BookRenter Takes In $40M, Seeks to Overtake Chegg in College Textbook Rentals

2/23/11Follow @wroush

Spend very long talking with Mehdi Maghsoodnia, CEO of San Mateo, CA-based BookRenter, and you might start to think that he’s an economist running some kind of commodities trading floor. He speaks of making markets, taking positions on inventory, liquidation demand, microlending, and managing financial risk. He says things like “I am capturing dispersed demand and matching it to dispersed supply.”

In fact, Maghsoodnia has a computer science background, and BookRenter simply rents textbooks to college students—much like its better-known competitor, Santa Clara, CA-based Chegg. But unlike Chegg, BookRenter doesn’t have warehouses. It doesn’t even have a standing inventory of books. Instead, the startup has developed a computational backend that constantly assesses textbook demand and supply and the risks of loaning out textbooks at low prices; it then directs the flow of books between publishers, bookstores, and students accordingly. The approach gives Maghsoodnia the luxury of thinking more like a banker than the CEO of an e-commerce company. In fact, he calls BookRenter “a very sophisticated microlending platform applied to a commodity that is in high demand.”

Now a syndicate of investors has placed a big bet on that platform. BookRenter announced today that it has closed a $40 million Series C financing round that includes new investors Comerica Bank, Focus Ventures, and Lighthouse Capital Partners. Also participating are return investors Adams Capital Management and Storm Ventures, who put $6 million into the startup’s November 2009 Series A round, and Norwest Venture Partners, which joined Adams and Storm for a $10 million Series B round last June.

BookRenter is growing so fast, according to Maghsoodnia, that the company was able to raise its third round against a valuation three times higher than the one in place for the second round just eight months ago. The company has partnerships with 560 campus bookstores serving six million students, and claims that business is expanding at an annualized rate of 600 percent.

Back in 2010, Maghsoodnia says, “there was a lot of concern” about how BookRenter could catch up with Chegg, which has raised nearly $150 million in debt and equity financing and says it reaches students on 6,400 campuses. “This year, we are growing faster than them, and our market is very robust, I would say better, in terms of our cost structure,” says Maghsoodnia. “We have gone beyond Chegg’s execution and we are looking at how to become a much bigger player in the overall market.”

But no matter how big it gets, BookRenter isn’t likely to surpass Chegg’s name recognition among students. That’s because it prefers to work through campus bookstores, which can use the service to launch their own branded textbook rental sites. Maghsoodnia says BookRenter is happy to forego brand recognition in favor of rapid growth. Given a low-cost, on-campus rental alternative to buying new textbooks or renting from Chegg, students will flock back to their campus bookstores, he says.

“My rental prices are the same as Chegg’s; the difference is that you can pick a book up and drop it off at school, and you don’t have to deal with finding a box and going to UPS and shipping it,” says Maghsoodnia. “On campuses where we are being adopted, Chegg is losing market share.”

To understand why investors are excited about BookRenter’s business model, it helps to think about Netflix’s DVD-rental business. To decide which DVDs to buy and avoid costly overstocking, Netflix has to … Next Page »

Wade Roush is a contributing editor at Xconomy. Follow @wroush

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