Andrew: Hey there, freedom fighters. My name is Andrew Warner. I’m the founder of Mixergy.com, home of the ambitious upstart. Imagine in 2003 telling someone that there’s a website you can use if you’re travelling to a foreign country and you want to find someone, a stranger, who’s going to let you sleep on their couch. The whole idea would seem too absurd to most people but not to today’s guest. Casey Fenton is the co-founder of CouchSurfing, a hospitality exchange and social networking website.
He is also the founder of Sovolve, the makers of Wonder App, which is a social mirror that lets you see what people think of you and get others around you to trust you faster. By that I’m here to talk about all those businesses and a few other topics that he’s especially passionate about, and the whole thing here is sponsored by TopTal.
In the past interview my guest told me, “Do case studies when you talk about TopTal,” so I’ve got one right here. I’ve got one about the team at Nifty that wanted to launch a product fast but all of their developers were pre-occupied with other projects and they had this deadline coming up. They considered all kinds of things, online sites that they could go to, dev shops, etcetera but they didn’t have time to screen. They wanted to know they were getting the best of the best so that they can hit their deadline right, and that’s why they contacted TopTal.
TopTal is a network of developers who are proven to be among the top of their peers, the top of the top. TopTal found the right developers for Nifty and helped Nifty get their product done on time. That’s what TopTal is about. You tell them what you want to create, you tell them how you like to work, your little idiosyncrasies and how you and your team like to work, how many hours you want, full time, part time, just a few hours a week whatever, and they will find the right people who are pre-screened for you.
I’ve been saying this for a long time, I urge you to go and check out their website, Toptal.com. That’s Top, like top of the industry, and Tal, like talent, T-O-P-T-A-L-dot-com, and I’m grateful for them for sponsoring Mixergy. Casey, welcome.
Casey: Hey, Andrew. A pleasure to be here.
Andrew: Casey, I’ve had you on my calendar like 60 bajillion times. You and I have talked on text or Skype every single time, so it’s not like you weren’t there but you said, “I can’t do the interview.” Are you in fact intimidated by me? Are you afraid of doing this interview?
Casey: I am psyched to do this interview, and in fact when you and I chatted the other day maybe even more excited to do the interview, and then the more I read about you, it just only increased the excitement. I’m working on a new app right now and we’ve got a singular focus this mission to get a viral coefficient of 1.0 and it’s been all consuming.
Andrew: Yeah, you seem obsessed with it.
Casey: Very.
Andrew: Not too obsessed for you to have even flown to Paris. What I dig about you is I was actually a little worried about you when we talked at one point. I said, “Maybe this obsession is going to kill him,” and I think I asked you, “Are you dating someone?” You said, “Yeah, yeah. I make sure to make time for stuff like that.” You’re actually heading out to Paris. This is something that you intentionally do. If you are working, you intentionally make sure to do what?
Casey: I make sure that I try to balance it all out. While I was working at CouchSurfing in the early days, I would work days and days in a row without sleeping, just more coffee, programming and programming and programming. My wife at the time kind of complained. She was a little bit sad and said, “But what about us? Why can’t we spend more time together?” and I really took that to heart. I have really tried to evolve and find some balance. So super intense for this amount of time and then try to balance it off with healthy social things.
Andrew: Okay, all right. I want to get into CouchSurfing but let’s talk a little bit about this obsession because you are so obsessed with it. The viral coefficient is something that you’re working for Wonder App. In your ideal world, how would this play out?
Casey: How would Wonder App play out?
Andrew: Yeah. How would virality specifically at Wonder App play out?
Casey: Yeah, so people have been trying to crack the nut on transferrable trust, or horizontal trust or whatever you want to call it, for a long time. They’ve probably put a hundred million dollars of venture capital into it, I would guess. It’s been a nut that has not been cracked yet. The standard strategies that have been used are, “Well, if we build it, they will come. If we build the trust network, they will come.” That didn’t work. People have tried that. It didn’t work.
The other one they’ve tried, and I experienced this with CouchSurfing, people are crouching us on this. If you give us your data, they will come but nobody was entrusted in sharing this data. It’s a moat. It’s a difficult thing to share. We’ve got to build an API so that you can access it. There are kinds of problems. That strategy didn’t work.
Our strategy for building a horizontal trust platform is to get a viral coefficient of 1.0, grow to millions and millions of members using that with the vectors relating to trust and other personal dimensions that are useful for people’s personal evolution. Once we become the gorilla in the room, so to say, with trust information, now we can do all kinds of things with this incredible API. Our singular focus, our mission right now, is a viral coefficient of 1.0. That means that for each person who joins, one more person is joining. It’s not like half a person is joining and it’s decelerating, growth is accelerating. That’s why we’re so singularly focused on this.
Andrew: All right. Let’s get into some of the things that you were saying about CouchSurfing. First, I think we should just talk about the background of CouchSurfing. This is something that you needed, right?
Casey: Yeah, absolutely.
Andrew: You were travelling to where?
Casey: I was travelling to several places in the world, and the one place I travelled was to Iceland. I couldn’t afford . . . I think the hostels at the time were $100 a night. I wanted to have a real local experience. I’d gotten lucky a few times travelling before that and when I get to stay with the locals, incredible things happen. I said, “Okay, how can I do this? I’m leaving on . . .
Andrew: What kind of incredible things happen to you when you get to stay with the locals?
Casey: I got to . . . let’s see. In Egypt, I was able to stay with locals at their house, climb mountains, and meet local kids who have machine guns on top of mountains guarding things. I got to meet people’s daughters who they wanted us to marry. And I got to travel with the local in their taxi and who wanted us to climb the pyramids in Egypt and introduce us to people who wanted to help us do that. I mean just . . . and smoking the hookah with the old man at the wedding that night. It’s just on and on.
Andrew: I see. This is not the kind of stuff that happens when you stay at the local Hilton.
Casey: Not so much.
Andrew: All right. So you said, “I want to stay with the locals,” so what did do?
