ON CHRISTMAS DAY Amazon.com said its customers purchased more Kindles than physical books for the first time ever. Last week, more than half a dozen companies, including Samsung Electronics, unveiled new e-readers at the Consumer Electronics Show in Las Vegas. Next up: Apple is expected to release a tablet-style computer, which can be used for reading, at the end of the month.

As the e-reader reshapes the publishing industry, how are affected businesses recalibrating? At Chegg.com, a Santa Clara, Calif.-based online textbook-rental company, it’s a work in progress. Though the three-year old company has yet to turn a profit, co-founder Aayush Phumbhra says he is banking on the fact that about three-quarters of his clients still “like the feel of actual books.” For the short run at least, that means sticking to the company line of marketing Chegg.com as a business that will save its customers money.

To keep operations going, Phumbhra recently secured $112 million in debt and equity financing from venture capital investors. While Phumbhra declines to discuss his sales figures, published reports say that Chegg.com generated $10 million in revenue in January of 2009 -- the same amount that it rang in for all of 2008.

SmartMoney asked Phumbhra about the ups and downs of his online textbook rental firm. Here are his condensed answers.

Where did the idea for renting textbooks to college students via Chegg.com come from?

When we started this business, I was in school at Iowa State University struggling with textbook prices. There, I got involved in the web site CheggPost.com. It was like a Craigslist.org for college students. At the site, they bought and sold books to each other. Many of them found that they could save money, rather than buying from the campus bookstore. But still, books weren’t affordable. Then Netflix, a web-based DVD rental firm, changed the way we viewed the whole textbook industry. For the first time, we considered online textbook rentals. Today, students from 6,400 campuses now rent from Chegg.com’s catalogue, which has 2.4 million textbooks, for roughly half the price.

Textbooks are constantly receiving updates and the newest versions are often in demand at schools. How does Chegg.com deal with textbook churn?

We’re basically able to rent various versions of textbooks simultaneously. So even though one campus might be using a newer version, another campus may use one that’s older. Books that we can’t rent anymore get donated.  

In the past few years, the textbook industry has become increasingly competitive. In addition to Chegg.com, Textbooks.com, BookRenter.com, CampusBookRentals.com and Flat World aim to steer students their way. How does Chegg.com stand out?

Since we offer rentals, students don’t have to go through the hassle of selling their books back. They also receive a 30-day satisfaction guarantee and any time a book is either rented or sold, we’ll plant a tree. By the end of this semester, we’re projecting to have planted nearly 2 million trees. Plus, we’ve saved students more than $85 million off the list price for new books.

You’re something of a serial entrepreneur. What kinds of companies did you launch before Chegg.com?

I founded two consumer-products distribution companies in India. I started one of the first companies that marketed peanut butter nationally. The other firm consisted of supplying Indian retailers with imported products from the U.S., Brussels and Asia.

Although, launching these firms was a vital experience and fairly natural since I came from a family of entrepreneurs, the Indian economy 10years ago wasn’t as developed as it is today. Once I realized that I was too early, I pursued my master’s in business administration from Iowa State University.

A number of companies have recently unveiled electronic-book readers. Does a possible future filled with digital textbooks worry Chegg.com?  

It’s true that publishers are making in-roads in digitizing consumer titles and even some textbook publishers are starting to offer electronic textbooks. However, the textbook industry has traditionally been slow moving. And even though there is a lot of hype around e-books and e-book readers, the e-book market is still immature, and, for now, e-textbooks are not in demand. In fact, according to our research, roughly 75% of students prefer actual books to e-books. Of course, if that changes in the future, we’ll have to re-evaluate things.

Beyond e-book makers, Chegg.com faces competition from other textbook rental companies. On Monday, Barnes & Noble announced that students from 25 campuses that have Barnes & Noble bookstores can now rent textbooks online. Won’t this have a big effect on Chegg.com? What’s your plan?

It’s great to see the category that we created adding players like Barnes & Noble because it’s helping build awareness for textbook rentals.  The more choices available to students, the more savings they get and our goal has always been to save students money.

What does the near future hold for Chegg.com?

We’re already working with all of the major publishers. However, recently we just landed a revenue-sharing partnership with McGraw-Hill. In the future, we’ll attempt to raise the awareness of Chegg.com and the rental book market, as well as grow our affiliate network and establish more partnerships.

What is your best advice for would-be entrepreneurs?

Stay focused and be persistent.

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