A Funny Story about an Acquisition that Didn’t Happen

In startups, as in life, you cannot have regrets.  Here’s a story about an acquisition offer that I rejected in 2006 that would have been worth millions today.

It was winter 2005.  I was a 20 year old just starting my second semester of my sophomore year at the University of Wisconsin. I’d just finished my first six months running ExchangeHut, a tickets and textbooks trading platform on campus.  In six months, we’d earned over $20,000 in revenue, much of it profit, and grown to over 7,000 users.  My cofounder and I had dreams of expanding.  If we could continue to grow Wisconsin and expand to other campuses while replicating our success, we’d make a pile of money!  We were having a ton of fun, learning new skills and meeting lots of interesting people.

One day, I got an email from a company called Cheggpost.  They said they wanted to chat because they had a similar service and we might be able to work together.  I checked it out and it looked like a college campus specific craigslist with users at Iowa State.  I was interested and so a few days later, we got on the phone.

I met Aayush Phumbhra who introduced himself as Cheggpost’s founder.  He immediately informed me that they’d just gotten funding, were coming into the Madison market with a huge budget and that we had two choices: join them or get crushed.

I was taken aback.  Who was this guy to tell me he was going to crush me?  He didn’t know anything about my business, it was all bluster.  I told him I didn’t agree, but I’d listen to what he had to say.  I didn’t have a good feeling about Aayush and Chegg, but decided to keep talking.

Over the next few weeks, we chatted a few more times.  The first time I called him, instead of a ring, I got “please enjoy the music while we connect your call” and a rap song that went something like “I’m gonna fuck that bitch, fuck that ho.”  I’m a pretty big rap fan, but was more than a bit shocked to hear it when trying to call the CEO of a company!  My initial uneasiness about dealing with Chegg continued to grow.

Still, I agreed to meet.  Aayush told me he didnt have much time, he could spare 15 minutes on a Wednesday night if we could meet just off the highway, as he was driving between Chicago and Minneapolis.  My business partner and I arrived a bit early and were surrounded by the late night Taco Bell crowd, pretty much drunks looking for fourth meal.  The Taco Bell next to the highway wasn’t exactly what I had in mind when I was thinking about doing business meetings, but I gave him the benefit of the doubt.  It was late, he was hungry and in a hurry.  We waited for awhile, but he didn’t show.  I called his cell, got the rap ring back tone, and finally an answer.  He was running late, but would be there soon.

Aayush arrived about a bit later in new looking sports car, wearing really flashy clothes.  The three of us really stood out in the late night Taco Bell crowd, but whatever, you sometimes have to do interesting things as an entrepreneur.  I still gave him the benefit of the doubt and decided to hear him out.  He started out by telling us his plans for Chegg.  They had raised money from a family friend who had made money from being an early employee in a large Silicon Valley tech company and planned to use it to take over the us college landscape by expanding Cheggpost.  He told me that they had so much cash and a better team that they would crush anyone who didn’t agree to work with them.

He sold us the dream: sell ExchangeHut to Cheggpost for a tiny amount of cash and lots of stock, join the team, move to the Valley and live the dream.  He’d pay us 100k+ salaries, give us hot cars and introduce us to the best women.  It was a slick sales pitch, but my bullshit detector was running full steam.  He reminded me of the multilevel marketing guys who prey on the new freshman every year.  We listened for 45 minutes, asked lots of questions and then decided to call it a night.

As soon as we left, my business partner and I started laughing.  We couldn’t take him seriously.  It just seemed so fake, like he was selling smoke.  My business partner and I decided we couldn’t cast our lot with Chegg, declined their offer and got ready for the next year on campus.

Fast forward to summer 2006.  Aayush called me again and said he was going to give us one last chance to partner before they were going to move full force into the Wisconsin campus.  He made a better offer, this time with a bit more cash and more stock.  But he was still selling the dream of moving to the valley, fast cars, hot, easy girls.  It reeked of fakeness, but I still really thought about it.  He’s a great salesman.

