Venture Funding in the Book Publishing Industry

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These slides accompanying my January 2014 blog post "The Book Publishing Startup Problem" at http://thefutureofpublishing.com/2014/01/the-book-publishing-startup-problem/. You'll find there also the accompanying Excel spreadsheet.

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  • Copyright 2014 by Thad McIlroy. All rights reserved (see last slide for Creative Commons license).
  • Turmoil!
  • I want to try and place the financial impact of the book publishing industry into context. The numbers are always hard to pin down. The latest figures from the largest trade publishers (as you’ll see on the next slide) total just over $7 billion. Nearly all of the venture-seeking startups are focused in the trade (and children’s) publishing space, rather than STM (Scientific, Technical and Medical) or in textbooks (though textbooks have commanded a fair share of attention and are represented here).
    I can see things in a more clear perspective when I realize that the lowest ranking company on the Fortune 500, Nash-Finch, is some two-thirds as large as the 5 big trade players (by sales). RR Donnelley, which prints many of their books, is a third larger.
  • These are the latest annual sales summaries from the big 5. Industry estimates guess that these 5 firms represent some 50% of annual trade sales, and 25% of the overall U.S. book business.
  • This slide is the first the references the attached Excel spreadsheet.
    I’ve located over 600 startups (there are more that I’ve located, but the ones not on the spreadsheet were announced two or three years ago and have no subsequent activity in the press or on their websites.
    I note that 7% of those startups have recorded investments. This number doesn’t really tell you much. Is it low or is it high? That depends on how large a pool you’re referencing. I could easily have added another 100 startups to the spreadsheet to pull this number down. So don’t spend any time with it.
    Far more interesting is the size of the investments. You don’t need cross-industry comparisons to realize that average investments of between $35,000 and $70,000 and just not significant. They hardly cover the expense of a single employee.
    I note that 2.5% of the startups listed have cashed out or “exited”. Hard to read this number as well. Except for the two big buyouts, Rakuten taking Kobo and Amazon taking Goodreads, there’s not enough publicly available data to indicate the quality of the transactions. Which, to me, says that they weren’t worth clapping hands for.
  • Outliers – in this case a few relatively very large transactions – throw off all the numbers. On the one hand I’d say that a startup was delusional if they thought that they could successfully position themselves to be acquired by Amazon. But it happened to Goodreads (and previously to a few other smaller tech companies) so it’s not out of the question. My greater concerns is to try and isolate these numbers from the average and the mean of the data.
  • Sometimes pinning down the exact market that a startup addresses is a challenge. There’s more of a crossover with periodicals and books than of newspapers. So just a caution as you read the spreadsheet: not all of the companies are pure book publishing ventures.
  • Lots of VC dollars. In the third quarter of 2013 4.1 BILLION was raised. The publishing industry may have accounted for $50 million of the downstream targets for that investment; not even a blip on the radar.
  • Several reports examine today’s hot and fertile startup industries. Book publishing is never among them.
  • When you’re close to the publishing industry and follow the hype and frenzy on a daily basis it’s easy to lose perspective on the simple truth that publishing is not growing. It was ripe for a degree of disruption, which is accumulating bits of value to hundreds of thousands of self-published authors, a few self-publishing aggregators (Smashwords, Lulu) and of course Amazon.
  • Even when you find a place on the chart with a designation like “media & entertainment” you soon learn that they’re not even considering book publishers.
  • As the report definition makes clear.
  • During the life of a company financing can take several forms. At the beginning angels and VCs. Somewhere in there a bank gets involved. Then there are exits or partial exits: a merger or an acquisition (M&A) or an IPO. The book publishing industry also proves to be a no-show at the M&A party.
  • Trying to zero in on the startup value of the publishing industry I throw the spaghetti on the wall against some proven investment magnets. Book publishing doesn’t resemble any of these classes of opportunities. There’s a good article in the January 10 New York Times on Uber: “Is Uber’s Surge-Pricing an Example of High-Tech Gouging?” (http://www.nytimes.com/2014/01/12/magazine/is-ubers-surge-pricing-an-example-of-high-tech-gouging.html). From my perspective Uber is a perfect example of disrupting an intransigent business. In certain big cities in rush hour or bad weather there are next to no cabs or limos available. Sure Uber’s drivers push the price as high as they can. And there are customers who can afford to pay the supplement. So be it. It’s hard to draw anything like a parallel from this type of opportunity to book publishing.
