Michael Arrington

The saying “he who laughs last, laughs best” comes to mind in relation to a recent spat between TechCrunch founder Michael Arrington and Offerpal Media founder Anu Shukla over Arrington’s assertion that social gaming companies, like Zynga, are making hundreds of millions through “unethical” means.

Arrington’s original post on the issue, titled “Scamville: The social gaming ecosystem of hell”, details how social media sites like Facebook and MySpace are complicit in the scams, because “they’re getting such a huge cut of revenue back from these developers in advertising.”

Arrington followed this up by challenging Shukla at last week’s Virtual Goods Summit in San Francisco; claiming that direct-marketing companies like Offerpal act as middle men in facilitating these scams. Warning the following video has strong language:

It appears as though both sides have been busy doing damage control after the incendiary confrontation, with Offerpal posting a blog defending its position and following up by replacing Shukla as CEO with George Garrick, who formerly guided the successful IPO of advertising firm Flycast Communications, which was eventually sold for $2.3 billion. Garrick was quick to tackle the brewing controversy in his first Offerpal blog, titled “An open letter from Offerpal’s new CEO.”

In it Garrick states: “I’ve only got 48 hours under my belt, and have entered this industry in the midst of a recent firestorm of controversy… I am not going to comment on events leading up to this situation, nor on other players in the industry, but I have quickly concluded that regrettably, Offerpal has been guilty of distributing offers of questionable integrity from some of our many advertisers.”

For his part, Arrington has continued to press the attack, blogging about the showdown and Shukla’s subsequent demotion and soliciting reaction from MySpace and Facebook (“Facebook to increase enforcement of anti-scam rules”). He also posted on Zynga founder Mark Pincus who admitted he deliberately ran these direct-marketing scams in order to raise revenues quickly and show investors his small company was profitable right off the bat. Warning, the following video has strong language:

For Arrington the main point, which is somewhat lost in the melodrama, is that these “scammy” practices by Zynga and others make it virtually impossible for other social gaming startups to participate equally in the space, without running the same unethical business model. In the end they just can’t compete monetarily, says Arrington, as companies like Zynga can outspend them on advertising to get their games on Facebook and MySpace.

“It’s time for this to stop,” wrote Arrington, who definitely had the last laugh in this one. “Facebook and MySpace need to create and enforce rules against it so that game developers aren’t tempted to get a competitive edge by scamming users. And if Facebook/MySpace won’t protect users, then the government will have to step in.”

What do you think of this controversy? Who do you support in the debate: Arrington or Shukla? Should the government police this kind of Internet advertising? Post your comments below.

Small and medium-sized businesses are wild with concern that the bankruptcy filing of CIT Group will cut off the financing they use to pay employees and creditors, according to an attorney who has many apparel and retail businesses among his clients.

“My phone has not stopped ringing,” said Jerry Reisman, a partner at law firm Reisman, Peirez and Reisman in Garden City, New York. Reisman said he represents 21 groups that depend on CIT for factoring and other financing. He also represents an additional four parties that have applied to CIT for new business financing.

“People were astonished. They don’t know what to do,” said Riesman, who took more than 10 calls during Sunday’s baseball World Series game and at least 10 more on Monday morning before 10 am EST.

“They have to make payroll this week — they don’t know whether they will be able to meet obligations for payroll or for suppliers.”

One of the biggest concerns is so-called antecedent debt, which refers to checks from CIT that its clients have received in the past 90 days, said Reisman.

“Any money received from CIT in payment of antecedent debt is considered a preference, and, under the bankruptcy code, has to be returned to CIT,” he said. “It could cause my clients to have to file bankruptcy. This could have a staggering domino effect. It’s going to be devastating. It will destroy their own businesses.”

Reisman said his firm is trying to find other sources of financing for his clients. “But now the problem is, some of them don’t qualify because credit markets have tightened,” he said. “They don’t qualify for financing from other lenders.”

Dunkin Donuts franchisees are particularly concerned, said Reisman.

“I also have as clients people who want to purchase Dunkin Donuts franchises, who have applications for financing pending. CIT has been the lender of choice, and we’re not sure if CIT will be able to fund the acquisitions,” he said.

