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Show Me the Money: Finding Cash for Your Publishing Start-up

Traditionally investors looked to technology as a scalable asset, but content appears to be making a comeback.

By Sophie Rochester

When it comes to getting your business off the ground, in addition to vision and a solid business plan, you need one thing above all: money. At O’Reilly’s Tools of Change for Publishing conference last week, a panel representing very distinct viewpoints — from that of CEO to venture capitalist — came together to discuss the issue as part of the panel: “Start-ups to Publishing Companies Ripe for Expansion: What Are Investors in the Publishing Sector Looking For?”

Thad McIlroy, Principal of The Future of Publishing, has been arranging VC financing for start-ups for two decades, specializing mostly with publishing tools and some SaaS (software as a service) companies. McIlroy kicked off the discussion with a sobering account of his experience of publishing investments – in the last two to three years he’s worked with a couple of pure publishing companies looking for VC funding and he feels it’s a very tough market. McIlroy explained that there are lots of companies looking for funding without success and believes that publishing is not a fertile ground for VCs, because publishing is not generally profitable. “You’re going to have to fight for the investment dollars and you may need to give up a lot more than you want to, to get that money”

Speaking not only as an investor, but also as someone who has sought investment, Christophe Maire, founder and CEO of txtr.com, begged to differ. Maire is bemused as to why there isn’t currently more interest from investors in this area. An active investor in the Berlin technology scene, Maire has been involved in the build-up of Brands4Friends, Plista, Barcoo, Readmill, Appaware, Amen, and Soundcloud, where he sits on the board. Maire believes that more investor attention should be paid to the publishing sector – especially the e-book market. Sectors such as the music industry, he feels, get a disproportionate amount of attention from investors.

This sentiment was echoed by Henrik Werdelin, Managing Partner at product innovation studio Prehype, saying that perhaps when presented with an ebook-related company that this somehow doesn’t have the same “sexiness” as something like a music-related project. Werdelin also dismisses the notion that when presented with a potential investment that vertical industries are particularly relevant at all — that is to say, that they would look more at whether a new product or service resolves a specific problem around user experience than to which industry it is set to serve.

Brian Rich, CEO of Catalyst, a growth private equity fund, is generally more optimistic about publishing investments. Rich distinguishes himself from VCs, and underlines that Catalyst is really looking for proven business models, namely lead generation, content and subscription businesses. Catalyst recently invested in two successful publishing businesses, including one bought from Reed/Elsevier a few years ago, which has been transformed into a majority digital business after what Rich calls “a lot of hard work.”

The Pathway to Securing Investment

Valla Vakili, co-founder and CEO of Small Demons, a content discovery platform, represents a company that has successfully managed to attract plenty of seed funding to date. Although the platform could be positioned as industry-agnostic (as it covers books, music, film, etc), Vakili is adamant that the company is a “narrative-first enterprise” and is not afraid to put it firmly in the publishing camp. Vakili explains that first-level meetings with investors aren’t easy, there are a lot of questions which, at first, are hard to answer – but in time responses to these potential investor questions improved, and with that the funding started to come in.

Do the Big Players Leave Room for Start-ups?

With the omnipresent might of Google, Facebook, Amazon and Apple, what hope is there for publishing start-ups? Rich explained that it’s a double-edged sword – while the big players certainly make it hard for many companies to make their mark, they also offer up huge audiences to work with and the opportunity for secondary businesses to cater for these audiences.

Direct competition with the giants is futile – Rich and McIroy agreed that they’re not interested in looking at companies claiming to be “the next Facebook.” However, Vakili pointed out that knowing the ground not being covered by the giants, can help companies like Small Demons in considering what else it can offer its users. Maire was also keen to underscore that throwing in the towel with the big players might be premature, noting, “The world will not be totally dominated by Amazon.”

