Zaarly’s Wild Ride: Winning a Weekend, Quitting a Job, and the $100 Midnight Cheeseburger

3/24/11Follow @curtwoodward

People have paid good money to hear Eric Koester‘s advice about running a startup. One of his cardinal rules: Don’t go into business with people you don’t know very well. “Founders—it’s like marriage. You’re basically pinning your hopes on each other,” Koester says.

So much for that bit of wisdom. This time Koester ignored his own counsel to co-found Zaarly, an online buying startup that tweaks some of the current trends in crowd commerce by putting buyers at the center of a name-your-price market. Say you’re in a social emergency and would pay $100 for a decent bottle of wine to be delivered to your hotel by dinnertime. Zaarly lets people put those kinds of bids out to the crowd and see if anyone’s willing to make a quick buck.

The company is coming off a whirlwind debut at the South By Southwest Interactive conference earlier this month in Austin, TX. Basically overnight, it secured $1 million in seed financing, and has quickly put it to work by adding staff and shooting for expansion to cities beyond Austin. Investors include Lightbank, the venture fund from Groupon co-founders Eric Lefkofsky and Brad Keywell, and actor Ashton Kutcher, a pretty active angel investor. The entire thing barely existed a month ago.

Zaarly’s story is in many ways a perfect representation of the current landscape for tech startups. It’s hitting several hot trends at once: Mobile apps, social networking, and supercharged individual commerce. While the underlying reverse-auction idea isn’t pure game mechanics, it certainly adds a contest element to the equation. The company was hatched at Startup Weekend, the high-speed mini-incubator that was just the cover story in Entrepreneur Magazine. And it’s aiming for a mobile-computing user base that can grow exponentially now, and find strong revenue streams later.

All of this should sound very familiar to anyone who’s been paying attention to Steve Blank’s “New Rules for the New Internet Bubble,” which we have cross-posted at Xconomy. Particularly this bit: “Startups that win in the bubble will be those that get wide adoption (using freemium, viral growth, low costs, etc) and massive distribution (i.e. Facebook, Android/Apple App store.) They will focus on getting massive user bases first, and let the revenue follow later.”

To get a window into this phenomenon, I sat down with Koester after he returned from South By Southwest for a little oral history of the Zaarly experience. It all starts in mid-February with a birthday party invitation, a trip to L.A., some big ideas and a snap decision. “Looking back, it’s like—what were we thinking? But it was great and it came together. It was better than I anticipated,” Koester says.

Koester knows Zaarly co-founder Bo Fishback from their work together as members of the Startup Weekend advisory board. But Fishback hadn’t actually seen the competition in action before, Koester says, so the two decided to meet up at an L.A. event that happened to coincide with Koester’s birthday. After batting around some ideas, the pair decided to do more than just give advice. They jumped into the competition themselves with a concept that eventually became Zaarly.

I’m not sure how experienced the other folks at this L.A. Startup Weekend were, but they may have looked at this crew as a pair of ringers. At the time, Fishback was serving as vice president of entrepreneurship for the Kauffman Foundation. Koester was vice president for operations and general counsel at Seattle-based Appature. Both had been part of successful startups in the past. And experience with the competitive format offered some key insights—apart from being an adviser, Koester himself has participated in Startup Weekend sessions about a half-dozen times before.

As a practical matter, Koester says, all of that background meant that he knew talent was the first priority. And recruiting in such a small pool of people is pretty straightforward: He just went up to the organizers and asked them to point out the best developer in the room. That’s how third co-founder Ian Hunter joined the team.

Koester says they’d settled on the basic idea in probably the first six hours of the 54-hour cram session. In a way, it’s an attempt at inverting the group-buying concept behind the now-ubiquitous daily deal services. “The buyer’s the one who always wants something they can’t get, and it’s the buyer who is really willing to pay for it. That’s where we flipped it on its head,” Koester says.

Many sleep-deprived hours later, they won the competition. But nobody was penning their resignation letters just yet. “We thought that there was enough to it that we wanted to keep trying,” Koester says. “We didn’t intend to raise any money, actually, at all. We thought this would be a fun part-time project for us.”

That started to change when Kutcher—one of the judges at that L.A. Startup Weekend—and others began inquiring whether Zaarly might be interested in some cash to get going.

“It wasn’t us going out—’Hey, we want to raise money.’ It was the reverse. It was, ‘Hey, we think this an interesting idea. Would you like to raise money?’ Which is not normal,” Koester says with a laugh. “Our original intention was that the three of us, maybe some others, were going to put in a couple grand, finish building it, put it in the App Store, and see what could happen.”

But things had begun to snowball. Within two weeks, the key people were leaving their day jobs behind to go full-time into Zaarly. Koester, who had just joined Appature in October in an operations role, had to tell the rapidly growing healthcare marketing company that he was leaving for a startup.

