Udemy’s Chicken-and-Egg Problem
This is Part 3 of a multi-part series in which I tell the story of Udemy. If you’re new, you might want to check out Part 1 and Part 2 first.
Traction, Traction, Traction.
Everyone tells you to get traction, but you feel like you need money in order to build the product to get traction. It’s the entrepreneur’s dilemma.
In a marketplace business like Udemy, this chicken-and-egg problem had to be solved multiple times. At first, we didn’t have instructors or students, so neither group could find value on our platform. In order for Udemy to work, we had to get both students and teachers to show up without the other party being on there.
This was particularly hard, because when we started, we had no money. Zero. We also had no credibility, so nobody was going to take a chance on us. Here’s what we did:
Step 1: Fake the Chicken.
When we realized a seed round was impossible, we went to the next obvious step: launch the product. I knew I could convince my contacts at TechCrunch to write about the company. But what would I send them to? A website with no teachers and no students? That wouldn’t make sense.
Eren devised a solution: there were lots of courses on the internet already. You could go on YouTube and learn practically anything. So, he built a crawler that created courses from YouTube content and imported them into Udemy. Stanford, Harvard and other famous institutions had published hundreds of videos on the internet, and so it quickly looked like Udemy.com was a place where you could watch videos from these amazing sources!
When we launched on TechCrunch and Mashable, this enabled us to have some content on Udemy. Having this content was critical for press coverage, and the launch announcement got us 10,000+ signed up users (details here)!
Sounds great right?
Sort of. On one hand, it was a life saving move. We raised our seed round based on the traction we gained (a story for another day).
On the other hand, it was kind of a bullshit move. Most of those users bounced, so it didn’t actually solve our chicken and egg problem.
Step 2: Make the Chicken.
With $1M in funding, we could now pay for users, right? Not so fast. We knew spending on advertising was a great way to run out of money. Our goal was to find a scalable, repeatable way to grow that didn’t require cash.
We were so cash conscious that we decided we wouldn’t bring on new team members until we saw authentic traction. We paid ourselves $60,000 each, kept our office in the living room of our 4 bedroom house in Palo Alto, and found a roommate on Craigslist to help reduce our costs.
It took 5 more months of grueling work before we hit our big break. I spent hours on the phone with instructors, tried to launch a poker university, started a dead-end partnership with The Learning Annex, and failed to create courses on how to meet girls.
Finally, I was sitting in the living room with our new roommate and thought: “Huh…” This guy’s name was Chris McCann, and his company StartupDigest was growing fast. It was a newsletter for startup founders, and everyone in the Valley was a subscriber.
In a fit of frustration, I thought: Fuck it, I can teach an online course myself. I just raised $1M! I could teach other people to do the same.
I asked Chris if he was interested in partnering with us, and he said sure.
Soon, we launched our first successful course: How to Raise Capital for Startups by StartupDigest University.
Obviously, as a 22-year-old who had only raised $1M, I wasn’t qualified to be the only instructor. So, I tried to recruit my investors. They invested in Udemy - of course they’d be instructors.
Once again, things were not how they appeared. Our investors were skeptical of going online and filming videos of themselves. They weren’t sure it was worth the time! Udemy was worth a small $50K check, but they were still skeptical. During one call, I asked them: “Why would you speak to a group of 50 entrepreneurs in person and then hesitate to speak to hundreds of entrepreneurs online?”
That gave me an idea. What if I held an event with 50 entrepreneurs in the crowd, and then stuck a camera in the back of the room?
So, that’s what we did. Yep, the first course on Udemy was filmed by a camera crew we hired to take videos of our instructors because at that time our investors didn’t believe it was worthwhile to speak directly into the camera!
We were vindicated in the end. After filming the courses in front of a live audience of 50 people, we posted them online. StartupDigest got 50% of the revenue, and we kept 50%. The first course did $25K in revenue in the first week! It was a thrill, and we knew we were onto something.
Step 3: Grow the Chicken.
From there, the key was to grow the marketplace as quickly as possible. We already had a winning formula, so we just repeated it:
Find a distribution channel (such as an email list)
Find an instructor who was knowledgeable about a topic the audience cared about
Make a deal that gives the email list 50%, the instructor 40%, and Udemy 10% of the revenue
Bam. We kept repeating that over and over for the next 1.5 years. We hired a team of marketers to build relationships with email lists, a bizdev team to recruit instructors, and a product/engineering team to meet the growing demands of our customers.
Our goal was 20% month-over-month growth, and we did everything we could to hit it. We had a massive spreadsheet of every email newsletter on the Internet, and we just kept closing deals.
This was Product-Market-Fit with a strong Go-To-Market strategy. Within 1 year, we were at a $1M run rate, and we were gearing up for our Series A. Things were humming on the inside, but it ended up being much tougher than we expected.
What you can learn from this
Some takeaways for your business:
First, do whatever you can to get your initial traction. It’s OK if you just stick a camera in the back of the room. Fake it’ til you make it.. If something doesn’t work, change your strategy. Don’t just do the same thing over and over again - keep trying new things until something works.
Second, product/market fit isn’t always obvious. In some businesses, you won’t know your product until you figure out how and where to sell it. That’s what we needed to figure out: we could monetize email newsletters better than advertising, which gave instructors a reason to work with us.
Finally, we stayed lean until we had traction. This is important -- you never know how long it’s going to take!
Next post: Lessons learned from a decade of fundraising.
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