How GroupMe thrived in year one of the messaging wars

GroupMe founders Jared Hecht and Steve Martocci

GroupMe has one of those great founding stories, born out of a hackathon competition it didn’t even win. But the New York City start-up more than compensated for the loss, launching one of the top group messaging apps on four mobile platforms, lining up a who’s who list of investors and becoming one of the most recognizable names in a market that is getting more more crowded with heavyweights entrants such as Facebook, Google (s goog) and Apple (s aapl).

As the company prepares to celebrate the one-year anniversary of its launch, I sat down and talked with founders Steve Martocci and Jared Hecht about how it found success and managed the hype around the company. And we talked about how GroupMe can keep going in the face of rising competition. I’ve been personally curious about GroupMe because these were the first founders I talked to when I moved to New York last fall and I think they’re also indicative of the rising New York start-up scene, which is giving birth to a lot of great companies.

Starting a business out of a hackathon

Just to rewind, Martocci was coding at Gilt Groupe last year when he was approached by his friend Hecht, who was doing business development at Tumblr. Hecht had an idea to build a text-messaging based communications app and they decided to see if they could get it off the ground at the TechCrunch Disrupt NYHackathon. Though they didn’t win, they blew away attendees and gathered critical support from some key investors. The two left their jobs and with $850,000 in seed money from Betaworks, SV Angel, First Round Capital, Lerer Ventures, they launched GroupMe a year ago.

Martocci and Hecht said a lot has come down to the company’s focus on its product and their ability to learn how to trust. Timing and chemistry were also fortuitous for GroupMe. The team has pushed hard at fulfilling the vision of the app and getting it to solve key problems for people. The early work on the app was how Martocci and Hecht were able to get their first investors and employees to sign on. And it drove them to keep iterating, squeezing in two updates in for GroupMe right before South By Southwest. The work paid off with GroupMe winning the Twitter stream race at SXSW with more mentions than rivals Fast Society, Kik and Beluga.

“We’re never happy with the product,” said Hecht. “We ask ourselves, ‘What does tomorrow bring and how can we change the way the world communicates?'”

The heavyweights move in

That’s the overall goal for GroupMe, to be a real world network for people, helping them organize their intimate connections. But it’s getting tested now more and more by tech heavyweights. Facebook bought Beluga and is now competing with its own Facebook Messenger app. Google has its Google+ Huddle app while Apple is preparing iMessage for iOS 5.

Martocci said GroupMe has always expected more competition and feels its work is vindicated by the added company. But he said he believes GroupMe can thrive by remaining independent, which allows it to strike partnerships with any number of companies. But he said it will come down to executing, something GroupMe is focused on.

Its latest update to 3.0 earlier this month introduced a Q&A feature, direct messages, better website features and international support. The service hit 100 million messages per month in June and is now daily breaking its own internal records thanks in part to the international expansion. GroupMe hit #1 in Spain for social networking iOS apps and has hit the top ten for social networking in ten countries since 3.0.

Learning to trust

The biggest challenge for GroupMe’s founders has been the idea of trust and delegation. Both Hecht and Martocci are used to taking things on themselves, but they’ve had to learn how to trust each other and their co-workers to fulfill the larger plan, believing that it will all come together.

“It’s about delegation and learning how to trust each other,” said Martocci. “Not having a co-founder on a previous project, it was a big move. That that trickles down to getting the right team and trusting the results will come back.”

GroupMe has grown to 20 employees and except for the last one, all came through referrals and friends. The company has raised about $11.5 million including a big $10.6 million round from Khosla Ventures, General Catalyst, First Round Capital, at the beginning of this year.

Co-founder chemistry

GroupMe's new offices in the Flatiron neighborhood

Another key component seems to be the chemistry between Hecht and Martocci. While they slide into seemingly familiar roles of business and tech leaders respectively, they find their jobs converging at times. Their unique traits also help balance out the duo, with Hecht’s more analytical and tactical nature working alongside Martocci’s more passionate and more thorough approach.

For example, Hecht helps set the pace for GroupMe but Martocci’s obsessiveness about “failure cases” has ensured that GroupMe has enough monitoring safeguards to prevent any crises. Martocci’s passion can be called upon to fire up investors but don’t count on him to sew up a deal because of his penchant for freaking out. “I can’t close the deal,” he said. “When you get to closing terms, you don’t want me in the room.” It’s a good example of how complementary co-founders can help propel a start-up if their talents mesh well together.

Even with the hard work, a lot of GroupMe’s success comes down to timing. Hecht said the people have been looking at messaging for a long time but only recently has the need really crystalized due to social networking overload. The economics have also become affordable for messaging apps and the hardware is now out there with the proliferation of smartphones. It seems like Hecht and Martocci were also personally at the right time in their lives to delve into the start-up pool after pursuing previous ventures. And I would argue that the New York scene’s maturity also helped in securing funding and talent, something that may not have happened so quickly in the past.

The revenue question

Now the question is how does GroupMe make money? The company has started some partnerships with Lollapalooza and brands like MTV and Oxygen for featured groups that leverage GroupMe for fan messaging. But the company is not sharing its financial progress or the details of its partnerships. It has started shifting its users over from text messaging to app-to-app messaging which saves on costs to messaging platform Twilio. It used to be 85 percent of the messages were over SMS but now in-app messaging is closer to half now. So what’s next and how do you get to profitability?

“When you have high context in groups, like you’re at Lollapalooza or out in New York, there’s a lot of opportunities to help people make decisions,” Martocci said.

It sounds like perhaps recommendations of sponsored suggestions, though we’ll have to wait until later this year to hear more. For now, the company continues to plug away and hopes to stay ahead of the competition. It’ll be interesting to follow the progress of GroupMe because its success could mean another break out hit for New York. Or if it falters, it could show just how tough this space has gotten in a short time. Hecht, for one, thinks there’s a long runway ahead for GroupMe.

“I think we can be that real life network and we can change the way the world communicates,” he said.