Couchsurfing Dilemma: Going for Profit
For five years, Casey Fenton and Dan Hoffer had pleaded with the IRS to grant their website, CouchSurfing.org, official 501(c)3 status. They argued that the site, which helps travelers find free places to stay in other people's homes, facilitates cultural exchange—clearly, a charitable activity, in their view. The IRS disagreed. To the agency, the San Francisco-based website was about cheap travel, nothing more. Finally, in late 2010, Fenton and Hoffer's lawyer, Don Crandlemire, told them their only option was to admit defeat and become a for-profit.
And that was a problem. Launched in 2004, CouchSurfing had never been just a business. It was more like a movement, an army of four million members who behaved more like activists than customers. They volunteered their time as customer service reps, translators, even Web developers. The company's guiding principles promised that CouchSurfing would operate as a nonprofit. Now, Fenton and Hoffer had to break that promise. Could they do it without alienating the very people who were both using and helping run their site?
The Backstory: Buddy, Can You Spare a Couch?
In 2000, Fenton was a New Hampshire-based computer geek looking for a place to stay in Reykjavík, Iceland. He e-mailed some students there and asked if he could crash on a couch. Fenton had so much fun that he decided to create a website to make the process easy for others.
To Fenton, that cause was more important than making money, so when CouchSurfing.org launched, Fenton and his co-founder, Hoffer, registered it in New Hampshire as a nonprofit. A few years later, they began looking into getting 501(c)3 status, which would exempt the site from federal income taxes and allow it to accept tax-deductible donations and grants. With a few books and some pro bono advice from lawyers, they submitted an application to the IRS.
The Problem: Can a Nonprofit Be Competitive?
The IRS challenged the application—and every one that followed. Meanwhile, a number of similar for-profit sites had emerged, most notably Airbnb, which raised $7.2 million in venture capital. CouchSurfing, by contrast, was running on about $2 million a year from members who paid to have their profiles verified. It was becoming impossible to compete. Finally, Fenton and Hoffer realized they would never get 501(c)3 status. If CouchSurfing was to survive, it would have to change.
Fenton and Hoffer researched corporate structures and came across a new designation—the B Corporation, a certification for socially responsible, for-profit companies. Legally, CouchSurfing would be a C corporation. But as a certified B Corporation, the company would submit to a lengthy audit every two years to ensure it remained true to its mission. As such, CouchSurfing would be in good company—Patagonia and Method are just two of more than 520 B Corporations.
Still, the co-founders were nervous. B Corporations, after all, are largely unknown outside the world of socially responsible business, and Fenton and Hoffer worried that the mere mention of the term for-profit would drive members to revolt.
The Plan: Mounting a PR Offensive
In July, CouchSurfing spent more than $10,000 to hire the San Francisco-based PR firm The OutCast Agency, whose clients include Zynga and Facebook. OutCast's execs put Fenton and Hoffer through an intensive media-training program, spending hours grilling Fenton and Hoffer about their competitors and whether or not they were sacrificing their ideals. "They pointed out that it was important not to let the reporter frame the conversation," Hoffer says.
The co-founders also spent several weeks crafting a series of videos designed to introduce CouchSurfing members to B Corporations and explain why the organization needed to become one. In one video, Fenton looks earnestly into the camera and explains, "Going forward, CouchSurfing will now be a socially responsible B Corporation. It may not have been what any of us expected, it may even be a little scary, but I believe it is actually the best thing that could have happened."
Meanwhile, they began preparing an e-mail to announce the change. About 1,000 active volunteers would get a detailed three-page note. The rest of the members would receive a short message with links to additional information. Finally, to prove just how much he cared about member opinions, Fenton planned a world tour to personally meet with members in 12 popular CouchSurfing cities, a journey that would take him from Paris to Istanbul.
The Decision: The Bombshell Drops
Fenton and Hoffer began alerting volunteers that changes were coming to CouchSurfing. "They had given something extra to us as an organization, so we wanted to provide them the courtesy of advance notification," Hoffer says.
