Transcript: The Book of Publishing Start-Ups

Interview with Thad McIlroy

For podcast release Monday, February 6, 2023

KENNEALLY: Publishing startup. No, that’s not an oxymoron. More than 1,300 new ventures have appeared in the industry over the past 15 years, according to a new report in Publishers Weekly from analyst Thad McIlroy. Whether those startups have gone public or gone belly-up, they may be found in an online database for your inspection.

Welcome to Copyright Clearance Center’s podcast series. I’m Christopher Kenneally for Velocity of Content. Digital disruption has come to publishing from many directions and many actors. Household names like Apple and Amazon appear on Thad McIlroy’s spreadsheet of startups, along with many more that are obscure, forgotten, and long-departed. Possibly – who knows – among them lies hidden a unicorn.

Thad McIlroy joins me now from San Francisco with stories of ambition and aspiration. Welcome back to Velocity of Content, Thad.

McILROY: Great to see you again, Chris. Great to be back.

KENNEALLY: We enjoyed looking at the spreadsheet and reading the background on this survey of startups that you published with Publishers Weekly last fall. Tell us about the inspiration for amassing such a list.

McILROY: Good question. I keep spinning it around in my head, because it took such a long time, and then you think, well, how did it all begin? I go back to an old conference – God, more than a decade ago – the Tools of Change conference, rest in peace – which was a great tech conference while it lasted. I was on a panel there where we were talking about startups. And it was interesting, because the different panelists had different levels of enthusiasm. I was still in my cynical phase, being still a young man at the time. And cynically, I was thinking, oh, come on. The publishing industry doesn’t have that degree of innovation, and there’s not a whole bunch of success in the startup sector. And I thought, well, easy for you to say that. Why don’t you look into it?

So began the journey, which began with a few hundred companies from a list I was able to obtain from someone else looking in this direction. I started to augment the list and went from 300 to 600 to 900, and now in this latest version of the publication, over 1,300.

KENNEALLY: Describe for us the definitions you use for book publishing and startups. What does it take for a company to make it onto that spreadsheet?

McILROY: That was a challenge, too, because I wanted to be inclusive, but I very much wanted people in the book industry that you and I have worked with over these years, who we work with today – I wanted it to be very relevant. So I thought the best way was to restrict, on the one hand, the book category. I talk about the bookish object. I think that the startup should have some reference to the bookish object. But I use that loosely, because for example, Wattpad’s included, and books are not their primary business. So they’re one of the most successful publishers out there. But generally speaking, the books as we’ve understood them over the last several decades, not multimedia – let’s say, for example – and we’ll come back to one other proviso here in a second. There’s that.

OK, what’s a startup? In my mind, there’s the lore of Silicon Valley. We all know what startups are, right? That’s Facebook. That’s Apple – little garages and multi-gazillion-dollar companies. That is what I refer to as the existential nature of startups – startup-ed-ness. But it’s hard, actually, to bring that into a tighter definition for consistency’s sake. A slightly complex aspect to this is what I call scalability – mainly tnot being just a service entity, not being a one-off. An editorial services company where each new customer needs hand-holding – I don’t think of that as a startup. A bookstore – not a startup. It’s not technologically innovative. Another publishing imprint using a traditional model – not innovative. So I want there to be a degree of technology, innovation, a sort of repeatability and expandability from a core investment in a tech kernel. Roughly speaking, that’s it.

Left out of it, to finish the answer, ed tech. What a challenge that was, because educational technology as a category is enormous, much larger than book publishing overall. In a sense, because the education industry started off with textbooks, then you would think that any new startup in that ed tech space would be relevant. But again, there’s hundreds of those, and I drew that line at those companies that reference, again, the bookish object, the textbookish object, even if they have substantially reconfigured the media package.

KENNEALLY: So, Thad McIlroy, for these book publishing startups, what’s the level of investment that you’ve been able to document?

McILROY: I was really very pleasantly surprised – delighted, perhaps – when I tallied up the numbers. What I report in the Publishers Weekly article is $3.4 billion in total dollars invested. What I also point out is that a lot of investment is not disclosed. A lot of people brag about investment. Other people want to keep it a little bit under the radar. I would guess it’s closer to $4 billion overall that’s been raised amongst these 1,300-plus startups.

