Erik Allebest: Scaling to $100M Revenue, 150M Members and 700 People, All with No Vc Funding | E1113

Intro (0s)

• Eric Allebest is the co-founder and CEO of chess.com, a successful chess business that generates over $100 million in annual revenue.
• Unlike many Silicon Valley companies, chess.com did not raise any venture capital funding.
• As a result, the company had to adopt different strategies, such as immediate monetization and a remote work culture, to achieve success.
• One key moment for chess.com was when Eric Allebest received positive feedback on his headshot, which was shared on social media.
• This moment helped to increase the company's visibility and attract more users.

Early Entrepreneurial Ventures (1m12s)

• Erik Allebest engaged in various entrepreneurial activities from a young age.
• He sold items like candy bars and bracelets at school, collected and recycled cans, and sold stationary door-to-door.
• Erik believes that exceptional entrepreneurs often display entrepreneurial tendencies early in life.
• He acknowledges that there are successful entrepreneurs who start later in life as well.
• Erik describes himself as generally unemployable.
• He lacks motivation when working on someone else's goals or projects.
• Erik's father shared similar traits, struggling to find fulfillment in his legal career while pursuing various entrepreneurial ventures.
• Erik's father came from a poor immigrant background and had a safety-first mindset, encouraging Erik to pursue a stable career path.
• Despite this, Erik's father had an entrepreneurial spirit and tried different ventures, ultimately falling back on his legal career.

MBA Journey and Embracing Risk (4m44s)

• Erik Allebest, the founder of Vidyard, shares his journey to building a successful company without VC funding.
• Despite feeling lost after graduating with an English degree, Allebest pursued an MBA at Stanford Business School, where he gained personal growth and self-awareness.
• Allebest emphasizes the importance of balancing directness with emotional intelligence in communication and building trust to mitigate the impact of negative feedback.
• As the CEO of a company with hundreds of employees, Allebest discusses the challenges of scaling his business to $100 million in revenue, 150 million members, and 700 employees without venture capital funding.
• He acknowledges the natural tendency for people to be more willing to make investments than returns and embraces his role as a leader, taking proactive steps to maintain relationships and organize activities.

The Origin of Chess.com (9m41s)

• Erik Allebest started his third chess business while in college.
• He initially ran an after-school chess teaching program, then franchised the business, and later started selling chess equipment.
• To reduce customer acquisition costs, he decided to build an online community for chess enthusiasts, leading to the purchase of the chess.com domain.
• Chess.com was acquired out of bankruptcy for $56,000 in 2006.
• At the time, the e-commerce chess equipment business was generating over $2 million in annual revenue.
• Erik considered the acquisition a no-brainer investment due to the significance of the domain name.
• Erik used Microsoft Word to create wireframes and enlisted a college friend to design a logo.
• He built the front end of the website using Macromedia Dreamweaver and collaborated with his technical co-founder to launch the site.
• The initial features included a homepage, login, forums, blogs, and a tournament system.

Reaching the First Million Users (13m52s)

• Chess.com started as a social media platform for chess players before adding the ability to play chess online due to popular demand.
• Building the online chess playing feature was challenging due to the limitations of technology at the time.
• Before the launch of the chess playing feature, Chess.com had less than a million users, but the number was growing rapidly.
• Forums were a significant part of the internet in the mid-2000s, contributing to the popularity of Chess.com's community platform.
• The company achieved product-market fit after launching the learning product, Chess Mentor, which allowed users to access learning materials by subscription.

Achieving Product-Market Fit (15m54s)

• The initial mission of Chess.com was to serve the chess community by creating fun and engaging content.
• The company focused on creating a positive work environment and fostering meaningful partnerships with employees, contractors, and chess grandmasters.
• After the success of the Queen's Gambit series, Chess.com expanded its mission to include growing the game of chess and attracting more people to the game.

Boost from Queen’s Gambit & COVID (17m54s)

• Erik Allebest and his co-founder Jay were making money and had good traffic, but they struggled to raise funds for Chess.com for the first five years.

Fundraising Challenges for Chess.com (18m30s)

• Investors considered the chess market too small and offered low valuations, which Erik declined.
• Erik believes that the chess market was undervalued and that investors were wrong in their assessment.
• Erik argues that even with a $200-300 million revenue business, the potential return on investment could still be significant.
• Erik expresses his lack of interest in money as a primary motivator and explains that he values experiences and security more than wealth.

Money's Impact on Self-Worth (20m49s)

• Self-worth should not solely depend on external factors or the opinions of others.
• It's important to develop a balanced sense of self-worth and self-value.
• Self-care, self-talk, and self-worth are crucial for well-being and enabling individuals to show up better for others.
• Finding inner peace and happiness through various means such as meditation, alone time, achieving goals, or engaging in fulfilling activities can contribute to a strong sense of self-worth.
• The speaker's experience with an ayahuasca retreat helped them become more comfortable with themselves and grounded in their own identity.