I decided to do some real due diligence before moving any farther.  I wasn’t sure if it was just my feeling or if others would get the same general bad vibe coming from Aayush that I did.  I tracked down the original guys from Iowa State who sold Cheggpost to Aayush and Osman.  They confirmed many of the bad feelings and helped me decide the not work with them.  I also asked my Mom, an attorney and experienced BS detector, to listen in on one of our long business calls to get her opinion.  She agreed, he sounded like an infomercial huckster or an MLM scammer.

Just before the school year started again, we decided to compete.  Aayush told us he was going to crush us.  After one semester, we’d crushed Cheggpost at Wisconsin.  They spent thousands of dollars and didn’t get any users, while we continued to grow.  We had revenues of over $30,000, most of it profit.  After the school year, Chegg exited the Wisconsin market.  Two years later, we sold ExchangeHut to an ad network we’d worked with that was itself getting acquired.

Chegg didn’t cross my mind for two year, until one day in 2009 I was reading USA Today and read that Chegg had pivoted and raised a nice sized round and was getting noticed by Kliener Perkins, among others.  I couldn’t believe it.  How could the guys I had gotten to know be winning over valley bigwigs with the same tactics?  Besides pivoting business models, I figured they must have learned and became more professional.  Over the next two years, I watched as Aayush, Osman and their team turned Chegg into a juggernaut.  They raised over $225m and have revenues in the hundreds of millions.  There are rumors that they will file for IPO sometime soon at a $5 billion dollar valuation.  They are acquiring companies left and right.

It’s amazing what Aayush and team have been able to accomplish in the past five years.  I look back and see the opportunity to have been one of the first, if not the first, acquisition by Chegg just before they pivoted their business model and see what could have been.  Our stock likely would be worth upwards of $25m and probably more.

The funny thing is, if I had to make the same decision today, with the exact same information, I would elect to keep working on my own instead of working with Chegg.  They’ve been an incredible success, but the sales pitch didn’t work for us.  Aayush and Osman have moved on and become incredibly professional, building an incredible business.  But its fun to look back and see where it all started.  Congrats to the Chegg team, keep killing it!

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  • Jimmy Matthews81

    U mad?

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  • Guest

    The Chegg game changer is CEO Dan Rosensweig. Everything he touches turns to gold. If he was there when they pitched you it would have been a no brainier.

  • Khgchgc

    “Our stock likely would be worth upwards of $25m and probably more.”

    More likely you would have been so diluted that your take would have bought you a small drink at Taco Bell.

    • http://www.nathanlustig.com Nathan Lustig

      You’re most likely right

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  • Greg I.

    All you can do is make decisions at the time with the information you have. And with the little bit I know about you Nate, you would not have been happy in that situation. Plus if you had signed on, who knows what would have happened. Maybe Dan Rosensweig would never had gotten on board, etc etc. So you made the right decisions for you and your business partner. Fun to look back and I love reading your posts because you always have such a great perspective and outlook on things. Keep up the good work!

    • http://www.nathanlustig.com Nathan Lustig

      Thanks Greg.  We need to skype and catch up soon, its been way too long.

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  • Corey Capasso

    that ringtone was priceless…I remember it like it was yesterday.

    • http://www.nathanlustig.com Nathan Lustig

      me too. that was by far the best part.

  • Mark

    With hindsight, you can still honestly say you’re glad you sold your
    company later on for basically pennies on the dollar compared to the
    potential $25M dollar deal?

    • http://www.nathanlustig.com Nathan Lustig

      I can 100% say I am very happy with how it turned out and knowing the same information that I knew then, I would make the same decision every single time.

      When we met the first potential acquirers, we thought they were like many people who offer equity and a small amount of cash: scammers. Even if they were successful, we didn’t think it would be a $1b company, much less a bigger one.

      We ended up with a great experience where I learned a ton, and still made good money on our final acquisition.

      I was disappointed that the first buyers didn’t invest in ExchangeHut like I had hoped they would, but it’s not completely their fault. The confluence of improved competition and lack of investment in both new technology and promotions ultimately brought it down to the level that it is today.

      There’s still a market for a ticket marketplace for students like ExchangeHut, it just needs to have someone on campus who is willing to put in the time and effort to make it happen.

  • Mark

    What do you think about the new owners of exchangehut.com turning what was once an extremely popular ticket site to basically a wasteland?

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