Casey: I want to stay with the local in Iceland. What I did is I found the University of Iceland student directory. I was able to type in names and get e-mail addresses out. And so the first name I thought of was Bjork. I typed in Bjork, found a whole bunch of Bjork Stefansdottirs. I wrote a little script, pulled out 1,500 names and e-mail addresses and then wrote a little script that created the mail merge. It’s “Dear Bjorn, I’m coming to Iceland. Here’s a little bit about me. Thanks, Bjorn. Yours, Casey Fenton.” Here are some pictures, here’s my personal philosophy, which is really an MVP for CouchSurfing. It was, “Can I get people to trust me over the Internet using the information I have and will they host me?”
I spammed 1,500 people and I had between 50 and 100 people saying, “Yes, come stay with me. We’ll go to my grandfather’s cabin in the wilderness and we’ll drink vodka from the springs under the stars and so on.” Then I have the opposite problem. I had too many people to choose from.
Andrew: Wow. So you weren’t initially thinking about it as an MVP with this business or something in mind.
Casey: I knew that I wanted to do something like CouchSurfing and I needed to try it out to know if people even would care to host me or host other people. This really was like my MVP. I had other experiences. I knew that there is maybe something there but I wasn’t sure how easy it would be to do and this really proved it to me. Then the experience I had that weekend was incredible. We did so many things that no one would ever do. I was hanging out with socialites; we were sneaking on to the US base to go to the KFC or something like that. The locals wanted . . . they just wanted to go the KFC. They wanted me to take them there. It’s one experience after another.
Andrew: All right. I see now that you get the positive feedback you needed to know that this thing could work.
Casey: Sure.
Andrew: What’s the next step? Was it setting up the structure of the organization, the nonprofit status or was it building out a web page?
Casey: It was building out. You don’t have anything so you get something that you can really just get some feedback and start to feel it. It took me years. I mean it took me a few years of saying, “I’m going to do this and programming a little on this side.” Then I was working on politics for a while in Alaska. Finally I said, “I’m not going to let one more year of my life go by until I find out if this is possible.”
I just said, “I’m going to stop everything I’m doing as much as I can and just use my savings, use my credit card, whatever. Focus on this.” Then the summer of 2003 in Alaska, in the middle of downtown, a little crappy house, I just kept programming and programming and programming and I tried not to go out and go to the bars with friends. When it was snowy nights and whatever and just kept after it and got an MVP of the site, which had all the basic things you would need to do trust and do searching and see profiles.
Done around January of 2004, I guess, and then I launched it. Then the Toronto Star picked it up a couple months later and boom! My website is down and all kinds of stuff. But it was right around that time, I actually launched. I knew there was something here and I was starting to feel it. I said, “Let me.” I did a previous company as a for-profit. I said, “I think this could be a nonprofit. I think this could be really cool as a nonprofit.” I feel like the energy of let’s all do this together and so at that time there weren’t any hybrid possibilities or [Inaudible 00:09:49].
Andrew: Let me come back to the nonprofit status in a moment. Is Wikipedia right to say you incorporated in 2011 and you did that with Dan? Dan Hoffer?
Casey: Not, it’s a little bit more complicated than that. I’d probably need to tell the story of the progression or how. Yeah, we didn’t incorporate. Basically we started off 2003, started as a nonprofit. We went for years trying to get the IRS to give us 501C3 status, spent like a quarter million dollars on legal fees and IRS fees.
Andrew: Why? What’s the problem? I thought if you just want to do good in the world and not make a profit that the government would help you out. That’s the thing that you explained to me. Why?
Casey: You would love . . . I would love it as that where true but like things, it depends and it’s complicated. From based on my experience and my observation, the IRS believes that the 501C3 status has the most coveted, the highest, the holy grail of nonprofit-ness. It’s a charity status.
We’re going back and forth. We found we could kind of get certain examiners to kind of side with us and agree with us, and then other examiners wouldn’t. We probably went back and forth in getting the best lawyers we could in the entire country to argue our perspective on it, in arguing 10 ways in which we were using case precedent saying, “We are charitable for these reasons.”
The IRS came back with the examiner, the examiner’s boss and the examiner’s boss’, boss and said, “We’re denying all 10, and for these technical reasons.” It came down to me. I just thought it was just kind of a personal preference. That’s what it felt like to me. I said, “Hey, can you just level with me and tell me why?” And he said, “Well, it all just seems it’s about saving money. It’s not about cultural exchange.”
Andrew: Wait, to them they were saying, “Hey, it seems what you guys have is just a way of saving on taxes and we just don’t agree with it.”
Casey: Right. We’re not saving on taxes, just helping people save money, business purpose: saving money versus business purpose: charity. They said, “If you were to do the handholding, if you were to say, ‘Person A, we’re going to take you with person B. You don’t have a choice,'” that’s cultural exchange. That’s what we understand. That’s what we know to be possible. We were like, “That is not what we’re doing here. Our users are not going to like that.”
Andrew: I see. They just didn’t see you saving people money as enough of a benefit for them to give you this status. What happened with that? You eventually got it though right?
Casey: Nope, we never could.
Andrew: You never got it.
Casey: They denied it. They said, “You cannot appeal this again. This is final.” We went back. I had to go back to the State of New Hampshire where I’d registered the nonprofit and explained to the Attorney General that they wouldn’t let us. The Attorney General was like, “Yeah, we’ve just been kind of waiting for this. We didn’t really think so either, so it looks like a conversion is in order. This will take probably a million dollars.” That point we were like, “Okay. Well, we’re going to need to get a million dollars to convert,” but we can’t get it from our own income source. It has to come from some other source. You can’t buy your way out with the same open source.
Andrew: Really?
Casey: You cannot.
Andrew: I see and now I see why you had to . . . so I’m still looking at these articles that I looked at for research to prepare for this and now I see why I misunderstood. You did set yourselves up as a nonprofit. They said, “No, you shouldn’t do it.”