How will CIT’s bankruptcy affect your business? Post your comments below:

Just when it looked like President Obama was making some headway with small business, along comes the CIT bankruptcy train to derail everything.

Last Thursday, on Obama’s urging, the House of Representatives overwhelmingly passed new legislation that authorized more than $40 billion for loans backed by the Small Business Administration. It was the relief U.S. small businesses had been hoping for. But just 72 hours later the good news was tempered when CIT Group Inc. - the SBA’s top lender - filed for bankruptcy protection. Now all that new federal money may be loaded onto a train missing its locomotive.

CIT’s failing could leave as many as a million small and medium-sized businesses looking elsewhere for credit in a marketplace where few banks are lending. According to the National Small Business Association, CIT lent $65 million in SBA-backed loans for the first six months of 2009; just 1 percent of all SBA loans issued. That figure was down dramatically over 2008, when CIT comprised 6 percent of the SBA total.

At a time when loan defaults by SMEs are rising and Equifax is reporting that small business bankruptcies are up 44 percent over last year, the CIT news is akin to a perfect storm for small business.

“It’s great that the stock market is coming back, but if you’re unemployed or you’re running a small business, the turnaround has not happened,” said Drew White, CFO for Sageworks Inc., which monitors the financial data of privately-held companies across 1,600 industries. Sageworks’s latest study found that since 2003 the debt-to-equity ratio decreased in the private sector, which might normally be a good thing, but according to White is likely the result of companies paying down debt and shrinking inventories due to slower sales and tightened credit in the recession. “It looks like there’s sort of a benchmark or a normal way that these businesses operate and they need a fair amount of borrowing capacity to do that and that has been restricted and constrained.”

Unlike Equifax, Sageworks only crunches the numbers for companies currently being audited, so White conceded the numbers are likely worse than their latest report shows. He also doesn’t anticipate a turnaround over the next couple quarters, unless the jobless rate improves and consumer confidence rebounds.

“Even if they (retailers) had a lot of access to credit, I don’t know if they’d be making a lot of big bets and say let’s go stock up with a bunch of inventory, because there’s certainly no evidence people are flocking back to buy things,” said White, who added the efforts by the government to stimulate lending are great, but it’s not a panacea. “In the long run the fundamentals of the economy have to come back: people have to be employed, people have to feel better and people have to start investing and buying. We don’t see much evidence of that.”

The good news - if there is any - is that the impact of a CIT bankruptcy on SBA loans may have less of an effect now than it would have prior to the downturn. According to SBA data, CIT’s loan volume has decreased dramatically since 2007, falling from 1,589 loans to just 142 loans for 2009. In dollar terms, that’s a drop of $873 million to just $105 million. CIT’s decreased lending over the current recession has been mostly offset by the 15 percent increase in SBA loan volumes since Obama’s Recovery Act committed more funds to boost SBA lending programs.

How will CIT’s bankruptcy affect your business? Send us your comments below:

(Note: The Recovery Act did not directly assign $15.5 billion in funds to the SBA, but $730 million that has so far supported $13.4 billion in SBA-backed loans to small businesses, according to the SBA.)

After having watched Wall Street get a near $1 trillion bailout, America’s reeling small businesses will get their own relief package from Uncle Sam, in the form of the “Small Business Financing and Investment Act” that was passed by the House of Representatives last night by a 389-to-32 majority vote.

The new legislation, which increases the Small Business Administration’s lending budget by $44 billion, was announced on a day when President Obama met with small business owners to discuss his proposals to improve their access to credit in order to boost job creation. The bill will still have to be approved by the Senate and there is no timetable for when the money will get into the hands of small business owners.

“This bill is about choices. It’s about better options for the small businesses that didn’t get a bailout,” said Nydia M. Velázquez, the chairman of the House Small Business Committee in a prepared statement. “Small businesses with tight profit margins don’t have the luxury of simply ‘tightening the belt.’ When money is short, they’re often forced to lay off workers. But with unemployment at 9.8 percent, we just can’t afford more losses. That’s why this bill delivers critical capital to new ventures.”

The latest small business stimulus follows on the heels of the $730 million Obama included in the Recovery Act passed in February, which has so far supported $13.4 billion in SBA-backed loans to small businesses, according to the SBA.