  • On the other hand book publishing is hugely vulnerable against a series of common industry benchmarks. Book publishing has never been classified as a hot industry. Why would the invasion of new technology necessarily make it more attractive? There are just as many arguments that a fragile industry will suffer from the changes.
  • Book publishing shares some of the “sex appeal” of the music and film industries. That’s valuable, though it also attracts gadflies. The investment dollars don’t suggest that mature venture sources are taking publishing very seriously as an investment opportunity.
    There’s been but one IPO in the “startup class” of book publishing industry companies. That’s Chegg, the innovator in textbook rental. The company is unprofitable and its shares are trading lower since its IPO in fall 2012. Not worth pointing to as a successful financing moment.
  • Yep, there’s Chegg’s IPO, arguably not a startup in the sense we’re using here. VICE is a fun website, gathering millions of pageviews. But that has nothing to do with the book industry.
  • When you look at the discreet advertisements of the big M&A players they’re not dealing with $2 million transactions. They’re selling big old companies to other big old companies who expect that they can raise the dead.
  • Another little reminder that book publishing is a no-show in the VC community.
  • Mark Coker, founder and CEO of Smashwords, is a smart, in-the-trenches type of executive who continually offers smart analysis and advice. It’s well worth tuning into his blog at smashwords.com.
    A few of his year-end 2013 predictions/observations are startling. What will happen to all of these precarious startups if, as Mark notes, “a normal cyclical shakeout is coming”?
  • The #1 source of information about startup funding is Crunchbase. They don’t miss many transactions. Down the list though still relevant, is AngelList, which tries to pair very early stage startups with some money from the Angels in the sky.
  • Unfortunately perusing the AngelList directory of publishing startups can make you depressed. It reminds me that all you need to do to pretend you’re a start-up is launch a half-decent website that explains your offering. No one can say that you’re not the real thing: they can’t climb under your kimono.
    But as you read the short descriptions of the value that some of these site propose to offer you can certainly feel some despair for the broad prospect of book publishing start-ups.
  • Gust is another match-the-startup-with-the-investor type of site. Very few book publishing listings emerge.
  • On Dosdoce.com you’ll find a good report (and accompanying slide deck) that represents the most thoughtful and optimistic view of startups in the book publishing industry. I’m not optimistic, but I did want to represent the optimist’s viewpoint.
  • I’m glad to be able to offer the “raw” data on the accompanying spreadsheet so that readers can draw their own conclusions about the prospects for startups in the book publishing industry. This is my read.
  • I can understand that the startup frenzy is attracting entrepreneurs to book publishing.
  • I’ve been track this stuff for decades.
  • It still the #1 book for publishers to help them get a handle on the metadata challenge.
  • Please contact me with questions or comments, positive or negative. Thank you.
  • Venture Funding in the Book Publishing Industry

    1. 1. Venture Funding in the Book Publishing Industr y Thad McIlroy thefutureofpublishing.com Vancouver & San Francisco January 11, 2014
    2. 2. A Brief Overview     Book publishing is not a major industry Book publishing is not growing nor is it significantly profitable Physical book retailing is under threat, and that threatens the balance A single dominant company (Amazon) is calling most of the shots
    3. 3. In Perspective Here’s is the smallest member of the 2013 Fortune 500. Nash-Finch is in the food distribution business and has sales of nearly $5 billion per year. RR Donnelley, the largest U.S. printer, had 2012 sales of $10.2 billion (10% market share).
