
So you got 10 cards next to your bedside.
Osman Rashid:
I mean, so they all have the same number.
Mike Maples:
15 now.
Osman Rashid:
But they all have the same number. They could call me and they'll tell what's going on and we would then, because somehow every time a new shift game, the same problem showed up.
Mike Maples:
Yeah.
Osman Rashid:
So three times a day I would get a call. So what are you doing? I'm like, I explained it as a person. Then I began to learn, remember the names. I'm like, well I spoke to Susie who spoke, spoke to Michael and we agreed this was okay. Can you please go look at the record? Okay, so let me, I'll get back to it in the morning and the rep would pass it to the next rep because again, for us...
Mike Maples:
Keep the plate spinning.
Osman Rashid:
... because we had to meet, we needed to keep the plates spinning for a couple of few weeks.
Mike Maples:
Yeah.
Osman Rashid:
This was not a year long thing. Right. Because it's lumpy.
Mike Maples:
Yeah.
Osman Rashid:
Your textbook rentals happen at the very start of the semester.
Mike Maples:
Basically Like if that, if that doesn't work in those couple of weeks.
Osman Rashid:
My projections for becomes if I'm down for a day, especially on a Tuesday.
Mike Maples:
Yeah.
Osman Rashid:
Because we owned a day in marketing called textbook. Tuesday we announced it, Chris Lochhead came up with it.
Mike Maples:
Yeah.
Osman Rashid:
It was amazing guy. He came up with it. We're going to call this textbook Tuesday and even on Tuesday, kids would come in and first day of class on Monday figured out what they want.
Mike Maples:
Yep.
Osman Rashid:
Monday night and Tuesday they would be ordering like crazy. So we knew that if we screwed up on that Tuesday and there are only three Tuesdays-
Mike Maples:
Yeah that's bad.
Osman Rashid:
...One of the things we could have done was we could have also gone to investors saying if you have this problem.
Mike Maples:
Yep.
Osman Rashid:
But we had to go through such a painful exercise to eventually get to the bigger investors. We don't want to freak them out either.
Mike Maples:
Yeah.
Osman Rashid:
It's a reality because sometimes they get freaked out about nothing.
Mike Maples:
Totally.
Osman Rashid:
And if you let go, all we would say is we've got to serve a cross to bear. We're going to figure this one out.
Mike Maples:
In spite of the fact that you're selling a lot of textbooks you're still turning away a lot of orders.
Osman Rashid:
Yes.
Mike Maples:
Raising money was not trivial.
Osman Rashid:
No.
Mike Maples:
Right now we pitched a ton of VC firms.
Osman Rashid:
Oh my God. Before it was Facebook.
Mike Maples:
Yep.
Osman Rashid:
Not with Amazon.
Mike Maples:
Okay. Why isn't Amazon?
Osman Rashid:
Because Amazon was the King of used books.
Mike Maples:
Yep.
Osman Rashid:
They started with books as a company. They're like, what the hell you talking about Amazon would do this they crush you.Yep.
Osman Rashid: Sad moment. I remember very clearly the conversation with my auditor. So my auditor was saying, you got to pay sales tax when you do the order online.
Osman Rashid: We like, no way Jose, Amazon doesn't do it. B, we're not going to do it. We're too small for anyone to come after us to like, no, you have to do it. We like any to get into this almost near shouting match with my editors.
Mike Maples:
It's like do what Amazon does.
Osman Rashid:
Amazon is doing it. Would I? Why would it cause I'm like you what? You're telling me that my value proposition just went out.
Mike Maples:
Yep.
Osman Rashid:
Right but 89%.
Mike Maples:
Yeah.
Osman Rashid:
That's a big deal E-commerce.
Mike Maples:
Especially when you're giving all that money to the search engine guys and-
Osman Rashid:
... and Amazon is very smart at decreasing prices Monday night for the important books.
Mike Maples:
Yep.
Osman Rashid:
They said, well, let me explain to you how the art of comedy response to me, eye level accounting guys, they can be calm. Let's mix it into how accounting works. I'm like, all right, lay it on me. Call me fine. And he goes, there's something called nexus. Nexus means if as a business, your property goes to an estate, you have to pay taxes on it when you take the audit.
Osman Rashid:
And so because you're renting, you're not selling, the title of your product is not been transferred to the student. Hence it is your product that's going to the other state. And hence you have to pay sales tax. It's the law. First I'm like, Oh crap. So now I'm taking all the bad stuff, but then something tells me, Oh my God, this is the best news I've ever heard.
Mike Maples:
Totally.
Osman Rashid:
And I'm like, tell me this. So if I rent one book, do I ask you to have to rent pay tax on the second book? Is that sir, if a paperclip of yours was rented in the other state, then you have to pay for the whole enterprise. Everything we do.
