Episode 32: Thad McIlroy on Publishing Startups

Thad McIlroy, an electronic publishing analyst and author who writes about publishing technology at his site, The Future of Publishing, joins me to talk about publishing startups.  Thad has been working for many years on a database that provides interesting details on these companies, and the list has now been published by Publishers Weekly. 

Thad describes how he got started with the list, and how he defines what a startup is for the purposes of the list. The list includes key information about each startup, including a mission statement or description about what the startup does, and a description of how successful they have been. The list provides publicly available details on investments into these companies, as well as information about whether they have exited via acquisition, merger, etc.

The list now includes about 1300 startups, around 10% of which have exited, and at least 37% have shut down. There a many vulnerabilities a new startup encounters, but one of the biggest is being “a solution in search of a problem.” Thad says that the real metric for success is being able to innovate and having a clear definition of the problem the company is offering a solution for. Market research and solid marketing is key to the success of any startup endeavor.

We also talked about trends in the startups that have started in the last few years, the lack of innovation in startups focused on helping publishers, and the potential opportunities available to publishers who are looking to innovate.

Thad’s article at Publishers Weekly provides a great overview of the startup database, and a link to the list itself. 

Transcript

Joshua Tallent 

This week on the BookSmarts Podcast, I’m excited to bring back Thad McElroy, who is an electronic publishing analyst and author who’s based in San Francisco and Vancouver, British Columbia. His site The Future of Publishing provides in-depth coverage of the book publishing industry. He’s also a partner in Publishing Technology Partners and an adjunct professor at the master’s program for publishing at Pace University in New York. Thad, thanks for coming back!

Thad McIlroy 

Thanks, Joshua. Very good to be back. Good to be chatting with you again.

Joshua Tallent 

Yeah, we had you on back in Episode 21. For anybody who hasn’t heard that episode, I highly recommend it. We talked about metadata quality and backlist books and things like that—it was really fun. Thad’s got a lot of the same interests that I have—metadata and those kinds of things are really always fun. But I saw something recently, and this is why, Thad, I wanted to bring you back on. We’re recording this in December, but it won’t go live until January. But I wanted to chat with you about this new list of publishing startups that you and Publishers Weekly have produced—or that you produced and they’ve published, I guess. So tell me a little bit about the story behind the book publishing startup database that you’ve come up with and kind of the connection that it has to Publishers Weekly?

Thad McIlroy 

Sure. The starting point goes back a decade, at least. It was a Tools of Change Conference, and I was on a panel looking at book publishing startups. And at that point, I was—I call it a little bit cynical. And there were some sort of high profile startups that hadn’t gone very far. And when I spoke on the panel I was like, I’m not sure there’s a lot of opportunity here around, you know, innovative startups in the publishing community. And on the panel, were also a couple of investors who were like, no, no, this is a hot sector. And we’re very excited about the investments that we’ve made. And I left the conference thinking, Well, I’d like to understand better what the activity is in this sector and find out whether I’m right or they’re right, I suppose when it came down to. They were right. There were already hundreds of startups that had, you know, slipped beneath my radar, I had not been tracking them. And I thought, well, this is amazing. At that point, there were probably 400. We’re up to 1300 now, but even you know, at 400, that was pretty amazing, a lot of activity. And so I started to create a database, track these startups. Five years ago, I published the first version, we had about 900, then and now we’re up to 1300, with the 2022 version.

Joshua Tallent 

That’s awesome. And that’s, that’s a pretty quick expansion there, in many ways, right? That you could have that many publishing startups. So let’s, let’s define some things, a couple of terms here. What do you consider a “startup”? You mentioned this in the in the kind of the overview article, but let’s go through kind of what do you consider a startup? And what kind of data are you then collecting on these startups as well?

Thad McIlroy 

Yeah, it’s a good question. And a tough answer in a way. I mean, I think we all have a picture in our mind, if you say, you know, XYZ is a startup company, I think we think in the venture capital, you know, Silicon Valley, kind of metaphor for startups. And that’s, you know, a reasonable enough picture to paint around them. But then you start to try and pin that down. You say, Well, what exactly does that mean? I mean, if it’s a startup, that means they started, they started a new business. So perhaps that should be the definition, this very wide definition there. A new business has formed, it is a startup, but then it’s like, Well, okay, well, that every new publishing company is a startup, every new bookstore is a startup, and that won’t inform people. I mean, that’s a separate list. That’s a study worth having to understand, you know, the pace of formation of new independent bookstores. That’s not my study. My study is to try to look at organizations that are coming from a mindset of bringing innovation to the industry, it could be that they’re actually innovating something that bookstores do or publishers do, that’s fine. But the idea is, you know, I call it somewhat existential because you can’t be pinned down with precision. But it’s bringing that mindset of innovation. That’s my loose, broad definition of what is a startup?