    4. 4. In Perspective: The Largest (‘12) Penguin Random House HarperCollins Macmillan Simon & Schuster Hachette Total $3,660,000,000 $1,200,000,000 $ 825,402,500 $ 800,000,000 $ 572,250,000 $7,057,650,000 = 50% of trade sales; 25.3% of total books sales
    5. 5. What’s in the Numbers?      Over 600 startups About 7% of those startups have recorded investments The average investment is $70,000k +/Remove the half-dozen over $10m and the average investment is $35,000k +/2.5% startups have “cashed out”
    6. 6. Ignore the Exceptions? These aren’t likely to repeat    Kobo sold to Rakuten for $315m Goodreads sold to Amazon for $150m Microsoft invests $600m in Barnes & Noble NOOK
    7. 7. Books vs. Mags vs. Newspapers    Several of the startups cross the space between books & periodicals. The blurring of the boundaries is encouraged by the likes of Kindle singles – in some cases long magazine articles repackaged. While newspapers are issuing ebooks in a flurry, there’s no real industry crossover The big difference is that the names of periodicals are the brand; for books the author is the brand
    8. 8. In Perspective: VC Dollars
    9. 9. Hot Start-up Industries No book publishers here. February, 2013
    10. 10. Another View
    11. 11. We Want to Believe in “Media”
    12. 12. “Media and Entertainment” Defined “Creators of products or providers of services designed to inform or entertain consumers including movies, music, consumer electronics such as TVs/stereos/games, sports facilities and events, recreational products or services. Online providers of consumer content are also included in this category (medical, news, education, legal)” No book publishers here.
    13. 13. No M&A Activity (via JEGI)
    14. 14. Judging Investment Value     Existing industry, in a period of growth (such as new homes) New industry, expanding rapidly (home medical devices) Existing industry with new opportunities (Apple with tablets and smartphones) Transformative technology addresses an unmet need (Uber for catching cabs at tough times in big cities)
    15. 15. Condemning an Investment       Mature and declining market Fragmented market Not significantly profitable Difficult to access internationally At risk of structural fragmentation (no more bookstores) Dominated by Amazon
    16. 16. The Proof is in the Pudding     All media markets have a “sex appeal” that attracts investment Yet book publishing has attracted less than $350 million in the past five years Three companies have had strong payouts, but most are failing even to get second-round funding. Just one IPO (Chegg) – not promising
    17. 17. What About Those IPOs?  Forget it. According to the authors of the 2014 Tech IPO Pipeline Report: “There are no publishers on our lists. The closest thing would be VICE media, but they're primarily online.”
    18. 18. Yes there are acquisitions ...but they aren’t startups
    19. 19. VCs aren’t Watching Publishing
    20. 20. Mark Coker on Flattening Sales  “A fast-growing market causes players to misinterpret their success... It’s when things slow down that your business model is tested. The market is slowing. A normal cyclical shakeout is coming.” — December 30, 2013
    21. 21. AngelList: The Forgotten
    22. 22. AngelList: Can’t We all Just Sound the Same?       “Making ebooks easy” “Building the future of ebook reading” “iTunes for ebooks” “A reading revolution” “Reinventing non-fiction book publishing” “A community within every ebook”
    23. 23. Gust: Never Visited
    24. 24. Collaborating with Startups Source: Dosdoce.com
    25. 25. Conclusion I   I don’t have a happy face to splash on the challenge of attracting venture dollars to the book publishing industry: I don’t believe that it will happen in any systematic fashion The one way that book publishing often overlaps newspapers: it’s an excellent way for the wealthy to indulge their egos
    26. 26. Conclusion II   I think the investment confusion arose because many thought that an industry in the throes of digitization should be an industry worth tossing VC dollars at Just because publishing is going digital doesn’t mean that there’s a new road to publishing riches. It’s the same tough slog
    27. 27. My Background • 8 years in bookselling & publishing • 15 years in the U.S. studying the intersection of technology & print publishing @ Seybold • 10 years at The Future of Publishing.com • Co-author The Metadata Handbook
    28. 28. The Metadata Handbook: A Book Publisher’s Guide to Creating & Distributing Metadata for Print and Ebooks Renee Register, DataCurate Thad McIlroy, The Future of Publishing Available both in print and ebook formats Published December 2012 themetadatahandbook.c om
    29. 29. For further information Thad McIlroy thad@thefutureofpublishing.com Publishing rights for this document: This license allows for redistribution, commercial and non-commercial, as long as it is passed along unchanged and in whole, with credit to Thad McIlroy at The Future of Publishing.

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