Houzz

Houzz's unconventional route to the big leagues

May 31, 2013: 5:00 AM ET

Hot interior design startup didn't have the usual beginnings.

By Colleen Leahey, reporter

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FORTUNE -- Adi Tatarko planned big things for her Silicon Valley ranch-style house. But making them a reality proved an expensive -- and miserable -- experience. Tatarko's friends described similar frustrations while renovating their homes, so she and her husband Alon Cohen began developing what would eventually become startup Houzz. Cohen understood the mutual need between buyers and sellers on eBay.com, where he was a senior director of engineering, and wondered why the $300 billion home improvement industry lacked a similar platform.

He took a note from Hollywood while dreaming up the design: "In a movie about the future, what would a product that solved this problem look like?" If Angie's List and Pinterest had an Architectural Digest-obsessed child, Houzz would be it. Professionals upload high-resolution shots of their designs, tag the images with detailed descriptions, and "Houzzers" can ask questions about the picture: What brand and color paint is that? What material is that countertop? Who manufactures that sink faucet? Ideabooks allow users to save images in an inspiration-board manner, and there's also editorial content, with a weekly newsletter and blog.

Word-of-Internet took off, and Houzz's initial users began sending the site to friends. With no marketing strategy -- or budget -- Tatarko knew they had hit a sweet spot when a parent of her son's friend called. "My sister in Oregon just told me she found this great site, you have to check it out!" It was Houzz. Tatarko left her job as an executive at a boutique investment firm to work on the startup full time.

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A year after launch, the couple met venture capitalist Oren Zeev. Petrified that an investor would come and "ruin everything," Tatarko cautiously listened to his pitch. His laissez-faire attitude ("You don't want to monetize, don't monetize. Do whatever you want to do. It's your thing.") eased her mind; Houzz raised $2 million that fall.

As the company's user base expanded, he joined full-time in October 2010 and hired top-notch engineers from Google (GOOG), PayPal (EBAY), and Yahoo (YHOO). They focused on simplifying the user experience, improving the website, and developing an iPad app (the Apple product launched earlier that year). Cohen's interest in scalable platforms, where the core code remains unchanged no matter the device, roots itself in watching eBay's API, which he helped build in 2001, grow so rapidly; he built Houzz in a similar manner, allowing a more seamless transition from desktop to mobile device. Professionals began getting business from homeowners outside of their local communities: One Houzzer paid for a five-person landscape firm based in Newport Beach, Ca., to work on his home in Dubai.

Tatarko remained hesitant about new investors; did she really want to invite more strangers into her digital home? Zeev pushed, and "we just said fine, let's pick the five best firms out there. No presentations, I'm not doing the Sand Hill Road thing." Zeev sent out five emails; Mike Morritz and Alfred Lin from Sequoia answered first. Tatarko grilled them on their interest in and commitment to Houzz, as well as their ability to lean back and let her run the company based on their vision. As the former COO/CFO of Zappos, Lin knew a thing or two about building a healthy company culture. "It was a done deal. We had to cancel the other meetings," Tatarko says.

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In January, Houzz closed a $35 million round, which included Yammer founder David Sacks and Kleiner Perkins Caufield Byers's Mary Meeker, bringing its total funding to $48.6 million. In the past year, unique users increased by 4 million to 14 million, the number of professionals is up 49,000 to 200,000 and the Houzz Apple app has been downloaded 8 million times. It also launched a Pro+ platform for professionals, whose subscriber base has grown 350% since January. The subscription service allows professionals to geotarget Houzzers to market to in specific areas; it's a pay-per-city model. (Houzz also generates revenue through advertising.)

Lin was attracted to Houzz's disruption of an old industry, with little information about best service and pricing. "The community brings transparency to home improvement." Meeker discovered the site more organically: "I've got a house. I like decorating. Someone sent me a link to the site, and I was a fan," she says. As she learned more about Houzz's founders, she was hooked. "Betting on a husband/wife team can be tricky." Referring to Tatarko and Cohen's complementary skills -- her financial acumen and his engineering background -- Meeker says, "This team seems very different, very special."

The founders are obsessive Houzz users not because it's their product, but because they are still remodeling their home. "Working together is way easier than remodeling together," Cohen laughs. Their team finished a survey of 100,000 Houzz users in March, and they're using the data to improve the recommendation engine with an algorithm that understands style, not just preference. "Everything we do, is to give back to our community."

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