Transformation Through Ayahuasca Retreat (23m20s)

• Erik Allebest, the founder of Chess.com, shares his experience of scaling the company to $100M revenue, 150M members, and 700 employees without VC funding.
• Allebest emphasizes the importance of self-awareness and recognizing external factors' influence on one's state of mind.
• He contrasts the Silicon Valley approach of heavy spending on office space, talent, and marketing with his strategy of remote work, cost-effectiveness, and immediate monetization.
• Allebest cautions against over-raising money, as it can lead to validation-seeking behavior and misaligned business decisions.
• He suggests that not having money can be beneficial as it forces creativity and prevents hasty decisions.
• While acknowledging the importance of capital for certain businesses, he believes founders should carefully consider their needs and avoid over-reliance on funding.
• Chess.com invested in content creation, which drives user value and SEO, instead of paid acquisition.
• The team's ability to capture demand on various platforms through valuable content helped signal to search engines the value of their offerings.

Creative Acquisitions Strategy (29m37s)

• Invested in content creation and followed content trends on different platforms like YouTube, Twitch, Shorts, and TikTok.
• Worked with creative and talented people to produce high-quality content.
• Invested in product development, content creation, and organic search optimization rather than paid advertising.
• Collaborated with YouTube influencers and chess creators, providing them with exposure and value in exchange for promotion.
• Used a range of compensation structures for influencers, including affiliate commissions, cash payments, and year-long ambassadorships.
• Provided value to influencers by exposing them to the Chess.com community, helping them grow their own channels and revenue.

Leveraging Affiliates and Ambassadors (32m16s)

• Used a variety of compensation structures for affiliates and ambassadors, including affiliate commissions, cash payments, and year-long ambassadorships.
• Provided value to affiliates and ambassadors by exposing them to the Chess.com community, helping them grow their own channels and revenue.
• Started live streaming on Justin.tv (now Twitch) before it became popular.
• Streamed events and matches on various platforms, including Twitch, Facebook, and Twitter.
• Adapted content strategy to suit different platforms, such as static content on YouTube, live shows on Twitch, and quotes and memes on Facebook.
• Faced challenges with attribution due to platforms like Twitch and Safari removing attribution data.

Hosting the First Live Chess Event (33m39s)

• Chess.com has experienced significant growth, with the most recent wave driven by short-form content on platforms like YouTube Shorts, Instagram Reels, and TikTok.
• The company has separate teams dedicated to each channel, with experts and young people who understand the unique voice and style of each platform.

Social Media Expansion Strategies (34m25s)

• There were a few key moments that led to significant growth in Chess.com's membership:
  • Collaborating with Twitch creators, streamers, and influencers.
  • Identifying and addressing user pain points, such as the frustration of getting puzzle answers wrong, which led to the development of the popular product Puzzle Rush.
• These product and content innovations ignited growth and attracted widespread attention, including a mention in Malcolm Gladwell's writing.

Unexpected Improvements by Keith Rabois (35m49s)

• Early wins are crucial for the success of an activity.
• Winning the first game of chess increases the likelihood of a player continuing by 2-3 times.
• Chess.com avoids moral hazards by using coach bots to ensure players win their first game.
• Retention rates have not been historically prioritized but are becoming increasingly important.
• General Atlantic, an investor in Chess.com, has been patient and understanding of the company's mission-driven approach.

Evolution of Retention Rates (38m13s)

• Chess.com has traditionally been guided by intuition, passion, and mission rather than metrics.
• The company is now adopting a balanced approach that includes both qualitative and quantitative factors.
• Success at Chess.com is determined by fulfillment, effort, mission, and serving the community, rather than solely by metrics.
• Key metrics include daily active users, subscribers, and usage of different features.

Defining Success Beyond Metrics (39m56s)

• Chess.com measures user engagement and habit formation through the retention rate of active users.
• The company focuses on the percentage of paying users (learners) versus free users (players) to understand the value users derive from the product beyond just playing.
• Approximately 60% of active users play daily, with half solving puzzles, half of that number taking lessons, and game review being the most popular feature.
• Chess.com has over 150 million registered members, with around 15 million weekly active users and 10% of those being active subscribers.
• The majority of subscribers pay yearly and opt for the highest-tier product for maximum access.
• The company experienced significant growth in subscribers following the release of The Queen's Gambit series, but retention rates were lower compared to subscribers acquired before the show's release.
• Chess.com's growth was significantly impacted by external factors such as The Queen's Gambit, the cheating scandal, the rise of short-form content, and the influx of younger users.
• Despite not having direct control over these external events, Chess.com capitalized on these opportunities by continuously improving its product, focusing on making it more fun and accessible for beginners and learners.