Content Discovery and Remixing Content

So are there currently any start-up opportunities in the publishing market? Content discovery and content remixing appear to be two key areas being watched. McIlroy says while other industries are exploring content remixing, that publishing is failing “to differentiate between original content and remix.” He believes that there is still room for publishers to create a “rich, algorithmic method” to explore existing content and present it in different forms, citing Reader’s Digest as the original remixer of publishing.

Content or Technology as a Scalable Asset?

Traditionally investors looked to technology as a scalable asset, but content appears to be making a comeback. Vakili certainly feels that content is an equally scalable asset, a notion backed up by Rich who feels we’re moving back toward a period where “content is king,” though he qualified this by saying we’re not quite there yet. Angry Birds is cited as the perfect example of a piece of content developed and expanded into an entire franchise.

Takeaways for Start-ups

So what should start-ups looking for investment put on their check-list: don’t try and create the next Facebook, look to how your product or service will fit in or work with the giants, try to widen out what you’re doing from ‘publishing’ to broader category of “content,” think about content discovery tools (suggested by Rich as current gap in market) and last but not least – as Werdelin pointed out – if you get turned down by one investor then keep on trying, at the end of the day it’s just one very personal opinion which can be founded one something as arbitrary as “daughter likes to read so I’ll fund books.”

DISCUSS:Which Segment is the Most Promising for Publishing Investors?

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  1. Posted February 23, 2012 at 5:13 am | Permalink

    It’s very hard. Author’s agents want the money up front and raising the capital to pay them is very difficult.

    Obviously we are looking for personal perspectives from named professionals, and have to deal with them in a very personal manner.

    Juxtaposing this with raising the capital to pay them is very painful.

  2. Posted February 23, 2012 at 10:09 am | Permalink

    Authors are trying to get a sense of the new landscape of the publishing industry as it evolves day by day. For me, as a novelist, it’s interesting to look at the issues from the perspective of an investor in hopes that a better understanding may be reached. My impression has been that it is the author who is taking the dominant role in the process of navigating this new terrain. Obviously, many authors are struggling to find ways of bringing their work to market. I believe it is true that, as suggested in this article, that content will be the driver.

  3. Posted February 23, 2012 at 8:48 pm | Permalink

    Our company is acquiring publishing companies assets right now. There are plenty of profitable small to medium publishers. We think it is an AWESOME time to be a buyer/investor. If you are a small to mid-sized publishers seeking an exit strategy, or would like to be a part of a global expansion, we are currently raising money ($5MM) in China and India for this “roll up” strategy. Of course, if you are a VC, we would love to hear from you. Our acquisitions are limited only by funds. We are buying at private P/E (1-2x, half cash and half equity) and selling the cash flow at 10x to listed companies on the Hong Kong and China exchanges. CEO@PublishOnDemandGlobal.com

  4. Posted February 19, 2013 at 11:15 am | Permalink

    I actually started my current imprint as a small press (a micropress, really) via a Kickstarter campaign. I raised $10,000—which was pretty good in 2009, though if I’d done it a year or two later I probably could have raised the whole $100,000-150,000 that I would have liked to have raised. As it was, the $10,000 was going to be used as seed money to approach a bank with for a small business loan, and I was definitely going to start small—small advances, small budget, and me doing most of the work with the help of interns from the nearby college.

    It would have been a very tough road to go down, but the Kickstarter got the attention of Lee & Low Books, and they acquired Tu Books (which I’d started as Tu Publishing) before I acquired my first book. They provided the funding for more books per year than I’d originally planned for, and we’ve been able to acquire great books and provide better marketing and distribution than I would have been able to alone as a start-up. I was lucky—and I think in 2009, I wouldn’t have gained the attention of VC at all, looking to fill a niche in content for children’s books (science fiction, fantasy, and mystery for children and YA that star people of color). So I agree that finding niches that the bigger players aren’t filling is very important, but there are also other areas besides content discovery (though that’s a huge one). Tu Books has been publishing since 2011.

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