How to build & sell an Internet startup to Japan’s biggest web merchant, Rakuten

Virtual CheeseJames Chen is a serial entrepreneur who built and sold two Internet start-ups by age 32. The first venture he started and sold while attending MIT. As for the second venture, James joined an early stage start-up. Within one year he had developed a unique and valuable software platform. With his nose for profit, Rakuten’s Mikitani soon spotted the opportunity in James’s technology. He liked it so much, he bought the company.

Here is James’s story:

James’s family moved to the US from Taiwan when he was young. “Our family was not wealthy. My dad wanted us to have a fulfilling life. That’s why we moved to the US,” says James. James studied and worked hard, sometimes holding multiple jobs. Then he went to MIT, where, in James’s own words, he “took hold of the American Dream.”

James started CampusCraze while at MIT. CampusCraze made college community portal and loyalty advertising software. CampusCraze’s users grew exponentially. But James sold the company just as the Internet bubble of 2000 had burst to a private buyer. He got an amount less than he hoped for, and then only in shares.

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James worked for the acquiring company for a number of years before joining FreeCause as its CTO in 2008. FreeCause was an early stage start-up. There, he was a key member of the decision-making team. The team wanted to take advantage of the Internet’s super fast user growth. “We asked ourselves, ‘How can we create something free to support a cause?'” says James.

Originally, they considered building a portal landing page where cancer supporters could raise money for charity by searching the Internet.

The better idea, which James devised, was to create a downloadable toolbar that, when installed, took over the search experience. “Anytime a person opened their browser to conduct a search,” says James, “they could earn one penny in support of their cause.” Supporters did not need to buy or donate any money. All they had to do was to search in the normal way on the internet to support their cause. “That’s a FreeCause.”

FreeCause launched its first product as a Facebook application called Pink Ribbon. Through the Pink Ribbon app, supporters could download the FreeCause toolbar to search and support Susan G. Komen for the Cure, the famous charitable breast cancer research organization.

FreeCause earned revenue each time a Susan G. Komen supporter conducted an Internet search through the FreeCause toolbar. FreeCause, in turn, paid one penny per search to Susan G. Komen from the revenue it received from Yahoo, FreeCause’s partner in Internet search.

Yahoo was not being charitable in this regard − all search engine companies, including Google, pay third-party partners for “search” because they know 10% or more of all searches result in ad-clicks. It is in their best interest to incentivize those who direct revenue generating traffic to them. This is how companies such as Mozilla Firefox and FreeCause make money.

Pink Ribbon was a marketing success and, for a time, Facebook’s number one app. But the FreeCause business model was anything but robust. To attract users, FreeCause had to pass almost all its revenue to the Susan G. Komen charity. “We had tons of toolbar downloads, we were making tons of revenue, but we weren’t profitable,” says James.

While FreeCause was not making money, it had built a strong brand-loyalty platform. With it, they had successfully raised money for a non-profit organization. Now James and his team had to find a way with their platform to earn money for themselves as well as for others.

The FreeCause team turned to potential clients with a strong brand and a legion of dedicated followers.

The Facebook game, MouseHunt, was already a smash hit when FreeCause integrated their toolbar into the game. Each time a player conducted an Internet search through the toolbar, they earned − do not laugh, free “cheese”.

Cheese, it turns out, is a valuable virtual currency. With cheese, players could buy special traps to bolster their chance of winning. But the FreeCause team was not certain they could earn enough revenue from supporters’ search efforts to interest the games provider. FreeCause had to pay a cut of their search revenues to MouseHunt. MouseHunt, in turn, had to pass a slice of that amount to their own supporters as a credit − the virtual cheese.

Would this business model leave enough virtual and “real” cheese on the table for everyone to be happy?

The answer, according to James, was Yes: “FreeCause makes a lot of money with Facebook games, especially by catching users that would have never paid much money anyway.” Junior high school students who wanted to play games, but did not have a credit card or could not afford to pay, could now download the toolbar and search to earn credits. “We get a piece of that action,” says James.

Soon FreeCause were partners with Mob Wars, another huge Facebook game. Notes James, “In one week of implementation work we conducted in 2009, FreeCause went from almost no revenue to $50,000 per month, or more. Our revenue can now easily be in the millions. That is where we found our niche.”

Eventually, Rakuten took notice of FreeCause and became a partner. They incorporated the FreeCause technology into the Rakuten toolbar. In less than five months, Rakuten was making at least $1 million in top-line revenue from the toolbar, of which 50% was profit.

“That’s why Rakuten wanted to acquire us,” says James.

On 10 September 2009, Rakuten bought FreeCause. FreeCause had two other offers on the table at the time.

Today, the FreeCause technology is integrated into the online affinity program of major brands, including the toolbar used by American Airlines’s shopping mall and Nectar, the UK’s largest loyalty brand.

The platform also underpins Rakuten’s own brand-loyalty program. Users earn Rakuten Super Points by conducting searches through the Rakuten toolbar, that itself utilizes the Infoseek search engine. Infoseek is yet another Rakuten company. This in turn drives users back to the Rakuten marketplace.

The “Rakuten ecosystem is brilliant,” says James.

Serial entrepreneur, James Chen. James now lives in Tokyo where he reports directly to Hiroshi Mikitani, CEO of Rakuten, for whom he manages three departments:

  • The Rakuten Ichiba’s E-Commerce Marketplace, where James develops domestic and global initiatives.
  • The Smart Device Technology Department, where James is responsible for mobile application development.
  • The Rakuten’s Cross Border Trading Department, where James has global responsibility for Rakuten’s Cross Boarder E-Commerce Marketplace.
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