Then, in late summer, he sent his volunteers the e-mail that had been years in the making. It read, "I'm happy to announce that I, Daniel Hoffer, and the rest of CouchSurfing's Board of Directors and advisers have finally reached what we believe is the best decision for the future of the CouchSurfing community. Today, August 23, CouchSurfing became a Certified B Corporation, or B Corp." A similar announcement, with links to the videos, was later sent to the membership at large.
The Aftermath: A New Business Model. And a New CEO
"For two weeks, it was intense," says Hoffer. He and Fenton worked around the clock responding to members and the media; Fenton says he received 1,500 emails. Some expressed congratulations. Others not so much. "They were like, 'You're going to do what corporations do and care about moneymaking more than vision and mission,' " Fenton says.
It took time, but Fenton responded to every e-mail. Then, on September 15, he set off for Montreal, followed by Istanbul, London, Paris, Berlin, and seven other cities. He spent a few days in each, holding town-hall meetings that drew as many as 200 people, as well as one-on-one discussions with anyone who wanted to talk.
Of course, there was still a good deal of dissent. A group opposed to the status change, with more than 3,000 members, formed on CouchSurfing.org, and an online petition opposing the new legal status garnered more than 800 signatures. Though members may have been vocal, however, Fenton says few actually left.
Meanwhile, Hoffer, who had spent the past few months meeting with venture capitalists, managed to close a $7.6 million round of financing from Benchmark Capital, Omidyar Network, and some angel investors. CouchSurfing began putting that investment to work. Hoffer hired 20 new employees. In March, they brought on Tony Espinoza, a tech entrepreneur and angel investor, to replace Hoffer as CEO. "We were looking for someone with experience that I didn't have in running a Web company," says Hoffer. "Tony had the skills and connections to help us grow."
The Takeaway: 'I'm Just Glad the Community Cares So Deeply.'
Will the management change inspire another user backlash? "I'm just glad the community cares so deeply," says Espinoza, who is overseeing a redesign of the website and the development of a mobile app. "There's nothing worse than building a product for people who are indifferent."
But there is one thing that will never change: Even as the site looks for additional revenue streams, the co-founders promise that hosting and surfing will always remain free. Fenton and Hoffer consider the transition a success. Fenton says his one regret was not giving the general members as much information as the volunteers had.
As for Hoffer, he says, "The lesson I learned is that overcommunication is the best path. Sometimes, you need to say something more than once for the message to really sink in."
The Experts Weigh In
Set Aside Some Profits
As a business, it's honorable to tell your customers or members what's going on. But people don't really want to hear excuses. When people support a nonprofit, it's from the heart. They're supporting one thing, and you're asking them to change. The way to make the transition really work would be to set aside some profits to go toward a charity and set a place where people can donate extra money to charity on the website. At least then, CouchSurfing is showing they're still committed to goodness.
Martin Pichinson | co-managing member, Sherwood Partners, Mountain View, California
A B Corporation Isn't Enough
I like the B Corporation certification, but in the case of CouchSurfing.org, it probably doesn't provide the reassurance members want, because it's not a legal structure. A better way to go would have been to incorporate as a benefit corporation, which is similar to B Corp. but is an actual legal structure in California. It obligates the board of directors of a company to act in the interests of all stakeholders, not just the shareholders—and that includes the members and community served by the corporation.
Allen Bromberger | partner, Perlman & Perlman, New York City
Time to Man Up
It's essential to flood the CouchSurfing community with truthful messages. They are shooting themselves in the foot by trumpeting the fact they are a B Corporation, while, legally, they are a C corporation. It's time the founders took a brave pill and realized it's not shameful to be a C corporation. Like in any growing business, they should expect to lose people along the way. They will experience churn among both volunteers and employees, but that's no bad thing. New people bring new ideas and a fresh perspective.
Gordon Beattie | founder, Beattie Communications, London