KENNEALLY: Thad McIlroy, you spoke with big five publishing executives for their views on startups. What is their own record for in-house innovation, and do they have much appetite for acquisition when it comes to technology?

McILROY: That’s a great question, Chris. I think a fascinating answer has emerged from that that I reported on in this version of the report. I hadn’t asked that before, and I thought that might bring an interesting perspective to get the sort of big five – their 100,000-foot view on it. I was able to get hold of some good senior executives, very thoughtful folks. They wanted to stay off the record, which is fine with me, and they were revealing as a result.

I sort of make a number of conclusions. Publishing – as we know, there’s a lot of smart people, and they’re experienced, and they’ve worked in the industry. They worked through a period of transition. But for the most part, and this may be too gross a generalization, the senior executives at the largest publishers tend to come up through editorial. Another bunch of them tend to come up through sales and marketing. They never come up through tech. They never come up through the IT channel or the department of innovation, such as those exist. And the result is, I think for the larger publishers, they don’t necessarily intuitively pick up on the value of some of the startups. So there’s that on the one hand.

There’s another aspect to it, where in the early startup mania in the early days after the Kindle was released and ebooks were a big deal and so on, they all for the most part went into it with a couple of startups internally, a couple of acquisitions early on, and most of them did not do terribly well. You could argue that’s because they didn’t have the kind of skills to manage it. I think there were more a variety of factors. But what ended up appearing to be a trend after time was that they just weren’t good at this. So the attention has turned more inward, and as one very smart executive said to me, why do we have to buy the company to use the technology? We can license the technology. We can become a customer. At the same time, we’re large firms, and we should be building this stuff internally. So they have the money to do some very intelligent internal investment that they don’t have to share with anyone. So they can develop a competitive advantage that way.

KENNEALLY: With startup culture in Silicon Valley, Thad McIlroy, there’s always important personae involved. Apart from the founders, there’s venture capitalists and other investors, lawyers, and advisors on exit strategies. Those are all in the picture. So who are the key players in those fields when it comes to book publishing?

McILROY: That question surprised me when I asked it myself. Again, in this version of the report, for the first time, I really delved in to what I call the service providers. I’d assumed when I started to ask that question myself that I would find a cadre of this person has five investments, this person has seven investments – that kind of thing. I wasn’t finding that. For the most part, the investments seemed to be one-off, not so-called sector investments. I didn’t identify a large number at all. In fact, it’s a very, very small number of investors that have made multiple investments in publishing startups. There’s one company, KKR – Kohlberg Kravis Roberts, whatever it was – they call themselves solely KKR, a multibillion company, and they have one executive who’s interested in the startup sector. So they’ve made multiple – three, four, maybe five investments in the sector. But that stands out as unusual.

KENNEALLY: And when it comes to investments, of course, we are interested in learning about notable exits. So what have been some of the most successful startups in the book publishing category?

McILROY: I went back to look at the list before our call and trying to find a kind of patterning there. One pattern that’s very clear and is one that is well known, I’m sure, to the listeners of your podcast – the Wattpad story, Radish, Webtoon – that development which has been with us now for – Wattpad must be 15 years old, something like that. We watched them for years with a degree of skepticism and perhaps scorn. It seemed like not our kind of people or something like that. And they ended up being ginormously successful. They were acquired for $600 million. They’re, I really think, the poster child for success, where they did the thing that you’re supposed to do, which is innovate around ideas, innovate around how creative content can be developed to an eager group of readers, and came up with a decidedly new, if in some ways retro, model and reinvented a sector and created hundreds and hundreds of millions of dollars’ worth of value.

KENNEALLY: How have publishing startups that you’ve surveyed fared when it comes to entering public markets?

McILROY: That was not as consistently successful as one would have hoped. Of course, I put Amazon on the list, because you have to put Amazon on the list, because they really started as a book publishing startup. I thought, oh, I should exclude them, because they’re a one-off. But no, they started as a book publishing startup, so they’re legitimately on the list. They’re the poster child.

A couple others – I think as with a question that’s often asked – what are the most successful areas of investment? The companies that do jump out are the fanfiction section, but they haven’t gone into IPO. So earlier than that, the textbook section for a while, the textbook subsector of the publishing industry – there were a couple of high-profile startups, one of which, Chegg, is still in business, has gone through its ups and downs, but has overall done quite well.