Under the new legislation SBA loan maximums for both 7(a) and 504 loans have been increased to $3 million (up from $2 million) and to $25 million (up from $1.5 million) respectively. The 7(a) loan program covers most startups and existing small business, while the larger 504 program is geared to larger, manufacturing- or construction-type companies that need to purchase real estate, machinery or to build brick-and-mortar facilities for expansion or modernization purposes.

The Recovery Act raised SBA-backed loan guarantees from 75 percent to 90 percent, and to 100-percent in the case of emergency microloans of up to $50,000. However less than 30 percent of the roughly 8,000 U.S. banks offer SBA-backed loans. The new bill should help to address this concern by ultimately allowing the SBA to step in as the “lender of last resort” should small firms still be unable to receive credit from banks.

The bill’s passage comes as a new PayNet report showed a rise in defaults by small and medium-sized U.S. businesses in September. PayNet’s Small Business Lending Index, which measures the overall volume of financing, fell 22 percent year-over-year in September, which is a troubling sign.

“It’s hard to imagine a robust recovery when you see numbers like this,” PayNet president and founder Bill Phelan told Reuters.

According to the latest figures by the SBA’s Office of Advocacy, there were nearly 28 million small businesses in the U.S. in 2006. That number is a little deceiving, as just 6 million of those businesses had more than one employee. Ninety percent of those 6 million small firms, or “employer firms” as the SBA refers to them, have less than 20 people on payroll. Generally, the SBA defines a small business as a company that employs less than 500 people. Of the roughly 3.5 million new jobs created over the course of 2005-2006, more than 70 percent (2.5 million) were generated by small businesses.

Since the recession officially took hold in December 2007, the number of unemployed Americans has doubled from 7.6 million to 15.1 million as of September 2009, according to the U.S. Bureau of Labor Statistics.

“The Small Business Financing and Investment Act will spur job creation and innovation, and help save or create 1.3 million jobs each year,” House Speaker Nancy Pelosi said in a statement. “As we emerge from this recession, our recovery will depend on small business owners and entrepreneurs.”

Erica Shea (L) and Stephen Valand. REUTERS/Julie Gordon

As the jobless rate climbed toward 10 percent this summer, Erica Shea and Stephen Valand, quit their advertising jobs, took $10,000 in personal savings and started selling their 1-gallon home brew beer kits from a stand at the Brooklyn Flea Market, testing the theory that beer is recession proof.

“When you go from an actual salary down to $0 an hour, it’s quite an adjustment,” admitted Shea, who got the bug for beer making after she stumbled across her dad’s old home brewing kit. But when Shea and Valand went to brew their first batch they discovered there was no place in New York to buy the ingredients, so they created the Brooklyn Brew Shop. The kits take up only a foot of floor space and come with everything needed to brew your own beer.

Shea said they opened their stand, which they rent for $100 a day, on the July 4th weekend, but sold just five kits. By the end of the month they had moved 40 kits, which go for $40, or $30 without grain. The kits, which make about 12 bottles through a four-week process, include a 1-gallon glass jug, some tubing, a racking cane, a thermometer, sanitizer and the yeast, hops and grain. (read the full story here)

THE PITCH

The U.S. craft brewing industry has weathered the recession better than most, with sales up nearly 9 percent in the first half of this year, according to the Brewers Association (BA). The BA, which has more than 1,500 members, also reported that overall U.S. beer sales were down 1.3 percent in the first six months of 2009.

Shea and Valand believe the trend of brewing your own specialty beers will continue to grow and that it will entice a younger, more urban demographic that enjoys the ability to experiment with different flavors.

“I just think that because there are really good craft beers now, there is really a drive for people to explore that and make their own really good beers,” said Shea, who has used ingredients as bizarre as lobster and jalapeno. “Our challenges as we continue to grow the business are time and space. There’s only so many hours in a day that you can be doing things and there are so many ideas that come up that we really want to pursue, but ultimately there are two of us and we get tired.”

TAKING IT TO THE EXPERTS

Sam Calagione, who founded Dogfish Head Craft Brewery in 1995 with his own home brewing equipment, understands the struggles Shea and Valand are going through to grow their business and felt they have the passion and commitment to make it work. Calagione said the craft beer and homebrewing movements are “thriving” and are being driven by the greater “‘localvore’ movement as people are treating themselves to gourmet coffee, bread, beer, etc. when they might not be able to afford a new house or car or large purchase.”

