CityPockets, Still Couch Surfing and Managing Daily Deals, Gets Office After $500K Grab

6/7/11

CityPockets’ tiny team was in desperate straits this past April. The Silicon Alley startup was supposed to help users organize the flood of online vouchers and daily deals that pack the inboxes of budget foodies and fashionistas. But just a couple months ago none of the three-person team seemed likely to be indulging in discount Mediterranean brunches or half-priced Armani sportswear.

All the good press could easily have fooled you. To read the reviews of CityPockets in Forbes or TechCrunch, you might picture foosball tables, bean bag chairs, and fancy complimentary coffees. The online reviews gave the whiff of high-end Silicon Alley success.

But around the time when these articles were coming out, both Cheryl Yeoh, the 28-year-old CEO of the fledgling tech startup, and co-founder Jhony Fung, 27, were nearly broke. They had burned through most of the savings they brought to the venture, after leaving high-end consulting jobs. Yeoh was down to budgeting $35 per week for food, eating mostly kale and quinoa. (“It’s the grain with the most protein, and the vegetable with the most protein,” she explained.) Yeoh had for months been sleeping on the Stuyvesant Town couch of her newest hire, David Guthu, with only a small curtain, Velcro-ed to the ceiling, for privacy.

Guthu didn’t have it much better. He may have had the bed but he hadn’t been paid in the two months since he started, and he feared he would lose the house he owned in Phoenix, where he is from. Fung, the programming whiz of the team, was also having mortgage issues, and was close to making a move that could have squashed any real hope of getting off the ground. “I was about to tell Cheryl that I would need to go get a part-time job. My mortgage is my responsibility,” Fung said.

In the middle of April, a prospective angel investor told Yeoh (below left) he wanted to talk. But she and the team, especially Fung (below right), had been through the cycle of pitching, optimistic feedback, and petering interest so many times before.

Yeoh had started CityPockets a year ago when she was still working as a management consultant at KPMG. Discount vouchers like Groupon and LivingSocial were just starting to take hold. But Yeoh, always on the hunt for a good deal, had already signed up for eight memberships. “I couldn’t keep track of all of them. And when they expired it was a real waste of money,” she said. From this peculiar Web 2.0 problem, Yeoh had the idea to create a tool to collect and manage all of a person’s daily-deal vouchers-–-a wallet for Internet coupons. The online software imports all of a user’s vouchers into a single account where he or she can sort them by type, location, and expiration date. Users also receive alerts when the coupons are about to expire.

CityPockets would also function as a marketplace for unused vouchers, allowing users to sell each other things like spa trips before they expire. Yeoh soon pitched the idea to Fung, an old friend from Cornell University who was working as a consultant at IBM. “We would work on CityPockets after work, every night from 9pm until 2am,” she said. “With four hours for sleep.”

After a few grueling months of this double life, the two quit their day jobs last summer and were accepted into LaunchBox, a tech incubator in Durham, NC. The three-month program gave them a small workspace, $20,000, and advice on how to get CityPockets off the ground.

But then the setbacks started. Investors and potential partners offered to give the company its startup costs if only they were willing to change the business model. Yeoh’s original idea had users selling vouchers to other users. But investors convinced her to try to enter the packed market of voucher issuers and group-buying sites. Instead of helping to organize coupons from Gilt City and Groupon, try to compete with them, the investors said. The new idea would have had stores issuing daily deals instantly through CityPockets, a scheme that several of the larger companies have since adopted.

The lure of a first funding round had Yeoh and Fung back in New York plodding to stores through the winter, trying to sell their service to merchants with a sales force of two. “This really would have required many salesmen and lots of capital,” said Fung. “But it was just me and Cheryl.” The model proved unfeasible. And in any case the prospective investors decided to walk. “I realized that I should have just stuck to my idea instead of changing it for the money,” Yeoh said.

The incubation program was over and so was the free office space. But in February, Yeoh was convinced that her original idea could still work. She and Fung decided to try to make money with the service by charging a small fee to users who sold vouchers—$1 per deal coupon plus 8 percent of the sale price.

Even as more users slowly came on, their cash continued to thin. Yeoh got rid of her Gramercy Park apartment and moved in with Guthu, a friend, to save rent. She convinced him to start working as her software engineer for free as he boned up on the programming language they were using. “I was turning down jobs,” said Guthu. “And I came to terms with the fact that I might lose my house [in Phoenix]…I really thought she could do it.”

By April they had around five thousand users, but were still only bringing in a few hundred dollars a month. The team realized they would need to grow the business to at least several hundred thousand users before any real money would come in. What’s more, since Durham, patience had been wearing thin between Fung and Yeoh. “People [at LaunchBox] used to say to us, ‘CityPockets isn’t fighting today. What’s going on?’” Fung said. The team had been spending most waking moments together for months.

Yeoh met with the latest prospective investor, in mid-April, in the Chinatown workspace they shared with dozens of other startups. And the discussion lasted just 30 minutes. “Usually you have to meet with an investor 10 times before he offers you even a penny,” she said. “David and Jhony didn’t believe me when I came out and said he had wanted to take the whole [funding] round, $500,000.” Yeoh herself was not entirely convinced, until the money was wired into their business account last month. (Yeoh declined to reveal the identity of the angel investor.)

As the next phase begins for the team, the challenges are unlikely to let up. Though still a relatively new niche, other daily-deal aggregators and voucher marketplaces like Lifesta and DealGator are out there, and as Fung explains: grabbing the market first is power. CityPockets also relies on the daily-deal companies not making a legal fuss. Companies like Groupon have not given their permission for CityPockets to collect and help resell their vouchers. And the legality of the model hasn’t yet been tested. “They could probably shut us down if they wanted to,” Fung said.

Last week CityPockets moved from the share-space to a Chelsea office of its own. Guthu is finally getting paid. And Yeoh is already grappling with the real problems that real companies face. “I worry how we grow from 10,000 users to 50,000. And then to half a million,” she said. “I worry about the culture. Do I want to provide free food so people work longer? We will definitely have free snacks.”

Joel Schectman is a journalist based in New York City. Follow @

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