Casey: Right.
Andrew: You fought it, which cost you money and then now you had to change it, which is going to cost you more money that you couldn’t use from the organization.
Casey: Right.
Andrew: Where do you get the million bucks?
Casey: That’s when we started talking to investors in Silicon Valley saying, “Can somebody help us please?” We encountered Benchmark, which was known as one of the best and most awesome, including Matt Cohler, one of the most awesome investors, who are just really good people, we believe. And just said, “Okay. So let’s go,” after interviewing 20, 30 people just find out and examine all different options.
I mean, I examined every possible avenue with matrixes of all the possible pros and cons of doing everything. My goal is to make sure that CouchSurfing survives into the future, so it’s there for our children so that we can continue to use this resource. I had to ask myself very difficult questions, probably the most difficult questions and most difficult process of my entire life by far, “Which path will maximize chances of it continuing?” I had to make a choice.
Andrew: What was that path?
Casey: The path was become a B Corp; become a hybrid, which was just becoming possible at that time. It will allow us to innovate, which 501C3s, you can’t actually innovate. You are only doing what is allowed by statute regulations and case precedent. So that is . . .
Andrew: The B Corp allows you to be a full corporation with an obligation to do certain good in the world.
Casey: Yeah, yeah so it’s not . . .
Andrew: For anything . . .
Casey: The obligation plus just stating to the world and stating to everyone on staff, “We care. We want to do this. We’re connecting our identity to doing good things, that’s who we are.”
Andrew: I see. And so first of all, that blew my mind this whole thing that that’s what was going on. I remember talking with Paige Craig, the angel investor, years ago over dinner and he said, “You should interview Casey but you should understand the guy’s . . . ” I don’t think he used the word crazy but something like that. “He doesn’t care about money.” Was that true or did I misunderstand him over that dinner?
Casey: Yes and no. This is what I would say. I wouldn’t say I’m just motivated by money. I think money unto itself has lots of problems, can have lots of problems. But it can be a great solution to a lot of things. I would love to get a lot of money together and give it to people who are going to change the world, that I have no problem with.
Andrew: Not use it for yourself.
Casey: If I can change the world, I’ll use it for myself as well. That’s fine. Yeah, there’s no problem with that.
Andrew: I see. So it sounds like you are a regular entrepreneur with a need to do good, not so much the hippie that I imagined you were after that conversation.
Casey: I mean life is short. I want to do meaningful things. Money seems like it can come easily. If you just want to focus on money that’s fine. I want to do some things that I find more interesting.
Andrew: How did Dan Hoffer get into this? Daniel Hoffer, who is now with TripIt?
Casey: Right, yeah. He and I were a long time friends. He was actually running a consultancy out of his Harvard dorm room back in 1997, and he and I found each other online. He needed somebody to do a little programming for him, and I knew how to do it. And so I started consulting for him. Then we traveled together and met up in California and just had all kinds of experience. I joined a startup that he was doing with a bunch of Harvard and MIT folks out in Sunnyvale back in ’99, and then he joined me at CouchSurfing. So we’ve kind of just helped each other out in various entities. I mean, he went to Columbia Business School. He went to Harvard for philosophy. He is a pretty cool dude.
Andrew: Is he a co-founder?
Casey: Yes, in fact he is.
Andrew: He is. Okay. And you guys own equal shares of the business even though you stayed on much longer than he did? He was there for about a year.
Casey: We both participated a lot over the years. I mean, he’s had other jobs. CouchShare has never been able to really afford his salary very much. We have very, very low salaries over time.
Andrew: I see. So he had to work on other things and if you were full-time person and you were the guy who was standing up all the time, then the compensation and equity I should say was different. How were you able to live with so little money in the early days?
Casey: Well, at first I did my own consulting on the side of course. Then in the early days, we came up with this model. We kind of have this weird problem. We are a nonprofit and we need to do the work of what has traditionally been for-profit. It’s like complex technical work that requires hours of focus and toiling, you would say. And so how do you get that done? And having volunteers do that in their free time here and there, it has mixed results. They’re just available or not available. Who knows?
What we do is we create these temporary collectives for a couple of months at a time where people come from around the world, get together and toil together. That helped get a whole bunch of work done and helped create this exciting energy and helped us feel what CouchSurfing is about. We did our first one, I guess, in Montreal in 2006 and then we did in Thailand and New Zealand and Alaska and Rotterdam and Costa Rica and Istanbul. Unfortunately, it wasn’t sustainable eventually because we needed even more commitment and more full-time commitment. Having a few people come together for a couple of months, and then disappear for a few months is not good for continuity. It was good. It was a great bridge.
Andrew: What a clever idea for doing it. What about you personally? You still have to eat. Were you living in San Francisco at the time?
Casey: No, I couldn’t really afford to live in San Francisco.
Andrew: No, so how did you afford?
Casey: I did a little bit in Menlo Park with Dan. But yeah, I just had to live either on the road or live with parents or I was living in Alaska or whatever, just living where it was the least expensive and greatest amount of focus available and the best Internet available.
Andrew: I see. How would you make sure that the Internet was right before you got there?
Casey: Back then you could do speed test and you could see what the averages were for any ISP or location.
Andrew: I see. I read in . . . actually heard in a FounderLY interview that you said, the donation model was pretty challenging.
Casey: Yes, there are . . .
Andrew: What was the challenge there? That was one of the big challenges in the business.
Casey: Well, okay, there are two parts to it. One is we have these verifications with CouchSurfing. Verification is actually pretty solid awesome model. They’ve really gotten us . . . they took us from where, if we didn’t have verifications with CouchSurfing, it wouldn’t be where it is today at all. It’s really provided enough income to make something happen of substance.
We had this vision that we would be able to get 501C3 and then we would be able to get these charitable donations. Then eventually we learned that aren’t a lot of grants at all, maybe $30,000 for cultural exchange, really, almost no grants for cultural exchange. We had to do $2,000 worth of grant research to figure this out. Eventually we’d get a professional but we didn’t know that in the beginning. We just were kind of making assumptions.