Capitalizing on Momentum (47m31s)

• Erik Allebest, the founder of Chess.com, achieved remarkable success by bootstrapping the company to $100M revenue, 150M members, and 700 employees without venture capital funding.
• Despite initial rejections from investors, Chess.com's decision to self-fund proved fruitful, leading to a 10% stake sale to an investor on equal terms.
• Later, Isai Scheinberg, the founder of Poker Stars, acquired a 20% stake in Chess.com when the initial investor sought an exit.
• As Scheinberg also needed to exit, Chess.com explored options to buy out his stake, engaging in discussions with private equity and venture capital firms.
• Eventually, Chess.com partnered with General Atlantic (GA) to buy out existing equity without raising primary money.
• Erik Allebest expresses regret over selling the initial 10% stake, which was valued at $2 million, as subsequent investors valued the company significantly higher.
• Allebest values his collaboration with individuals like Tanzeen, Anton, and Jesse at GA and emphasizes a mission-driven approach to business, using chess as an example of stewardship aligned with their mission.
• While traditional institutional investors prioritize maximizing shareholder value, Allebest believes in building a great product that serves the community, recognizing that this approach ultimately creates shareholder value as well.

Transition to Post-Investment Phase (52m37s)

• Remote work allows access to talent from all over the world, expanding the hiring pool and reducing competition for talent.
• Erik Allebest's company has a diverse international team with members from India, Serbia, Argentina, and New York, fostering collaboration and creating a positive work environment.

Remote Work Dynamics (53m48s)

• Erik Allebest, the founder of Chess.com, has grown his company to $100M in revenue, 150M members, and 700 employees without VC funding.
• Chess.com's mission-driven culture fosters collaboration and respect, attracting passionate individuals who prioritize lifestyle and mission over high salaries.
• Remote work success at Chess.com is attributed to a strong mission, hiring people who are consumers of their own product, and filtering out those solely motivated by money.
• Common mistakes founders make in remote work include treating employees as assets rather than teammates and failing to create a meaningful and respectful work environment.
• Erik Allebest emphasizes the importance of having a community that cares about his work and uses national-level compensation planning due to the challenges of a global workforce.

Chess.com's Salary Insights (58m20s)

• Erik Allebest used to personally hire the first 300 to 400 employees at Chess.com.
• He would ask candidates how much they needed to make to do the job and would make an offer if he could meet that amount.
• As Chess.com globalized, the wages of employees in countries like Serbia increased significantly due to the global marketplace.
• Erik tries to adjust salaries accordingly, but some employees leave the company if their wage demands are not met.
• On average, candidates' salary expectations were slightly higher than what Chess.com was initially offering.
• Andy Dunn, who Erik spoke to before the show, described Erik as wonderful in many ways but not a fan of capitalism.
• Erik believes that the value structure of work is disproportionate, with the value flowing to investors and financiers rather than the workers and managers who do the actual work.
• He acknowledges that capitalism creates jobs and wealth for those with money but believes there should be a better balance between where the value flows and where the work is done.

Discussing Capitalism 2.0 (1h0m39s)

• Ownership structures in companies can be complex, especially when splitting ownership across teams, due to legal and regulatory barriers such as tax implications in multiple jurisdictions.
• Vesting schedules can create challenges in ensuring that employees who leave the company early do not benefit disproportionately from their ownership stake.
• Capping returns and sharing excess returns with the rest of the team, as well as setting aside a percentage of gains from exits to reward employees without ownership, can ensure more equitable profit distribution.
• Erik Allebest received a death threat for speaking out against Russia, leading to an FBI investigation and notification of the local police station.

Dealing with an FBI Call Over a Threat (1h6m5s)

• Erik Allebest decided to take a public stance on certain issues, despite the potential risks to his safety.
• He believes that taking a stand is sometimes necessary, but it can be difficult to decide which issues to address.
• Erik acknowledges the hypocrisy of taking a stand on some issues but not others, but he believes that the Russian invasion of Ukraine is a clear-cut case of evil.
• He tries to avoid taking political stances in the workplace, but emphasizes that chess is for everyone, regardless of race, gender, religion, or other affiliations.
• Erik Allebest had his first child at the age of 23.
• He felt scared but ready for parenthood.
• Erik describes himself as a mature and independent person from a young age, taking on responsibilities like laundry and grocery shopping at an early age.

Balancing Parenthood with Entrepreneurship (1h8m39s)

• Erik Allebest, the founder of Allebest, shares his experiences as a father and entrepreneur.
• He emphasizes the importance of meeting each child's individual needs, finding a balance between structure and freedom, and creating a positive home environment to help children cope with negativity.
• Allebest advises against fixating on controlling outcomes, as it can lead to more problems, and highlights the value of showing love and giving children time and space to grow.
• In a marriage, the most important thing is to make your partner feel heard and validated before having productive conversations about policies, decisions, or other matters.

Insights on Maintaining a Great Marriage (1h14m16s)

• Erik Allebest, the founder of Allebest, a highly successful company, emphasizes the significance of listening and validating emotions before problem-solving.
• He stresses the importance of vulnerability and authenticity in fostering strong relationships.
• Erik suggests practicing self-acceptance and reflection to attain genuine happiness.
• He believes parenting can be fulfilling but may require balancing work and family time, prioritizing presence for one's children despite a demanding schedule.
• Erik Allebest finds joy in accomplishment and views money as a potential indicator of success.
• In the past year, he has revised his parenting philosophy, recognizing that guard rails may not be essential for all children.