Don't Cut Out the Middleman--Become One
Roommates Brian Chesky and Joe Gebbia had a problem.
They loved their San Francisco apartment, but it was more expensive than the wannabe entrepreneurs could afford. So when a conference came to town in October 2007 and area hotels were booked solid, they offered up their place, netting $800 from two travelers.
Two years later, Chesky and Gebbia's apartment is home to Airbnb, a thriving web business that connects people with houses, condos, couches, air mattresses and other accommodations for rent with travelers looking for them.
Airbnb is one of many "middleman" businesses to find success in a down economy by linking users to a product, service or information. Low startup costs for web-based businesses, immediate feedback from users and ample advertising opportunities from the niche market make being a go-between a field ripe for startups.
The trend took hold during the first internet boom when individual brokers struggled to compete in a web-based marketplace, says Jay Weintraub, founder of the LeadsCon conferences, which help companies connect with customers online.
"It's hard for an individual broker, like an insurance agent, to compete in the landscape of the web," Weintraub says. "It was only natural that we'd start seeing these sort of middleman sites that aggregate enough individual insurance agents that it becomes a compelling proposition for the end-user.
"When every dollar counts," Weintraub says, "companies that specialize in offering very quantifiable ways to measure goods and services will thrive." He adds that businesses that give consumers a way to compare goods and services are especially likely to find success in a shaky economy.
New York-based Homethinking draws success from that model. The website lets homeowners compare real estate agents by providing statistics on the homes each agent has sold, how much the houses sold for and how long it took them to sell, as well as reviews from homeowners.
Founder Niki Scevak says the real estate industry seemed to beg for a more statistic-driven way to search for agents, saying the search is now "done in a very cursory way," with homeowners relying on recommendations from friends and family.
Scevak launched the site using roughly $50,000 of his own money in 2006, in addition to a round of angel capital that he used to hire sales representatives after seeing early success. The company's advertising-driven profits are reinvested, Scevak says.
Like Airbnb, Boomerater stemmed from a personal need. It's a site where baby boomers can exchange advice and ideas about topics ranging from retirement locations to finding a financial.
When Rami Weiss' in-laws were searching for elder care for their own parents, Weiss struggled to find a place for them to connect with others who had been through the same experience.
Weiss created Boomerater to fill that void, using his own money to cover the $50,000 in startup costs. He says the website was cash-flow positive within four months of going live.
Weiss says the site's niche focus makes it easy to seek the advertising dollars that power his profits.
"Because it is a very niche market, the boomer demographic, I was able to find lots of advertisers looking to target it," Weiss says.
Greg Lou, founder of Racevine--a site where endurance athletes can post and search for race reviews--says he, too, found success in providing a service he needed himself.
A marathoner and triathlete, Lou says he was frustrated that there was no equivalent to Fandango or Yelp for road races and triathlons. So he created a site that lets users share both race-day basics and nitty-gritty details like pre-race parking, post-race goodies and the availability of portable toilets.
"I tell people I was basically the site's first user," Lou says. "An understanding of and passion for the field you're in gives you a major advantage."
Lou says he paid almost nothing in startup costs besides his own time. He started working on the site full-time in April, and already has scored reviews from media outlets such as TechCrunch and The New York Times through grassroots marketing efforts, like spreading the word to other athletes at races and on social media such as Twitter.
Lou says he hasn't monetized the site yet, which he describes as "10 percent of what we want it to be eventually." He adds that he will likely seek investment capital to get to that point, but says the beauty of this industry is that "initial costs can be next to nothing."
Chesky says grassroots marketing efforts similar to those used by Racevine helped Airbnb propel itself into the public consciousness after its first experiment in 2007, followed by the launch of what he calls "Airbnb lite" in March 2008.
In the summer of 2008, Airbnb sought to generate buzz by piggybacking on a hot topic of conversation: The Democratic National Convention in Denver, where hotels had been sold out for months. Once rentals went up on Airbnb's website, The New York Times, The Wall Street Journal, CNN and other media outlets reported on travelers finding rooms through the company.
It was "the golden opportunity," Chesky says. "We would be nowhere today if not for that."
The company, which now employs 10, took $20,000 in venture capital in January and went cash-flow positive in April. Its transaction-based business model gives Airbnb roughly 8 percent to 10 percent of each transaction, though the fee varies depending on the total cost.
Chesky says for all of Airbnb's recent successes, the best thing he and Gebbia did was to connect people with a service the pair found useful themselves.
"We didn't start with some entrepreneurial thesis," Chesky says. "It just worked beautifully for us and others we talked to, and we went from there."