Then we figured out later that that’s a dead end unfortunately for us. If we added some component of handicapped CouchSurfing access, maybe we could get something related to a handicap grants or some other kinds of specific grants that there’s money for.
We found out that to go after large foundations, I don’t know if it’s the Gates Foundation or whatever, that you need to hire a professional. The professional usually costs $80,000 a year to kind of lobby on your behalf to do this. Then they might help you get $100,000, $200,000 $300,000 a year and then over time. And we were already making more verification and we’re like, “All right. That doesn’t make sense.” There’s no chance that you would necessarily get it.
At some point we said, “Well, I guess all roads do lead to this hybrid organization. Not only Attorney General but the funds weren’t there that we were hoping for and the innovation is impossible as a 501C3. It’s just not set up for that. It’s actually the opposite of that. That’s the idea.” That’s why we converted, and the conversion was the hardest thing I’ve ever done and . . .
Andrew: People hated you for it.
Casey: Absolutely. It was hard emotionally. It was hard just for the day-to-day basis. I just kept trudging through. I kept trying to figure out what’s next.
Andrew: I misunderstood the reason for it. I didn’t realize until . . . and frankly I have the Inc. article right here that explains it, that talks about it. This is an Inc. article from . . . no one writes dates anymore because they don’t want articles to seem out of date. But it’s an Inc. article from around the time that you guys made the transition and I didn’t fully get that that’s what was going on there.
Casey: Yeah, I think we haven’t done a good enough job of really making that clear, for better or worse. It’s just we . . .
Andrew: What was the biggest shock to you at their response?
Casey: I wasn’t totally shocked. I mean, we had a lot of people saying, “Great. Hopefully this could give us the things that we want. We want an upgraded site, an updated and fixed site. We want something that’s more stable, better mobile stuff.” And we had some people say, “This is horrible. We were happy X, Y, Z.” And then people saying, “Well, wait and see.” It’s just a lot.
Andrew: So far, I’m seeing that it went kind of both ways but you are saying this is one of the hardest times of your life. What made it so hard?
Casey: It was logistically difficult.
Andrew: I see. Where’d you . . .
Casey: Emotionally difficult as well. I mean, it was a path I hadn’t expected. It certainly it had to happen in a certain timeframe. The Attorney General was like, “Hey, this needs to happen in this timeframe here. It has to happen by this date.” We had to value the company using the best value, the people that do the evaluations in the country, Grant Thornton that required lots of complexity. We had to with the Attorney General’s office and follow their lead. They were like, “We have a certain process. You have to follow us.” Then we had to line things up with somebody that could help us with the million dollars that it would cost to . . .
Andrew: Yeah, where did you get the million dollars? Could you use the . . . what did you get, $7.6 million from Benchmark? Could you use that?
Casey: Yes, exactly. Yeah, that’s what we had to do.
Andrew: They knew that one million of this was not going to go to getting more customers and understanding your business, it’s just gone because you have to make this transition. They were okay with it.
Casey: Yeah, they were like, “Well, give it a try.”
Andrew: This whole thing happened 2011. I told someone I was interviewing you today and they said, “Those were the guys who do a different version of Airbnb.” I thought, “No, Airbnb came afterwards.” When Airbnb came out, how did you feel as the guy who created CouchSurfing about four years before?
Casey: I was pretty psyched for them. It’s an overlapping model. It’s like it could be a substitute but it’s really different. CouchSurfing is people first and amenity second, you could say. I think Airbnb is amenities first, people second. Although people is prominent and people is important to both things, obviously. I think people want different things in different times. Sometimes they’re, “I want a guarantee on these dimensions,” maybe it’s Airbnb. Then sometimes it’s like, “I’m looking for a backstage pass to the world. It’s CouchSurfing.” To me, the more ways in which more people can see the world and get more perspective and grow as individuals, the better.
Andrew: Is this what Paige said when he told me that you had this hippie streak in you? I don’t need the world to just be better. I want the world to be better because of Mixergy. I can’t deal with some other guy coming out with it better than me, and you’re okay with that.
Casey: I mean, I’m going to work as hard as I can and if I can inspire other people to do amazing things as well, if I can be any part of that, I’d be very happy. It just means that actually there’s a business model in it and that more people can actually help solve that problem or give people possibilities. I’m all for it.
Andrew: Really? All right. Does it bother you that people know more about them than know about you, that there are more listings on their site than yours?
Casey: Not really. Why would it bother me?
Andrew: Because you’re a competitive, ambitious entrepreneur who wants to get his viral coefficient up above 1 so the word spreads and you could have more impact. If you have more listings that means you have more.
Casey: There are so many things that need innovation. There are infinite numbers of things that can be done and there are so many places. I mean it’s so often people are, “Should I share my idea? Should I hide it?” I think you even talk to this a little bit on one of your interviews. “Maybe I should just keep it all to myself and be quiet.” And I think as entrepreneurs we start to learn that that doesn’t really work. You become isolated and it’s better when there’s a whole ecosystem that is . . . they are all helping each other. The tide lifts all boats.
Andrew: I help a lot of people create interview sites, and I’m really proud that there are more and more out there but I think that maybe because I prepped for the interview with Jackie “The Jokeman” Martling of the Howard Stern Show and I kept listening to those old episodes where they said, “We are going to crush our competitions.” I’m saying, “I’ve got to crush anyone who wants to be exactly like Mixergy or go to the same audience. I want to crush NPR. Why is NPR doing a business podcast that’s getting more than Mixergy? They don’t have anything better to say than we’ve got here on Mixergy.” You’re smiling at it. You’re smiling at it. I can feel from a sense of pride. I think you identify with this.
Casey: I love diversity, really. I stand for diversity in this world. I don’t want a world that’s boring. I want a world that is really diverse and interesting and entertaining and so the more that there is the better for me.