Calagione suggested Shea and Valand bang the drum more about Brooklyn Brew Shop by getting more involved with online communities around homebrewing, such as the ones at Ratebeer.com and the Beeradvocate.com. He said they might also try connecting with “crafty” types on websites like Etsy.com. To further promote their product, Calagione advised renting booths at places where serious beer drinkers hang out, such as farmers markets, craft fairs and beer festivals.

Calagione said they should also offer 5-gallon jugs “as the space it would take to make 5-gallon batches isn’t five times as big as the 1-gallon batch and the brewers could yield over two cases of great beer instead of 12 bottles.”

Amy Mittelman, the author of “Brewing Battles: A History of American Beer”, felt Shea was a good spokesperson who “highlights the growing role of women in the brewing industry.” Mittelman said that women traditionally did the brewing at home in their kitchens and she felt this is a point Shea could stress as a way of marketing the product to women.

Mittelman, who also writes the blog “Brewing Battles”,  said the high price of beer in New York should help encourage customers to try their product, but said the main “appeal of home brewing is getting exactly the taste you want” and that Shea and Valand should emphasize the creative aspects of their business to new customers.

In terms of scaling the business, Mittelman cautioned about jumping into retail stores and urged the founders to grow more organically online and at festivals and fairs. Mittelman suggested Shea and Valand try selling their kits on Amazon.com first, as they would “need a broader brand identity before they can approach places like Target and Wal-Mart.”

Beth Goldstein, the president of Marketing Edge Consulting Group and author of “The Ultimate Small Business Marketing Toolkit”, said they should lower the price of the kits to possibly under $30 and not include the grain, as a way of increasing their profit margin.

“I couldn’t help but wonder if this is similar to the razor-blade model, where you sell the razor cheap - as a loss leader - because you make a significantly larger profit on the blades?” said Goldstein, who also suggested they convince their customers to buy annual memberships, where they could get various grains delivered to their house on a monthly basis, similar to Beer of the Month Clubs. “This would produce a steady, reliable revenue stream. They might even have ‘Home Brewing Parties’ and show people how to conduct these (getting their customers to basically sell for them). Mary Kay, Tupperware and many jewelry companies have perfected this model.”

Goldstein said before they try marketing their kits to retail stores, Shea and Valand should seriously improve their website, as “it doesn’t look very professional.” Goldstein said she doubted major retailers would take them seriously enough to host their kits based on their current site, which is cluttered with too many messages that make it appear amateurish. “I certainly wouldn’t feel confident buying from their site, which is unfortunate since they’ve got an intriguing story and I see lots of opportunity for growth for them.”

Do you agree with our experts? What do you think of entrepreneurs Erica Shea and Stephen Valand and their business? Would you buy one of their kits and brew your own beer at home? Leave your comments below:

With the Web 2.0 conference about to kick off in San Francisco, Internet start-ups are unveiling new products and tossing out crumbs of data about their businesses intended to illustrate how fast they're growing.

Social-networking firm Ning led the charge on Tuesday with the news that it has grown 300 percent year-over-year to 36 million registered users and that it is jumping on the virtual goods bandwagon.

The company said it will begin selling virtual goods across the 1.6 million specialized social networks that exist on Ning for $1.50 per gift. The company said it will split 50 percent of the revenue with the Ning network creators who offer the goods on their respective networks.

Virtual goods are increasingly catching on as an attractive revenue stream for Internet companies.

Zynga, the hot videogame maker for social media services like Facebook, said it raised $427,000 from three weeks worth of virtual goods sales on its FarmVille game, according to the Silicon Alley Insider.

Still unknown is Zynga's annual revenue, which has been estimated to be between $100 million and $200 million in some media reports, but as SAI notes:

By telling us that some of its 59 million monthly FarmVille users spent $427,000 on just one product of the many available in just three weeks (annualized, the number is $7.4 million), Zynga is sending a very clear message: Yo! People really are spending lots of money in our games.

Demand Media, the company co-founded by former MySpace Chairman Richard Rosenblatt, also had some growth metrics to share.

