Rival book rental services square off

Two companies that rent textbooks to college students online announced dueling funding rounds recently, creating heated competition for what appears to be a fast growing space.

Insight Venture Partners this month led a $57 million Series D round of equity funding into four-year-old Chegg.com and helped provide a $25 million credit facility for the company. In addition, Chegg received a separate $30 million debt facility from Pinnacle Ventures and TriplePoint Capital, bringing the total money raised to $112 million.

Total equity funding now exceeds $90 million, according to Thomson Reuters (publisher of PE Week). Past investors include Kleiner Perkins Caufield & Byers, Foundation Capital and Gabriel Venture Partners.

Meanwhile, BookRenter.com, which is a year younger than Chegg, rushed out a press release announcing that it raised a $6 million Series A round from Storm Ventures and Adams Capital.

BookRenter’s round was raised in September. But now is the time when many students typically trade in their books, and with Chegg’s funding news out, BookRenter couldn’t keep quiet.

“We’re a viable company and the market is large enough for [multiple] players,” says Alex Mendez, general partner of Storm Ventures and a former executive at Cisco Systems.

Chegg and Book Renter have very different approaches to what appears to be a huge opportunity—eroding the lock on textbook prices held by college bookstores, which have been able to pay pennies on the dollar for used textbooks and then turn around and resell them at big markups.

In addition to Chegg and BookRenter, a number of other tech startups are also looking to revolutionize the way school books are bought and venture capitalists are getting in on the action.

Another recent example is Akademos, which raised $2.5 million in a Series A investment round from Kohlberg Ventures. The Norwalk, Conn.-based company is looking to partner with academic institutions to help them transition away from brick and mortar bookstores to online marketplaces.

New York-based Knewton offers GMAT and LSAT classes to students online. Since 2008, the company has raised $8.5 million from VCs, including Accel Partners, Bessemer Venture Partners, First Round Capital and individual investors, including Reid Hoffman and Ron Conway.

Also, Flat World Knowledge, a Nyack, N.Y.-based startup, has a different vision for the textbook business. It offers education books for free on its website and charges students who download. The startup $8 million from Greenhill SAVP, Valhalla Partners and High Peaks Venture Partners in February.

Another in the college textbook space includes CampusBookRentals, which is not VC-backed, but is considered a top competitor.

While Chegg buys textbooks and has invested in technology to receive and ship them—including a large warehouse in Kentucky near a UPS shipping hub—BookRenter relies on Amazon.com for fulfillment.

BookRenter CEO Mehdi Maghsoodnia says that by outsourcing fulfillment to Amazon rather than investing in its own expensive book processing infrastructure, the company can tackle Chegg’s market at a fraction of the cost.

He says Chegg built its own infrastructure because Fulfillment By Amazon didn’t exist when Chegg was founded in 2005. He believes BookRenter is about a year behind Chegg in revenue growth—BookRenter reportedly took in $10 million this year—and he estimates that Chegg is earning $40 million to $50 million in annual revenue.

Chegg CEO Osman Rashid declined to discuss revenue, although he says Maghsoodnia’s estimates are off.

Rashid says that Chegg previously tried BookRenter’s approach and was not happy with the results. He adds that investors were clamoring to get into Chegg, and he picked Insight Venture Partners because of the firm’s experience in working with e-commerce companies.

“It’s all scale,” he said. “They understand that one unhappy customer is one too much.”

Deven Parekh, a managing director with Insight Venture Partners and new board member at Chegg, says that the company could finance its growth through cash flow if it wanted to grow more slowly, without raising money, but the company wants to dominate its space.

Both companies have sophisticated software that monitors book sales and prices and can automatically change prices quickly in response to market demand. Both companies also claim to be growing rapidly and to have already saved students millions of dollars on textbooks. George Ugras, general partner of Adams Capital, says that BookRenter tries to partner with the various players in the college bookstore supply chain rather than compete with them as Chegg appears to be doing.

BookRenter plans to deliver its textbooks electronically within three to five years, Ugras says, and he sees partnerships with college bookstores down the road.

Storm’s Mendez says that Chegg’s raising $112 million is a big risk for the company.

“It’s a pretty high bar,” he says. “They have to deliver a substantial amount of value, and if they don’t, the next investor gets to reset the price, and it gets crushed down to a fraction.”

Alexander Haislip contributed to this report