Andrew: The hardest part then was not even seeing another company take your idea. The hardest part was changing the structure of the company. Another difficult period was where you had to redo the whole site. Somewhere around . . . was it 2006?
Casey: Yeah, no, it was more recently. We just to redo the site. That was pretty hard.
Andrew: I mean where the data was gone.
Casey: That was when we had a major database crash. That really sucked. And so what we found out eventually in all the web caches, we were able to get all of 20,000 of the most active profiles that were actually in the web cache, reverse engineer the web cache and feed it back into the database. That took many days to do that.
Andrew: That’s unreal. People were upset and you lost data of the less popular.
Casey: Stuff happens.
Andrew: You’re okay with that?
Casey: We keep going. You keep doing your best. You keep going. I mean, we have a limited budget of course. We have actually no money. We were operating on fumes at that point and we just kept going. We operate on . . .
Andrew: I had Mixergy go down in the first few years of the site before a guy named Bob [Hiler] joined up and said, “I can help solve this problem.” I was eating myself up inside over it. And frankly, Mixergy, if it goes down for a few days it’s not like people are going to trust it any less. It’s not like people are going to have crisis in their lives, right?
Casey: Yes, yeah.
Andrew: They’ll know that when it comes back up everything is good. But I was going nuts, so how do you keep your head about you when those things are happening?
Casey: I think it takes time. You start off and you lose your head, and then eventually you’ll see over time how it goes and you’ll deal with all these problems.
Andrew: What does losing your head mean for you? For me, it’s just deep anguish, lots of work until the middle of the night, trying to call the hosting company.
Casey: Yeah, sure. It is always that but it’s whether you can . . . you’re going to do those things no matter what. That’s going to happen. You’re going to go back up.
Andrew: Do you do something like I used to say, “What is it happening to me? I’m just running a WordPress site. Why can’t I even keep a WordPress site up?” I feel ridiculous saying it now but in the moment I did say, “What’s wrong with me that I can’t keep the site up?” Did you do that?
Casey: No, I don’t think so.
Andrew: No.
Casey: I think my father gave me an identity as I was growing up. He said, “You know, Casey, some people, they might give up. You just stick out. There are out there in the yard, there’s tinkering on your car, and even when it gets hard and all messed up, you just keep going.” Somehow I took that on, and that’s really served me. Even when things get hard, even when it seems like this isn’t going as fast as I want, just keep going. That’s why I think what it takes a lot as an entrepreneur when other people are getting sad about it. It’s not happening as fast as you want. Keep inspiring, keep going, it takes time.
Andrew: You are just that kind of person. How did that express itself when you were growing up when your dad could see it and encourage it? What did you do? Do you have an example?
Casey: Yeah, I skipped school for a week and did an engine swap on my Saab, from one Saab to another in a dirt driveway.
Andrew: Okay, with what?
Casey: In a dirt driveway.
Andrew: In a dirt driveway. And because you were so obsessed you weren’t going to stop until you had this done, not even go to school.
Casey: Yeah, right.
Andrew: Your dad didn’t say, “What’s the matter with you? You idiot, you have to be in school.” He did what instead?
Casey: He’s like, “You get really good grades. You’ll figure it out.”
Andrew: Wow.
Casey: Yeah, yeah, that was it.
Andrew: Is he that kind of person with everyone constantly confident, or he did just see something in you that you didn’t even recognize in yourself growing up?
Casey: Great question. I don’t know. I should probably ask him.
Andrew: Are you guys still close?
Casey: Very. He lives right down the street.
Andrew: Wow.
Casey: Yeah, I moved out to California.
Andrew: You were staying with him when things were tough.
Casey: No, this is a recent thing. He retired from teaching school for 15 years, schoolteacher.
Andrew: How about your mom? You guys close too?
Casey: Pretty close. She grew up in an East Coast family and she lives in New Hampshire where I grew up, small mountain town, lots of ski areas around and for people there, it’s really about the outdoor life. I was lucky enough to grow up with that outdoor life. I love countryside, the mountains, skiing, just my favorite thing in the world and so yeah, we’re close and we connect a lot on outdoor activities.
Andrew: What’s this thing here I see in my notes? Someone on the team said, “People were upset. If he was any more blatantly deceitful, we’d have to call him Zuckerberg.” And this has to do with you guys allowing Google and other website, other search engines to spider your site.
Casey: I’m not sure.
Andrew: That’s not even a crisis that you remember or are aware of. It’s funny what’s this crisis to people?
Casey: I don’t think that’s a crisis. It’s a strategic decision and these people can turn it off whether they want people to spider their profile or not. We’re trying to increase the number of people that know about CouchSurfing and can use it and can get a backstage pass to the world. We want people to know about it and so one way to do that is allow the site to be found in search engines.
Andrew: I wonder why it is the people feel more hurt by little things like that for CouchSurfing than they would for other sites. Do you think that it’s because they see it as more of a community and because of that it feels like it’s theirs, and less of a business, and so they don’t see any rational business decisions being okay?
Casey: I think it’s a multitude of things. One meme I kind of put out there in the very beginning was the possibilities are endless and completely up to you. Meaning this can work in so many ways, we can all use it in the way that we want to use it. We’ve kept such a policy on really keeping it open, diverse and multicultural. And as a consequence, we have a true slice of the world. Some people love that move, some people hate that move. We’ve got it all, and that’s something I’m really proud of.
And it was hard at the very beginning when somebody says, “That Casey, Fenton, he’s a horrible person,” or something. I really got to do some soul searching and thinking about what does that mean and it really helped me grow as a person and still be very loving and not take it personally and do everything I can to make things the best I can but also realize that we’re trying to serve every kind of person.
Andrew: Where is this lovingness come from? I guess I grew up in the East Coast in New York. I didn’t have lovingness towards other people. I had rudeness and I loved when people were rude to me because I felt they were being honest. People who aren’t rude, in my mind, are hiding something. I love being rude because it meant I’m being efficient, I’m getting right down to things. That’s my natural state because of where I grew up and I’ve undone it now that I lived in California for a few years and travelled and gotten to know that people are not assholes or and I’m not either internally. You have an internal lovingness that you keep coming back to that I don’t relate to. Where does that come from for you?