The company, which comScore now ranks as the 15th most popular U.S. online property in terms of unique visitors, said its library of originally produced content is set to surpass one million unique items (from how-to articles to videos) this week and that it now has streamed over 1 billion videos on YouTube.

Demand Media also said that freelancers who produce content on its sites can now get affordable healthcare. Demand isn't actually paying for anyone's healthcare, but it says that by pooling together the freelancers on its payroll it was able to negotiate healthcare packages at rates that cost about half of what it would cost someone to purchase health insurance individually.

As if CIT didn't have enough problems digging itself out of a credit morass, now it has Carl Icahn to contend with. Troubled by what he sees as sweetheart deals between CIT and its largest creditors, at the expense of the little-guy bondholder, Icahn has offered to underwrite the $6 billion the small-business lender says it needs to survive. Icahn's offer sent CIT shares soaring by double digits ... to well above a dollar.

In a letter to CIT's board, Icahn said certain large bondholders are being offered an opportunity to purchase secured loans at prices well below their fair market value.

In the end, Icahn underwriting offer may serve more as a publicity stunt than a White Knight vanguard attempt to save CIT, which is busy searching for a new CEO -- presumably, a restructuring artist.

A week ago CIT CEO Jeffrey Peek told the company he would retire, thumbing his nose at a fresh one-year contract renewal and firming up market expectations that the company would soon seek bankruptcy protection. It's hard to accept that the 11 percent stock move this morning represents a serious shift in that expectation.

Mark Solon, the managing partner and co-founder of Boise, Idaho-based Highway 12 Ventures, wrote a blog post - “Don’t Let the Bastards Grind You Down” - offering some entrepreneurial advice he gleaned from one of U2’s more underrated tunes. Now we highly doubt Bono had entrepreneurs or venture capitalists in mind when he penned the lyrics to “Acrobat,” but let’s roll with it.

Solon thought of the song after he recently rejected a funding request by a young entrepreneur, who he said “took it fairly hard” and Solon spent the next 20 minutes attempting to explain himself. When he sensed it wasn’t helping to soften the rejection, Solon piped up “Who the hell do you think I am to tell you that your business won’t be successful?” Solon then recounted his own ordeal in moving from Boston to Boise to start his VC firm and the ensuing 18-month span where he was rejected over and over, before launching Highway 12.

Nearly a decade later, Solon said he still remembers “almost everyone who said ‘no’ to me and proving them wrong still motivates me to this very day.”

For entrepreneurs rejection is part of the deal and Solon’s point is that just because you get turned down, does not mean your idea is bad, because as he added: “anyone who regularly invests in startups has said no to many entrepreneurs who went on to build wildly successful businesses.”

Solon’s more self-reflective treatment here is in stark contrast to a generally negative perception of the VC community that has recently sparked some excellent debate. Bijan Sabet, general partner at Spark Capital, has written a great blog on the prevailing anti-VC sentiment that tackles the issue from all sides. It sources Union Square Venture partner Fred Wilson’s post “The ‘we need to own’ baloney”, in which a reader posted a comment that Wilson couldn’t be a real VC, “since you don’t seem greedy, a jerk, don’t appear to know it all and actually seem human and actually appear to show some empathy - all of which are anathema and not typical VC decorum.”

It appears VCs are undergoing an internal reality check in regard to their standard operating procedures and the message from card-carrying members like Solon, Sabet and Wilson is borrowed from U2: don’t let the bastards grind you down.

-- Lance Knobel is a guest columnist. The views expressed are his own. He is an independent strategy advisor and writer based in the United States. His professional site is www.lknobel.com --

The promise was certainly seductive: Lock up your money with me for five years and I'll give you double-digit annual returns.

For years, that was an accurate equation for venture capital. From 1981 to 1998, there were ups and downs, but the 10-year return generally hovered around 20 percent, well above most other asset classes. That return came at a price of course. It was illiquid and there was no secondary market. And there was a further catch. Most potential investors were excluded: Venture funds were relatively modest in size, there weren't very many of them and they were picky about whose money they'd take.

