> Tactics. Trends. Best Practices.

STRATEGY

Surfers Rule Dan Hoffer (playing guitar) and Casey Fenton (right) spend some quality time in
the San Francisco apartment of CouchSurfing.org member David Byttow and his dog, Charlie.

CASE
STUDY

CouchSurfing S goal was to

connect people, not make money.
How would users react to a new,
for-profit business model?
BY ISSIE LAPOWSKY

PHOTOGRAPH BY OODY PICKENS

JUNE2012

INC.

101

STRATEGY

For five years, Casey Fenton and Dan Hoffer had pleaded with the 1RS
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 exchangeclearly, a charitable
activity, in their view. The 1RS 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 Reykjavik, 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 pmcess easy for
others. To Fenton that cause was
more important than making
money so when CouchSurting.
org launched, Fenton and his
co-founder, Hoffer, registered it
in New Hampshire as a nonprofit.
A few years later, thev began
looking into getting 5tl1(cj3
status, whicn woufd 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 1RS.
102 I INC.I JUNE2012

Can a nonprofit
be competitive?
PROBLEM
The 1RS challenged the
applicationand every
one that followed. Meanwhile, a number of similar
for-profif sites had emerged,
most notably Airbnb, which raised $7.2
million in venture capital. CouchSurfing,
by confrasf, 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.
Fenfon and Hoffer researched corporate structures and came across a new
designationthe 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
companyPatagonia and Method are jusf
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 forprofit woul drive members to revolt.

PLAN

mg 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.

STRATEGY

AFTERMATH

A new business model. And a new CEO

THE DECISION

"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 e-mails. 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-maii.
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-bmbshell 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 becanne a Certified B
Corporation, or B Corp." A similar announcement,
with links to the videos, was later sent to the
membership at large.

THE TAKEAWAY

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.

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 tue board of
directors of a company to act in the
interests of all stakeholders, not just
the shareholdersand that includes
the members and community served
by the corporation.

Martin Pichinson | CO-MANAGING MEMBER

Sherwood Partners, Mountain View, California

Allen Bromberger | PARTNER

Perlman & Perlman, New York City

104

INC. JUNE2012

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 Connmunications, London

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