“I believe they have a huge opportunity at Appature. It’s a big market they’re playing in,” Koester says. “It’s like you’ve got two pretty girls you could date. It was very difficult.”

The timing obviously wasn’t ideal, Appature Chief Executive Kabir Shahani says—the company, which doubled in size between 2009 and 2010, is now getting four to six opportunities for potential new customers every week. That creates a lot of logistics work for a staff of about 25, but it was also clear that Koester felt he had to take the unusual opportunity that Zaarly presented.

“The good news on all that was, Eric was our counsel before coming on board,” Shahani says. “In many ways, this was almost like an internship for him. He was able come on, be there for about six months, and get the framework in place. So it kind of worked out.”

With Fishback, Koester and Hunter in place as co-founders, Zaarly began a dead run toward one of the biggest tech events of the year: South By Southwest. The team decided on March 7 that the conference would be the ideal spot for a public debut of Zaarly’s service, Koester says, and planned to roll it out the following Sunday. They didn’t even have a fully functioning app yet, much less credentials to access the event itself, so the Zaarly team went with an approach that sounds vaguely meth-lab inspired: They got their hands on an RV, parked it across from the convention center, plastered a big banner on the side, and got to work cranking out the product.

“At 2 p.m. on Saturday before it’s supposed to launch, we basically have a functioning prototype that actually works,” Koester says. But then they passed it along to some friends to field-test, and it didn’t work on the user end. “We realized that we needed to totally redesign the way a consumer uses this thing. So basically, we started over.”

The clock was also ticking, because TechCrunch was readying a story for Sunday complete with a video interview, telling the SXSW crowd that the much-hyped app was going live in Austin.

By about 10 pm on Saturday, Koester recalls, the team had sketched out how the redesign would work. But their designer, who is also in a band, was actually playing a show at the time. So the crew basically spammed their contacts with an all-points bulletin searching for a designer to carry the product across the finish line. They wound up finding Matt Constantine in Austin, who got to the RV at about 11 pm, Koester says, and pulled an all-nighter to get the project finished by about 6:30 am. “It was frightening,” Koester says.

That version was sent out for more testing, and things seemed to be working. At around noon, Koester says, the TechCrunch post went up and people started logging in. “And our server starts filling up. Then Ashton sees it and starts trying it out, and it works great and Ashton tweets about it. And it shuts our server down.” Kutcher has almost 6.5 million followers on Twitter.

Once the servers recovered, Koester and the rest of Zaarly sat back and watched a marketplace take shape. They initially thought that souvenirs and restaurant reservations might be big items. That didn’t happen. “But other things that we really didn’t anticipate at all became big,” Koester says.

Soon enough, people were angling for all kinds of things: T-shirts. Hats. Tickets to upcoming concerts and passes for the convention. Someone paid $100 to have a very specific cheeseburger delivered to their room in the middle of the night. Luggage was procured to help get home, and rides to the airport were brokered. The Zaarly team drove some of this, even paying someone to lug them a keg of beer. But it was also spreading. “Amazingly, after 12 hours, there was literally a market created where both sides, buyer and seller, were being created by people without a connection to us,” Koester says.

That may not be terribly surprising. After all, the SXSW Interactive crowd is essentially several thousand really early adopters—that’s why you debut the product there. “But the amazing part is the Austin community—people who were not at South by Southwest got wind of this, and they were part of the people fulfilling the offers,” Koester says.

Austin remains the experimental site for Zaarly, although the last time I checked there was only one offer: $5 for some cucumbers. Are those rare in Texas? In any event, Koester and the other principals are now hiring people and looking for ways to build robust networks of users in different cities. The plan is to be strongly tied to locations—sites will be similar to seattle.zaarly.com—and work with businesses to get them on board as order fulfillers.

Zaarly also wants to incorporate existing payment processors in its next launch, Koester says, citing examples like Square, PayPal and others. They don’t plan to ask for fees on cash transactions, focusing instead on being a platform for deals and taking a piece of electronic payments. Zaarly also might have a decent revenue opportunity in marketing or advertising deals with merchants and other businesses who want to be in the new marketplace.

Even in the sometimes overheated world of tech startups, this is a pretty quick growth curve. And there’s a big difference between fun deals at a tech conference and building a citywide network that’s big enough to sustain itself. Craigslist, an obvious model of comparison, didn’t stick around because of the novelty. It killed off old-school newspaper classifieds because it solved their problem in a much better way. So the question will be: Is your inability to get concert tickets right now, or my late-night lust for a cheeseburger, or someone else’s willingness to deliver a keg of beer really a sustainable market?

The answer will determine whether Zaarly is the next big thing in social commerce, or a fun idea from the new bubble that became the tech equivalent of an abandoned shopping mall. It will be fun to see what that answer is.

Curt Woodward is a senior editor for Xconomy based in Boston. Email: cwoodward@xconomy.com Follow @curtwoodward

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