Mike Maples:
Wow.
Osman Rashid:
So Dennis had, so what you're saying, if Amazon rented a textbook, they would text for, for the electronics that I buy for them. Did a yes.
Mike Maples:
Wow.
Osman Rashid:
We quote our series B three weeks later.
Mike Maples:
Basically for Amazon to compete with you, they would have had to be willing to pay taxes on the rest of the 99% of their business ends.
Osman Rashid:
In billions for a small textbook rental service.
Mike Maples:
Which they don't even know is going to be a big business yet.
Osman Rashid:
And then on top of a dev, all these used book who are competing on price, they have decreasing price, there's a good fight going on.
Mike Maples:
Yeah.
Osman Rashid:
And they really don't have to get into it. Because you know they got a lot of stuff going on. Even much later they allowed merchants to rent textbook. They still weren't doing it themselves.
Mike Maples:
So then once you have that insight and once you realize that Amazon doesn't have the business model of motivation to come after you, this is a totally different page to the VCs.
Osman Rashid:
Completely different pitch because now I'm talking to finance guys and they can look up nexus.
Mike Maples:
Yep.
Osman Rashid:
They'd send the law and they're like, Amazon is never going to do it. But then just before we did the series B, you were about to have a board meeting to look at the final page. What are we going to tell to the investors?
Osman Rashid:
And we looked at our system, only 82% of textbooks had returned and the model said it's supposed to be, we've been 95 plus because said there'll be 5% breakage, fraud, whatever. Right. And then we looked at the data UPS had, they were, they had been shipped to the warehouse, so we called the warehouse where are the books, they're like, dude, it was a laid back environment in a summer.
Osman Rashid:
It's very hard in a warehouse and we are not going to worry about the books till August. So we'll take our time over summer to what's your problem? [crosstalk 00:36:19] You don't need the money and they're safe in a book on a palate. We make sure don't know. Mice are getting in. You're good. We would open them and get them on the shelf. You've got three months. We're like, no dude, we need them like this weekend.
Mike Maples:
And I tell my board how many books came back?
Osman Rashid:
Because there's a model that we have to go with it. Right? That's when I usually did one of the hardest things you can do. I'm preparing the page, getting all this thing lined up. You and a couple of guys need to go there. You've got to manually do this. So he flew out to Kentucky.
Mike Maples:
Wow.
Osman Rashid:
110 degrees inside the warehouse [crosstalk 00:36:48] . It's like it's coming down from the ceiling. Decide for six hours, they ate there, drunk there, they stood for three days, Friday, Saturday, Sunday and manually got these books on the shelf and all.
Osman Rashid:
We can have an 83% 84 85 my pressures decreasing West as a degrees in 91 98%.
Mike Maples:
Nice.
Osman Rashid:
We've got the 98% we like baby.
Mike Maples:
We got this.
Osman Rashid:
We got this, there's no bullshit here. There's no Lang is the actual raw data. This model works. That's when we said we've got to open our own warehouse because we had so many customers complaining to us, Hey, the book didn't arrive on time and one thing we had promised we would not be like the useful guys who once you order a boat, they don't want to send it there. They don't care. Right.
Osman Rashid:
And part of our customer service experience of building a great product, a brand was we will do amazing customer service in textbook industry like nobody else had ever done. A great example is we get a call from a student, she is crying. He's like, you're not because of you guys.
Osman Rashid:
"I'm going to get my first bad grade." We like, what happened? "I ordered a book, it never came. It's Friday night and I have a test on Monday and have a big assignment, I have to do all these things." And, and because if you, this would happen in the customer service and I had a little portal, they could check every book, right. We're now getting subsidiary in technology. This I hate. The book was left at your apartment doorstep and she said," well I'm here. It's not here."
Mike Maples:
Yeah.
Osman Rashid:
Now the underlying way the textbook companies dealt with it. They said, Hey your problem.
Mike Maples:
Yeah, I shipped it.
Osman Rashid:
I shipped it. Textbook theft was a real thing because imagine $150 sitting on a doorstep, you take her to the bookstore, you sell it for $100 you walk out in 30 minutes with 100 bucks.
Mike Maples:
Yeah.
Osman Rashid:
So then we said, okay, so our brand is, we are going to believe the customer should be overated, another book at $25 to this person to arrive on a Friday. And next thing we know we exceed on an email, which seemed to have the campus relaying everything we are done. Right. And. throughout the experience, that was one of the moments when we realize our brand is really not just about the cheap price.
Mike Maples:
Yep.
