ChaCha

What did it do?

ChaCha was a question-and-answer and search service where users asked questions via the website, a mobile app, a text message to 242-242 or by phone, and the answers were prepared by freelance human guides. The company earned its revenue from advertising.

Why did it shut down?

Founded in Indiana in 2006 by Scott A. Jones and Brad Bostic, the company laid off 25 employees and cut the remaining staff's pay by 10 per cent in March 2009, even as it raised USD 12 million in new investment; a month later Bostic stepped down as chairman. Its UK operation, launched in September 2011, was closed in April 2012 after user interest stayed low. ChaCha peaked in 2012 with 370 million page views a month and USD 20.5 million in annualised revenue, but advertising revenue fell sharply in 2016. Although the company had repaid 80 per cent of a USD 5 million secured loan, it could not cover the remaining debt and failed to find a buyer. On 12 December 2016, after the lender emptied its bank accounts, it ceased operations.

The story

Founded in 2006 in Carmel, Indiana, ChaCha tried to offer an alternative to search engines with a different idea: let people answer the questions. The service built by founders Scott A. Jones and Brad Bostic routed users' questions to freelance guides. At the end of 2006 the company announced that 20,000 guides had signed up. Its early investors included Bezos Expeditions, Jeff Bezos's personal investment firm.

ChaCha's real breakthrough came on the phone. Users texted questions to 242-242 and received the answer by text as well. According to a 2009 ESPN report, the service was receiving around 1 million questions a day. But growth did not turn into profit. In March 2009, having raised USD 12 million in new investment, the company laid off 25 employees and cut the remaining staff's pay by 10 per cent; a month later co-founder Bostic stepped down as chairman. Its UK operation, launched in September 2011, was also closed in April 2012 because user interest stayed low.

According to the Indianapolis Business Journal, ChaCha peaked in 2012, reaching around 370 million page views a month and USD 20.5 million in annualised revenue. The company raised USD 84 million in capital in total, USD 34 million of it out of Jones's own pocket. Over ten years the service answered 2.25 billion questions and paid guides USD 44 million.

A sharp fall in advertising revenue in 2016 left the company unable to pay its debt. Eighty per cent of a USD 5 million secured loan had been repaid, but no buyer emerged, and the lender emptied the company's bank accounts. ChaCha ceased operations on 12 December 2016. Jones said they had sold some assets but not enough to cover their obligations, and that debt and equity holders, himself included, would write off their investments.

Lessons for founders

• When advertising is your only source of revenue, a drop in traffic and ad prices hits your ability to service debt directly; diversify your revenue early.
• In a company kept afloat by secured debt, set early-warning thresholds for falling revenue; by the time the lender acts, your options are gone.
• An answer service built on the work of thousands of freelancers grows its costs as it scales; find a way early to bring the unit cost down through automation.

Sources

1. ChaCha, unable to find financial answers, shuts down operations (Indianapolis Business Journal, 2016-12-12)
2. ChaCha (search engine) (Wikipedia)
3. Q&A Site ChaCha Cancels UK Business After Poor User Take-Up (TechCrunch, 2012-04-27)

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