The dotcom boom changed all of that. Venture capitalists became business magazine stars, new funds sprouted up all over, and established firms with a decent track record were suddenly able to raise nine- and ten-figure funds. The 20 percent mark began to look pallid. In 1999, the U.S. venture industry was boasting five-year returns of nearly 50 percent, as a flood of IPOs provided swift and lucrative exits. The end-to-end return, net of fees, expenses and carried interest, for the year ended March, 2000, was 310 percent.

Alas, that was then. New York VC Fred Wilson, principal of Union Square Ventures, reckons average returns over the last 10 years are in the range of 6 to 8 percent. Aggregate industry figures are still flattered by the anni mirabili of the dotcom era, and the staggering venture bonanza of the Google IPO for a handful of elite firms. But when 1999 drops out of the 10-year calculation, average returns will slump to the low single figures or negative.

The returns have shrunk, yet the industry hasn't contracted all that much. According to Thomson Reuters data, in 2008 there were 882 existing venture capital firms with $197.3 billion under management. That represents an increase from the go-go year of 1998, when there were 624 firms with $92 billion under management.

Venture investments have been ticking along at a fairly constant rate as well. There were two astoundingly anomalous years -- 1999 and 2000 -- when U.S. venture investment was $52 billion and $102 billion. After the dotcom crash, that slumped to $19 billion in 2003. Last year's $28 billion was down from 2007's $30 billion, but before 1999 the biggest year in the industry's history, 1998, had seen just over $20 billion invested.

Returns have slumped and lucrative exits are vanishingly rare. Only six venture-backed companies went public in the U.S. last year. Earlier this year, the National Venture Capital Association launched a plan to increase the number of sub-$50 million IPOs.

Given all this, why do investors continue to back venture funds? After all, $28 billion went into VC funds last year. I asked Wilson, who is one of the more publicly skeptical VCs. "If you get into a good fund, you can still get 30 to 40 percent," he said. "That's what keeps the LPs interested."

Everyone believes they are investing in the children of Lake Wobegon, who are all above average. But institutional investors won't play the fool for long and the response from potential LPs is bound to get stonier for all but the most accomplished funds. So what, if anything, will save venture capital?

There will need to be fewer, smaller funds, making smaller bets with their investors' money. Fewer exits won't be such a problem, because fewer exits will be needed. It will be something that looks, in fact, a lot like the VC world pre-dotcom. That will be a wholly good thing, for venture capital, for investors and for entrepreneurs.

A smaller industry will have fewer hangers' on who invest with the latest trend, and there will be less dumb money buoying poorly formed, unrealistic dreams.

(Edited by David Evans)

Lee Lin had a full-time job, three rental properties and a problem: he had no time to find tenants to live in them. He tried advertising on free-listing websites like Craigslist, but found it too time consuming, so he created an alternative.

Lin and co-founder Lawrence Zhou, both former programmers, spent nine months and $20,000 in personal savings to build RentHop.com. The website showcases available apartments in New York, predominantly ones that don’t charge renters expensive broker fees.

“Landlords and property managers are very desperate now,” said Lin, who added that when the rental market tanked it forced landlords to absorb broker fees as a way to try to entice renters. These “no-fee” apartment listings have become extremely popular with New Yorkers. “The bottom line is the recession is driving landlords and brokers to work harder to find tenants and that makes room for a new site and a newer business model, such as RentHop to come along.” (Read full article here)

THE PITCH

The site is now averaging about 25,000 visitors a month, which Lin said puts it on par with the websites of established New York-based brick-and-mortar brokerages like Anchor Associates (www.anchornyc.com), Ardor (www.ardorny.com) and Bond New York (www.bondnewyork.com).

“I don’t want to suddenly start expanding to other cities without first locking down New York,” admitted Lin, whose primary goal is to establish RentHop as a “dominant player” in the New York rental market over the next 12-18 months. That means becoming an “indispensable tool for the property managers and brokers to use.”

Lin and Zhou are currently looking for angel investment of between $200,000-500,000 so they can hire a few people to help with sales and marketing and start scaling the business.

“What’s really going to make us stand out and prove to everyone that we have a lot of traction is when everyone thinks of RentHop as the place they go when they need to rent, find an apartment or lease out an apartment.”

