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 study the preferences of its members, predict which movie titles will be in greatest demand, and figure out how many times it will be able to rent and re-rent the same discs before they wear out or go astray. BookRenter does something similar with textbooks. Through its network of bookstore rental sites, it gauges demand in real time for all manner of college textbooks (5.5 million titles in all). It also has a real-time picture of which publishers have the books in stock, and how much they’re asking for them. It buys copies only when it knows it has enough trustworthy renters lined up to enable a profitable series of returns and re-rentals. It arranges for publishers to ship the books directly to campus bookstores, where students pick them up and bring them back, so there’s no need for a central warehouse.

Say you’re a student who needs a $220 biology textbook for the semester, but you don’t want to shell out for a new copy. BookRenter might offer it for $60 for a 90-day rental. “I am effectively loaning you that $220, without you purchasing the book,” says Maghsoodnia. “I am taking the financial risk, and doing some computing to make sure you’re a legitimate student and you have a track record and you’re going to send it back. I’m making a real-time purchasing decision based on your credentials, and I’m doing that hundreds of thousands of times a month.”

Sometimes students don’t return the books. Sometimes the books come back damaged and can’t be rented out again. Sometimes titles get dropped from course syllabi and no one wants them. Those are among the risks BookRenter’s platform is programmed to hedge against. “We have exactly the same profile as a financial lending company, where a percentage of the loans get paid back and a percentage doesn’t,” says Maghsoodnia. “The genius of the model is in how you do e-commerce without having a warehouse or inventory, and how you take inefficiency out of [the textbook market] without taking a huge risk position.”

(Actually, the model is a little more complex than I’ve been describing. For one thing, only 30 percent of the books sent to BookRenter customers are purchased by the startup for rental circulation. The other 70 percent of the time, the publishers retain ownership of the books and simply use BookRenter as a platform for renting them out; BookRenter collects a percentage of each transaction. Maghsoodnia says publishers like the idea of earning recurring revenues on their textbook inventories. He compares the arrangement to loaning your car to Hertz, then collecting 80 percent of the fee every time they rent it out.)

The original idea for BookRenter was developed by founder Colin Barceloux, a 2003 graduate of Santa Clara University who worked for Google, 24/7 Real Media, and Decide Interactive before founding the startup in 2008. Barceloux got the idea for the company when he was still at Santa Clara, according to the company’s website. Seeing stacks of discarded textbooks at around campus, Barceloux thought it was wrong that objects that had cost students so much just a few months earlier could lose their value so quickly. For beer money, he started collecting unwanted textbooks and sold them online to students at other campuses. Together with two computer-science classmates, Barceloux eventually grew that idea into BookRenter, where he’s now vice president of business development.

“These kids came out of college and said, ‘I don’t want to build a warehouse and buy books, but I still think books should be more affordable,’” says Maghsoodnia, who joined as CEO in 2009. “So the question was how do you bring technology into play, where supply and demand can be balanced computationally.”

You may be wondering why a 70-employee company that has no warehouses and no inventory needs $40 million. Most tech companies use their B and C rounds to hire more engineers or beef up sales and marketing—and BookRenter will be doing some of that. But mostly, Maghsoodnia says, the company needs the cash so that it can buy more books, thus enlarging its market. It also needs leverage to hedge against the whims of its trading partners. “Say somebody is supplying 30 percent of my volume, and one day they decide to take away 10 percent of their inventory,” says Maghsoodnia. Those may be books that BookRenter already promised to rent to students. “I have to have the cash to back up my position.”

And Maghsoodnia says BookRenter will use some of the venture cash to look beyond the era of printed textbooks, toward the inevitable day when the startup’s own rental business will be undermined by the rise of digital learning materials. “Will this go down the path of e-books, like Amazon and Kindle, or will it be more like iTunes, where you consume content in a more dispersed, snackable way?” Right now, that’s unclear, Maghsoodnia says. But with so much information stored up about individual students, the courses they’ve taken, and the books they’ve used, BookRenter is in a good position to serve as a distribution network.

“Our school partners are already asking us to bring digital content to their student bodies,” Maghsoodnia says. “They’re saying, ‘What if our class uses one rental book, one new book, and one digital—can I offer that under one account?’ Given our 560 campus partners and our mission of serving students, we are in a very interesting position to become that platform.”

Xconomy goes the extra mile to bring you in-depth startup profiles. Compare this story to:

BookRenter Raises $40 Million To Take On Chegg In Textbook Rentals (TechCrunch)
BookRenter raises $40M for textbook rentals (VentureBeat)
BookRenter Raises $40M (San Francisco Business Times)

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

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