Casey: Yeah, it started early on. I remember it very, very clearly in high school. In world history class, we studied the classic philosophers for a week and it never occurred to me that the concepts to Hume, Descartes, Kant. The concepts of free will and determinism never occurred to me before. I started really thinking about that, thinking, “Do we have free will in what we do? What do we have free will at?”
I started to think we’re born into this confluence of life and kind of asleep in a lot of ways and not really . . . I mean, all we can do is what we know. If that’s true, and maybe there are some choices in life, let me try to figure out what those are, but if that’s really what’s happening, I should be a lot more compassionate with people for the situation that they were born into, the confluence of the river that they’re flowing in. Thinking about it like that allows me to be more compassionate. But then it was just to connect with people more and not take it so personally and to try to really just hear people for what they’re saying, what they’re going through. I think that was probably some of the roots of it.
Andrew: That’s really hard thing to do, and I’ve gotten through doing all these interviews but in the early days, if you and I would have had the same experience around this interview, maybe my first year of interviewing, I would have thought, “Casey thinks he’s too good for me, and that’s why he’s not doing this interview. Casey thinks that I’m nothing and that he’s a superstar that everyone knows online and that’s why he’s not doing this interview.”
As a result, I may not have either reached back out to you because I would have thought, “He thinks he’s too big. I can never get him to come on,” or I would have done the interview with maybe a chip on my shoulder like, “I’ve got to show you instead of paying attention to what you are saying to me in private before we started the interview and what you were talking about within the interview.”
Casey: Thank you so much for giving me a chance. I really appreciate the opportunity to be here. I really appreciate the work that you’re doing. In the world to connect, the challenges, trials and tribulations and the beauty of being an entrepreneur to other entrepreneurs, I mean it’s such a hard thing. The odds are stacked against us and the more we can share the spirit and our successes and challenges, the more we can all learn. We can build that better world. It’s just, yeah, I’m thrilled to be in front of them.
Andrew: Right, no, I appreciate it. I know it has nothing to do with me. I know what you’re trying to do now because I’ve got my head on straight. When I didn’t, it would have been a problem. Virality is something that we started out with. That’s one of the reasons that you’re obsessed with getting your product right and that means getting that viral coefficient up. You were starting to say how that related to CouchSurfing. Can you talk a little bit more about that and then we’ll talk about how it applies to your life today?
Casey: Sure, yeah. I learned in CouchSurfing that . . . well, I’ve learned a lot, honestly. A couple of things I’ve learned is the CouchSurfing viral coefficient is a bit slower. It’s like you’ve got to hear about CouchSurfing and then you go and try to use it and then eventually you have an experience and then you become an evangelist and you’re telling all these people. But that might be six or eight months in the cycle. It might take a while.
I really started to think about that and think about how things spread, and I started thinking about look at the value the people get when they can immediately trust a stranger because they can see this person has a hundred positive references. I can go to their country and I don’t speak their language. I don’t know anything with their culture. I know that I’m going to be taken care of. This world feels safer now and I’m having these amazing experiences of my life. But somebody I didn’t know, I don’t speak their language, all of this immediately gets accessible because of reputation.
What would it be like if the world could experience that along all vectors, beyond just staying on a couch? There are many websites out there. Let’s give eBay for example. I can now go to eBay, send $2,000 to someone I don’t know and I can’t really remember where they live, and by a computer immediately transact and have this great computer and improve my life. You can only do that in silos.
What would it be like if I can do that in all walks of life, if I could capture my reputation and then use it? Once I start to see how important that was and that it couldn’t be done, it wasn’t being done and then I watch other people trying to do it but failing, I started to think, “There is a way to do that.” We started to come up with a strategy of the give to get viral loop strategy that is evolving in Wonder App.
Andrew: How do you include that in Wonder App?
Casey: The Wonder App is you get to give yourself feedback, you get to give your friends feedback and you get to discover the average of what everybody is saying about you. It’s feedback loops in your life. In that, you get to see yourself kind of for the first time. I thought I was really an empathetic person. Maybe I thought I was too empathetic and maybe I started to come a little bit more hard edged or something as an entrepreneur. I don’t know.
I got lower empathy scores that I thought I would. And I was like, “That’s fascinating but nobody would have told me that. Nobody could have told me that. Nobody wants to rock the boat or jeopardize a future opportunity. I mean, it’s like pulling teeth. I know the Graduate School of Business Stanford, they have run a program of course that’s just on that. People say it’s the most useful information of their life.
Andrew: Just on what? One what other people think of you?
Casey: Doing a 360 feedback from other people. The problem is it’s hard to get people to be honest with you because if they are, then you get this tit-for-tat. You know want to rock the boat. It’s really hard to get honest answers and it’s a bit time consuming. We’ve taken that value and distilled it down to the lowest possible effort for everyone involved. We packaged it in a viral loop, this give-to-get viral loop where you can discover only after you also share with your friends. That helps you see yourself for the first time, amazing, and then we . . .
Andrew: I see. And so because my friends are the ones who are giving me a rating and an understanding of myself and giving the rest of the world an understanding of me, I have an incentive to invite my friends on Wonder, which is Wonderapp.com is the URL. Then you get the virality. You as a company. I see. So what was your challenge in getting more than a 1 coefficient? It seems a natural play for me to not just invite one person but to invite seven other people, if not more, because the more people I get, the better.
Casey: Sure, yeah. Absolutely. I think once it starts rolling, it will have that effect more. But as we know, viral coefficients are driven by a couple of things. One is number of invites being sent. Let’s say you send 10 invites to your friends but your friends get a lot of invitations to a lot of things. Then some number is going to click it and then some number is actually going to go through the landing page and then do a Facebook connect and sign up. We’re actually converting our app to SMS now, so we think that’s going to really spike the virility. We’re getting pretty close to our coefficient of 1.0. We’re very excited right now.
Andrew: I bet you are. What’s the most powerful thing that you did?
Casey: What’s the powerful thing that we did? Let’s see, probably gamifying the results. It’s like we’re constantly switching it up and changing, “Okay, you’re giving some feedback and then suddenly you’ve just unlocked this thing. Isn’t that great?” Instead of just being monotonous and being more of a tool, this can become a game. I think that’s one of the most powerful things we’ve done.
Andrew: When we talked I guess a week or so ago about what you think would be most helpful to the Mixergy audience, you said, “Gamifying sweat equity is something that we could talk about.” I didn’t want to ask too much about it because I wanted it to come across as fresh ear. I did write it down. What do you mean by “gamifying sweat equity,” and how did you do it?
Casey: Yeah, so it was fascinating. In one year within CouchSurfing, I got to watch us go from the nonprofit model where we’re using mostly inspiration to get things done and get the right things done in the line of people. Then we converted using salaries and both have their pros and cons. With salaries it felt to me like we got more time out of people, more effort, yet sometimes it wasn’t the right alignment out of people.
In the nonprofit world we got less effort but more alignment. It’s like, wait a second. And then when we converted to the traditional stock option model that Silicone Valley has, I also saw that people don’t really know what its worth and the people are more like, “Yeah, show me the money. I’m kind of jaded. I’ve seen all these stock options before.” and maybe, oh, wait, wait I’ve learned from my friend I’ve got to buy it later. Then it cost me way too much to buy it anyway and so unless I’m here, it’s some kind of magic, change of result.
Andrew: Do you mean buy the shares that you just got options on and . . .
Casey: Right, and people have realized that then they find this out later and they get jaded and then just like this stupid stock option game. I watched all this. I’m like, “This isn’t really working as an alignment tool, is it?” What would it look like if we could actually use equity to create alignment tools? What we did within Sovolve is we took 75% of the company at the beginning and so that’s our sweat pool. Everybody who is working on this would record their hours and the hourly rate and they’ll be able to see in real time their ownership of that pool.
As we get more and more valuations over time we’ll be able to see the value of that pool and people can see as they’re recording that, whoa, foregoing this much cash and getting this much sweat equity and receiving that much value, this is amazing. I am feeling like an owner. I’m feeling like an owner and I’m incentivized and I can see through to the price. I don’t have to do as much work as an entrepreneur. I don’t need to inspire everybody out.
Andrew: This is a site that they can go into and see how much equity they are getting in return for the hours that they put in, or return for something else?
Casey: Yes, for the hours they are putting in and based on their hourly rate, based on their . . . each person is a different hourly rate.
Andrew: I see. And the more they do, the more equity they get in the business. How does it solve what you called the “stupid options game?” In fact, can you explain what that is because this is something . . .
Casey: I would love to explain what that is.
Andrew: Please.
Casey: Yeah, so back in the day, the options games used to kind of work. Imagine 10 years ago, 12 years ago, Google, right? There is this thing called preferred stock, which investors get, and this thing called common shares, which most everybody else gets. Both groups of people have different goals. One wants the price to be really high because they want to write it off in whatever they are doing on their books. The other, the common shares, they want them to be really low because they have to buy them.
Back in the day, you could have a 100:1 split on value between if it’s preferred shares to be worth $100 and then common shares to be worth $1. Finally, let’s say you’re going to leave the company, you’re getting fired, whatever, if that company I think is really going to be worth something, I’d love to have some options. And if you had $100,000 worth of stock maybe in some way, you could buy it for a very, very low price because of this 100:1 split.
Andrew: They give you options on the stock that you could buy at a certain price but . . .
Casey: You are accruing options as you go. You’re vesting options and then let’s say you’re like, “I want to leave. I want to go to this other company.” Well, within 90 days your options are being vaporized pretty well.
Andrew: Which means you have to exercise those options, which means you have to buy the stock that those options represent. If the stock price is high, you have to . . .
Casey: You can’t buy them or you have to come up with that cash. And most people are like, “I don’t know. I don’t know what this company is going to do. I’m just going to throw $50,000 into this and . . .
Andrew: Right, $50,000 is not unreasonable that you leave the company and within 90 days, you have to come up with a $50,000 to pay for the stock that you have the right to pay for.
Casey: Right, I mean $50, who knows what it is? Depends on what . . .
Andrew: If you don’t, it goes away and you don’t know. It’s not like a stock trades on the market that you can go and sell it right away and say, “I’m going to get that money back.” You’re sitting on the sidelines waiting for these people who used to be your buddies and you used to work with on a daily basis to decide whether they want to go public and you can sell or give you other options. But until then, you just are sitting on the stock that’s just nothing to you.
Casey: Right. So it’s not very well aligned and it’s not a very good tool for motivating people that kind of understand the game.
Andrew: What is it? In some ways, I believe that some entrepreneurs here trick their employees by saying, “Look at all we’re giving you,” without saying, “Hey, if you ever want to leave . . .
Casey: It’s effectively a clawback. And the way in which it started to happen was about eight, 10 years ago. The IRS changed the rules so it’s not one where you have a 100:1 split. You can have a 3:1 or 4:1 max. That’s what the IRS has said. Now it’s impossible to buy these options. Ten years, 12 years ago, you could. That’s where these instant millionaires were coming from. It’s just so much harder now with that problem. What we said is that’s not a very great game to play and then you have to pay tax on these things potentially and you have to get a CPA involved. The company can’t even advise you . . .
Andrew: You not only have to come up with the money to buy the stock, you also have to pay the taxes on this thing that you don’t know when it’s going to be worth anything until the people who you used to work with decide what happens to it.
Casey: Exactly, yeah. What we’ve done is I researched all the different models for giving equity and we chose phantom equity. The downside of phantom equity is that you get taxed at regular income tax levels instead of capital gains. But the upside is it’s really easy to deal with. You can do it all contractually and you don’t have all of these problems about taxation and so on, and you can do it really in a way that is completely gamified and just removes a lot of the problems.