TAKING IT TO THE EXPERTS

David Rose, the founder and chairman of New York Angels investment group, said the New York rental market that RentHop wants to crack is highly competitive with a lot of entrenched players and is worried that the founders’ lack of real-estate experience will make the challenge even more difficult.

“This is not a technology play, this is a real-estate play,” cautioned Rose, who has an MBA in real-estate finance from Columbia University and actually developed his own real-estate sales software more than 25 years ago. “They are not the first out of the 8 million people in New York City to think about a website for listed apartments, so the question that then comes up is: why hasn’t this worked before?”

Rose liked that Lin and Zhou developed a Web-based solution for renters and didn’t want to throw a “wet blanket” on RentHop’s aspirations as there are many positives with “fresh, young tech eyes coming into an existing market.” But he advised the co-founders to take a hard look at the business before getting in any deeper. Rose said fundamentally the founders should ask themselves: “has there been a significant enough sea change so that you can survive on a site with just listings from the major firms?”

Rose’s firm invests in startup tech companies looking for anywhere from $250,000-$750,000, but he said RentHop’s business model has “zero” barriers to entry and any angel would want to do some serious due diligence before investing. “This would be the kind of company that would be interesting enough for us to bring in for screening,” admitted Rose, who receives a handful of real-estate related pitches every year. “Do I think there’s a chance at this? Yes. Do I think it’s a slam dunk? No.”

Alicia Schwartz, a former broker and founder of rental resource website HowToRentInNYC.com, said the New York market has become inundated with listings websites since she started her business three years ago and that the key for RentHop is to advertise higher-quality apartments.

“When brokers list apartments they lie,” said Schwartz, confirming Lin’s assessment of the duplicitous nature of many Craigslist postings. “A lot of times they list an apartment which they know is going to go within an hour because it’s unusually priced and then when they get somebody to call they say well we did have this, but let me show you A, B, C, D, F and it just ends up being a bait-and-switch. If (Lin) is dealing directly with brokers that he feels are honest and are giving genuine leads of exclusive properties, that would separate him from the pack.”

Schwartz said RentHop’s model of charging both landlords and brokers is also unique, but wasn’t sure it would be sustainable when the economy improves. “Right now it’s a renter’s market because of the economy crashing, but New York City is always competitive and in 6-to-8 months landlords aren’t going to need to fight for people or give up fees. I don’t know how he will survive when it becomes a landlord’s market again.”

Ironically Schwartz said RentHop would likely have more success in any market other than New York, where vacancy rates on average are nearly twice as high. “If he’s tackling this market now and he’s having some success with it, I can definitely see it being duplicate in other cities,” said Schwartz, who originally hails from Washington, DC where she said there is virtually no service connecting quality landlords with quality applicants. “In New York the rental market is really transparent how to connect everybody, so in other places where it’s not as transparent you would need a service like this more.”

Peter Iannone, a managing director at national accounting firm CBIZ MHM who acts as an outsourced CFO for startups looking for funding, was very impressed with Lin’s pitch video and his ability to communicate the problem RentHop is trying to solve by appealing to people as a better alternative to Craigslist.

“Ultimately if somebody doesn’t get it, they don’t want to invest in it,” said Iannone, who added that a lot of the entrepreneurs he helps are unable to succinctly convey to potential investors what their product or technology does. “This is something that you can easily paint the picture and someone can look at it and say, ‘I understand, this is not that complicated.’”

Iannone said he immediately connected with Lin on how frustrating Craigslist can be to quickly find what you need and felt it gave a clearer idea of RentHop’s value proposition to renters and landlords. “I look at Craigslist as the equivalent of scraps of paper stuffed in my pocket: my chances of pulling out the right piece of paper and getting the information I need out of all those scraps are minimal,” said Iannone, who added that RentHop should try to broaden its appeal beyond those who are disappointed with Craigslist.

“To just say we’re better than Craigslist is great if Craigslist is the only competition,” said Iannone, “but if NewYorkRenter.com (hypothetical) says we’re better than Craigslist and we’re better than RentHop too, then they’ve missed seeing the competition and therefore have set themselves up to be trumped by it if the other guy has better intelligence.”

Do you agree with our experts? What do you think of RentHop’s business model and co-founder Lee Lin’s goal to make the company a dominant player in the New York rental market? Will they make it? Post your comments below: