Some small-business owners turn to credit cards out of desperation. For the co-founders of Meebo.com, it was a conscious choice.
Entrepreneur Seth Sternberg, 28, along Elaine Wherry and Sandy Jen, created a new product that allows users to send instant messages via the Web without a software download and had it ready to launch in 2005. But rather than seek venture capital (VC) money, Sternberg and company consciously decided to put the upfront costs on a few credit cards.
The decision paid off. Their product, Meebo.com, was an instant success. With Meebo, students on university machines, suits stuck behind corporate firewalls, even soldiers in Iraq are able to IM with their online friends from any Internet-connected computer, while still using AOL Instant Messenger, MSN Messenger, Google Talk and the like.
By the time the credit card debt was due, rapid growth in traffic had justified the team’s costs and a first round of angel investment. While personal credit cards got them started, it was the success of their business that allowed the three to step out of credit card debt before the payments became unwieldy.
Here, Sternberg shares his instant-financing theories.
Your initial round of financing was nothing more than credit cards. Was that a conscious choice, or did you just start buying things you needed and reason, “We’ll figure this out later”?
It was a conscious choice. A lot of people think, “Oh, we should raise money via a VC.” But we really thought that we should put the product out there first and see if users liked it. Once we launched it and saw a lot of traffic growth, we thought, “Wow! OK, now we should really start to raise some money to pay off the credit cards.” So that was the thinking: Get the product out there and see. And it was super-inexpensive. We were spending $120 a month to lease the servers. After the launch, we had to start buying additional servers really quickly. We needed them to handle the traffic. So that was incremental, another $120 per month per server.
How did you strategize who would take on the credit card debt?
We all put charges on our personal cards. We basically all decided that we’d each pitch in $2,000.
Which cards did you use?
Honestly, the cards were just the ones we had in our wallets, just very normal consumer cards. I used the same Citibank Dividend card that I have now. We didn’t put a lot of thought into choosing the cards. I wasn’t even sure of the interest rates, but I figured it was between 10 percent and 15 percent. I had the point of view that carrying debt on the card was not a good idea. Personally, I really don’t like being in debt.
You must have felt very confident that some angel investors would swoop in.
Well, not really. There are two cases: One case is where you get very little traffic. But with Web-based businesses, you only need to buy more servers and pay for more bandwidth if people are actually using your service. So, in that scenario with no users, we’re paying out $120 per month and dividing that by the three of us. We all had enough savings that that scenario really wasn’t going to be a big deal. In the other scenario, you launch and you get a lot of users, and only then do your costs rise. It’s very different starting an Internet company versus, say, a restaurant, where a lot of your costs are upfront. You’re either going to raise money because you have a lot of users or you’re going to have very few expenses because you don’t. Fortunately, being in Silicon Valley, if you get a lot of users very quickly, raising a small angel round of financing on the back of that growth tends to be relatively easy. So we figured, “OK, if we launch and get a ton of growth and our costs really start mounting, that’s a problem we’ll be happy to have.”
Did you even consider the scenario of potentially falling into a debt trap on those credit cards?
We didn’t think a lot about it. We’d call the server guys. If they accepted credit cards, we’d just throw those new server costs on the cards. I had a lot of confidence that we’d be able to pay off the cards without paying much interest. If we ever carried real debt on those cards, it was for a short time. It all happened so fast. Between the time we launched Meebo and the time we raised our first angel round of $100,000 was only 30 days. The costs really started mounting when we launched, but 30 days later we had an infusion of money that we used to pay off all the expenses.
If you had to do it all over again, would you consider using credit cards to launch, or would you try a different strategy?
I think the right way to use credit cards is as an extraordinarily flexible kind of bridge loan for 30 or 60 days, maximum. That’s because I think the interest rates are too high to use as a true debt vehicle.
Some businesses try to play the game of “chase the zero percent card.”
It’s hard to play any games when you’re starting a business. It’s so time consuming.
Early on, you put VC funds off when you could have landed that financing. But eventually, you did take a large venture capital investment in late 2005. How did you decide when to finally negotiate with the VCs?
We raised $3.5 million from Sequoia two months after that first angel round. That decision was totally tied to our realization at that point that we couldn’t scale the business with just the three of us, considering the amount of traffic we were getting. And $100,000 is not enough money to start hiring folks. So we went to a few of the VCs who’d contacted us earlier on and said, “OK, it’s time. We’re going to go ahead and raise some capital.”