Osman Rashid:
It's actually, we are going to get it to you really fast. If you'd want to drop it, no problems, because we could really take a loss on your one transaction. We'll do the right thing by you. I mean that again, there was a lot of questions in the VCs. How can you trust these guys? I'm like, look, they're inherently not bad people. They're kids who want to deal and then the parents can, will got involved. Parents would make sure the books came back cause it was on the parent's credit card by the way. Right. So, so then we realized we've got to own the whole stack here.
Mike Maples:
Yep.
Osman Rashid:
Right. And to me the whole stack was from the time you click from the time you have the book and how you're going to send it back, we're going to own the whole thing.
Mike Maples:
Yeah. Then crush it.
Osman Rashid:
And crush it.
Mike Maples:
And then where did the orange boxes come from?
Osman Rashid:
Yeah. That was many of these decisions, it's crazy how you've made them, we made them on the fly right from our own warehouse. We want to ship our own boxes cause buying boxes of the street was expensive. You would go to the source and the guy from the store that said Hey do you want your own branding on the box?
Osman Rashid:
We can vet save a cent per box but good for you. And again this was summer and he was like "Hey I was walking by, I remember in the upstairs office and on old iron Ironsides. I said what color do we want for this box? I'm like well brown is kind of boring. Netflix is red. Zappos is blue. Like yellow. You can't do it. It's going to get too dirty cause we want to use a box multiple times. If we could like dude let's do orange.
Mike Maples:
Yep.
Osman Rashid:
You said we want people to see this thing on campus. Because when it comes in and you walk into your dorm, you want people to see the orange box, you're going to be going to make that a thing.
Mike Maples:
Yeah.
Osman Rashid:
Because Zappos was shipping blue boxes. We've got to do that. Right. And it's actually interesting, the later on we started hearing from the bookstore managers that they're noticing in the dorms where all the books were piling up, that they'll see more orange boxes than Amazon boxes is. When I began to get messages from my friends and other people I know, Hey, I saw this kid at Atlanta airport, she had a checkbox. It's like that's yours, right?
Mike Maples:
Yeah.
Osman Rashid:
Like, Oh my God. And we learned this over time that we began to understand what is a brand all about.
Mike Maples:
Yeah.
Osman Rashid:
Because you there were stories like we had a mom called us crying on the phone saying that, "Hey, for the first time I've been able to afford the books my needs. My three daughters knew for college."
Mike Maples:
Yeah.
Osman Rashid:
I mean that's a powerful story message to hear. I mean, you would make up a serius cry actually on the phone. It was no longer about cheap books. It's more about, Hey I love when I'm working with this brand. Yeah I'm saving money cause I'm smart because I haven't figured it out.
Mike Maples:
Was there ever a time when you said, okay I think we have product market fit or was it all just kind of a blur? It was just one crazy fire after the next.
Osman Rashid:
Actually we never sat down and said man we've arrived. Because actually for me personally, that's a huge mistake for any entrepreneur to make. Because the moment you let that into your head, I think you become complacent and you lose your head overnight.
Osman Rashid:
For us he was never good enough. Never big enough. There's so much more to do. Once we have done textbooks, what's next with textbooks? Have you already talking about how do you do homework? How do you do tutoring? Right. We already had that in the model back then that we're going to do these other things. What adjacent to the textbook so that we're looking at all that stuff already.
Mike Maples:
Okay, so there's a lot of entrepreneurs out there listening. What's the one piece of advice you'd give them about, going from zero to one and creating something from nothing?
Osman Rashid:
I would say that the iteration, understanding your customer's voice. I mean that has saved us again and again because it's not just about the analytics which are coming in. Because if analytics would have come in, we could have seen it a failed product cause people don't buy it because they don't click on the button. But understanding the customer's voice, what is the pain point? That's the biggest thing that understanding that I'll drop my class.
Mike Maples:
Empathy.
Osman Rashid:
Empathy. Right. You've got to understand what is their pain point. Why would they want to do this? Right? And understanding that you can solve so many problems because the biggest moments we had nothing to do with technology. It was nothing to do with strategic marketing. It was putting the right words at the right moment. You've got to do the analytics. You need to know what's happening at the button. At the same time I'm understanding your customer's voice.
Osman Rashid:
That is the biggest thing because when we would ship a box we would put some extra stuff in it, maybe add a few pens and this and that. People like, Hey, this is cool box. I'm getting more stuff with it.
Mike Maples:
Yeah.
Osman Rashid:
Because the band was becoming more about them and how it would affect about it and you've got to capture, you've got to understand that because at some point technology is only going to go so far.
Mike Maples:
Well, Osman Rashid for what it's worth, it was a fun adventure.
Osman Rashid:
Yeah, absolutely.
Mike Maples:
Thanks for hanging with me, thanks for sharing your ideas, the founders.
Osman Rashid:
Thank you so much Mike.