Now, it’s like trading, it’s like saying, “My thesis is it will improve the chances of company success by 2x, 3x, I don’t know. And even though people are taxed more, well I’d rather be taxed more and have a greater chance to success than be taxed less and have a way less chance to success.” We multiplied that out and one seems . . .
Andrew: Let’s suppose someone leaves once they have phantom shares. Phantom shares just mean it’s a contract that says, “We will base what we give you in cash on what the stock of the company does.” It’s not really stocks but it operates financially in alignment with stock. If someone leaves the company, what happens?
Casey: I think Facebook did something like this. This is where I actually learned about it was from Steven [Inaudible 00:47:49] work. He did the first Facebook stock program. Especially when they’re going beyond 500 employees, they had this problem where companies are non-public, you can’t have over 500 shareholders. They started using RSUs, and so that was their genius way of getting around this problem and so once I started talking to him I was like, “Oh, that’s pretty interesting.” Did two years worth of research, spend a lot of my own money on figuring this out and so we’re working on this problem right now and we’re building and starting . . .
Andrew: I see, so it’s not locked in. You don’t have the contracts yet and you’re going to figure out what you can do for people once they leave.
Casey: With Sovolve, we’ve run a test for two years now and it’s been amazing to see all the different . . . there are all these little dials in there and things that make it really go. And so now that we’ve had that test for two years and have this experience, now we’re testing with five other companies.
Andrew: What are the companies you test? What are the companies you’re involved with?
Casey: I can’t say which companies they are. They are small companies. I don’t have the . . .
Andrew: You are an investor on those companies?
Casey: No, this model that we built out is a piece of software. We are allowing other companies to use it and the legal docs that go along with it that build this.
Andrew: I see. And that’s a Sovolve property?
Casey: Right, currently, yeah. We’re spinning it out.
Andrew: Got you. [Inaudible 00:49:13] to do this so they can contact you and you’ve got this system in place and get started. But you don’t want anyone contacting you. You’re still at the friends and family stuff.
Casey: I would be okay if people are really serious about it. I would love to probably . . .
Andrew: Actually you know what? I don’t think we should even open it up for people to contact you because if anyone is serious, they know you already and they’re going to have a conversation. If they’re curious, we don’t need them contacting you about the details of something so complex and . . .
Casey: Yeah, we have enough people to test with it and we’re spinning it out and . . .
Andrew: If you are testing it with them, you must know what happens when their employees leave the company. What’s the deal there?
Casey: Each company will probably have a few knobs and dials that they can set, and everybody playing the game will know what the knobs are and dials are set before agreeing to it. So in Sovolve, we just set it where you get to keep it no matter what. You contribute it, you got it. Another company can say, “Well, if you leave without cause, let’s say, you lose 50% of them.” Whatever. The goal is that the people can see and understand a very simple system upfront and agree to it and get that on the other end and really feel aligned and powerfully motivated.
Andrew: When they leave do they get essentially an IOU from the company or do they get the cash that they paid taxes on?
Casey: It’s an IOU.
Andrew: It’s an IOU from the company but they . . .
Casey: Nobody gets any cash unless there’s cash to be gotten, really. I mean yeah.
Andrew: Right, because the company hasn’t exited and has [Inaudible 00:50:37].
Casey: No explanation, nothing, yeah.
Andrew: They get essentially an IOU, a legal document from the company. They have to pay taxes at that point on it? No?
Casey: No, you don’t pay taxes on . . . it’s just called differed compensation until you know the value of the different compensation and where it’s constantly . . .
Andrew: This changes things completely, completely.
Casey: Constantly change. What say that again?
Andrew: This changes things completely. So you’re saying they don’t have to pay taxes the day they leave. They don’t have to pay at the year. They only pay it when cash comes in the door.
Casey: Got it.
Andrew: At that point yes, their tax rate is up higher because it’s taxed like regular income instead of capital gains but they know exactly how much money they get. They get the money first actually right? Then they pay the taxes, which makes things a lot more sane and frankly not just sane but more honest because when somebody leaves the company and realizes they have 90 days, as you said, to come up with cash to buy this thing that they don’t know what it’s worth and they don’t know when they can do something with, they often walk away from this big thing that they worked so hard to get.
Casey: Yeah, and they walk away jaded, and that’s unfortunate. I mean, we don’t want that. That’s not part of our entrepreneurial dream. We want people to think like entrepreneurs, we want them to be excited like entrepreneurs and we want to all do this together and we don’t want people walking away from that dream and being saddened by that dream. Unfortunately, the current system does affectively act like a clawback system.
Andrew: You know, I’m really glad that you gave me an opportunity to talk about it. In private, people have talked about this. In private, some bosses will tell their employees, “Look, I know you’re excited about this thing but you should just be fully aware of it. And then if you want to get excited and get carried away but also be aware of what you’re going to have when you leave the company.” I just never knew how to fully explain it here and didn’t anyway. Didn’t even have an opportunity so I’m glad that we got to do that today.
Casey: Absolutely, right. I’d want this to happen for the world. I think it would accelerate companies and it will give these companies using this tool an advantage.
Andrew: I predict, and I’m not in the prediction game, I’m in the let’s study what happened in history game, that’s why I said I don’t even want to talk about what’s going on today. I want to talk about how you got to today. But I predict that if you start talking about this problem, people are going to be incredibly upset and eager for a solution but they need to understand it. And I predict if you do it, there could be a revolution.
Casey: One would hope.
Andrew: I hope so. All right. If people want to follow up with you, I think the best place for them to go is they should check out wonderapp.com or caseyfenton.com, your personal site.
Casey: Yep. That sounds good.
Andrew: All right, Casey. Thank you so much for doing this interview.
Casey: Thank you, my pleasure.
Andrew: Thank you all for being a part of it. Bye, everyone.