KENNEALLY: In 2012, Microsoft announced a $300 million investment in the Nook reading device developed by Barnes & Noble, only to end the partnership two years later in 2014. Nook remains on the market today, but never emerged as a strong player. So I have to ask, Thad McIlroy, is the Nook a cautionary tale when it comes to innovation from the inside?

McILROY: That, too, is a very good question, Chris, and one that I pondered. It’s a saga, isn’t it – the Nook saga and the Barnes & Noble saga, of course, over the last several decades. The Nook, by all accounts, technically speaking was – and I suppose is to some extent, though we don’t hear much about it these days – it competed on a technology basis, and it was priced competitively, and it came from a very credible vendor. I think if there’s any lesson, don’t think that you can beat Amazon. That’s a lesson that many startups have learned. You take the Nook business and then tie that into the overall online business of Barnes & Noble – though their current financial data is secretive to some extent, before they were acquired by private equity, their online sales were declining, declining, declining. So it was part of their larger failure to compete with Amazon. I think Nook fell victim to that.

KENNEALLY: Self-publishing has caused the most disruption for traditional publishers over the last decade. Thad McIlroy, are we likely to see anything as disruptive in coming years?

McILROY: You tipped me off to that question before our call, Chris, so I had a chance to think about it. It’s a question that’s well worth asking and one that I hadn’t really looked at head-on until you posed it. I guess a couple points that I would make. Self-publishing clearly has been enormously disruptive, by the term that we would use disruption in the startup sense. Though we don’t have exact figures, it’s a $4 billion, $6 billion, $7 billion industry, depending on how it’s defined. And when you consider that trade publishing as a whole is less than a $15 billion industry, self-publishing is a very significant sector financially. That is enormously disruptive in that sense.

How, then, would we say what the next level of disruption might be? Is it an economic disruption? Is it the number of players, the number of firms that come into the field? Those certainly would be some of the factors. The technologies that I point to, and the one that I keep coming back to even more than just the few months since the report’s been published, of course is anything to do with artificial intelligence. That had been a big buzz several years ago, and there were a number of startups. I had about the better part of 20 startups that had glommed on to trying to apply some degree of artificial intelligence to their product offering 10 years or so ago. That fell off. They weren’t able to come up for the most part with very viable business models.

What we’ve seen and is much discussed these days – the GPT-3 for language generation and the DALL-E for image generation – many people are saying that that could be enormously disruptive. The jury’s still out. Clearly, the technology is fascinating and fantastic. If indeed most writers begin to use some of these tools routinely in their writing, even if that doesn’t have enormous economic impact, wouldn’t that be even more disruptive if we changed the way that books are written, not merely the way they’re published and sold? So yes, potentially there’s – regardless, I look forward to the next disruption. It couldn’t be more fun from my perspective.

KENNEALLY: And for everyone listening to the call, they can have a little fun, too, exploring the database that you’ve collected. It’s accessible from publishersweekly.com for anyone to search and drill down on your data. Since it was made available a few months ago, have you seen much traffic, and do you have any idea of what kind of interest – particular areas that people are most focused on?

McILROY: I’ve been hearing a lot. I’ve been hearing lots of very positive feedback. I tried to get the download numbers, and I haven’t got the totals on that as yet. We have three ways that you can get it via the web, so I’m looking for the total downloads. But my impression is that it’s getting out there, that people are seeing it. It’s a bit daunting when you first get it. It’s the better part of 10,000 words, and it was put up on the Publishers Weekly website, where you’re used to reading a 200-word posting. So this one, you got to sit down for 10,000 words and then go to the database and start playing with that. I think that has slowed adoption, as they would say.

KENNEALLY: All right. Well, Thad McIlroy, thanks so much for speaking with me today and for sharing your data with the Publishers Weekly audience.

McILROY: Thanks, Chris. Great to see you.

KENNEALLY: That’s all for now. Our producer is Jeremy Brieske of Burst Marketing. You can subscribe to our program wherever you go for podcasts, and please do follow us on Twitter and on Facebook. You can also find Velocity of Content on YouTube as part of the Copyright Clearance Center channel. I’m Christopher Kenneally for CCC.