Joshua Tallent 

Okay, and so you’re collecting information about these, these different startups? What are the key fields, the most important kind of details that you’re wanting to put into the—that you are putting into the database and that you think are helpful or informative to people who are interested in this?

Thad McIlroy 

There’s sort of two sides of it. The thing that I find most interesting is, you know, oddly enough in a way, but it’s just what the heck are you guys up to, and you’re trying to pin that down in a way that can be captured as data. I mean, I, you know, each one of them has a website, and the website goes on and on and on. And for me, the challenge was to try to distill that into a mission statement, which they’re not always very good at articulating their own mission statement. So I, my first task was to be able to, you know, concisely say, this is the value proposition that we bring to the table. And so, you know, for someone diving into the database, just clicking those, you know, looking at each of those mission statements is enough to get you sort of started, there’s some intrigue on some of them. And then, of course, beside that click, you can click the URL of that organization and delve into it more deeply yourself. And I find it endlessly intriguing what people come up with. So it’s always fun for me to go back to the database. But then at the same time, of course, we needed some kind of metric on success. And there’s not a heck of a lot of published and publicly available data to give some kind of a, an indicator or barometer of success. And so we’ve used some specialized and licensed database—subscription databases that do a good job of tracking investment dollars in the startup community. And so there’s—I think one of the real values of the report is that we’ve captured all the investment dollars, everything that’s gone into startup investment in the last two decades. And, and we also in a surprising and delightful number of cases, people have managed to exit their business—”exit” is always the term you use in startups, have found a buyer, have merged with another organization. And so we capture the amount of money that’s spent on the acquisition, not always publicly available, wherever we can find that information. And so you’re able to get a again, barometric kind of reading of how much excitement these startups have engendered in the investment community, both from a, you know, going into the business and going out of the business, and it’s in the billions of dollars.

Joshua Tallent 

Yeah, and I think that’s the interesting thing about this, too, is like, like I said, there’s 1,300 on the list now, and you even make the point that that’s guaranteed not the total number, although it’s probably pretty close to the number of startups in the publishing industry or related to publishing. But of those, a pretty small percentage of actually exited. Right? Actually had an acquisition of some kind or some other merger, something like that. What number would it, I think you’d get you gave that number at some point…

Thad McIlroy 

I think it’s about one in five, which is not bad at all. You know, because when you think about it, most people, you know, entered the business, not for a quick exit—I mean, it’s delightful if you can have one, but mostly, you’re going to have to build five years, seven years. And, and even then, you know, in many cases, they don’t want to exit so the fact that about a fifth—one and five have gone, been taken out of the market at a multiple of the investment dollars. That’s pretty good, pretty good signpost.

Joshua Tallent 

And alternatively, on the other side of that, there’s 37%, you say are no longer in business. And that’s, that’s pretty normal number in the startup community to see that.

Thad McIlroy 

If anything.

Joshua Tallent 

If anything, yeah. It’s also interesting, too, because, you know, in some cases, you say, it’s like, well, you don’t really know if they are still around. They still have a website, you know, you may, it may still just be up because they paid for the domain. And it’s just still there, doesn’t—don’t really know for sure if people are still continuing to run a business behind that. But that’s, you know, that’s I guess that’s pretty normal. It’s not abnormal in startups in general, technology startups in general. It’s just interesting to see that number here in the publishing space.

Thad McIlroy 

I think, for anyone who reads the report, it is important to recognize that when you look at a company that you find listed on the spreadsheet that we’ve just published, when—I guess we’ll talk about that, there’s a URL you can go to, to actually access the spreadsheet and play with it yourself. And as you start to play with it, you will be misled. In other words, you will go to a company and it looks like they’re going concern. And then, you know, a big part of the research work we did—I was working with a researcher was really trying to pin down are they still in business? Because that’s an important metric, of course. And so, you know, we would go to secondary indicators, quite often just their tweet stream. I mean, if you’re not willing to tweet, you’re probably not still in business. If your last tweet was three years ago, you know, we felt pretty confident. We then go to secondary sources as well: Facebook pages, LinkedIn listings and so on. But a few of these companies, they, you know, they’re nominally in business, they haven’t shut down, they’re still tweeting, but they have so few customers as to be marginal. And that’s something that you, you need to be sort of wary of. Just because they’re there, just because they have a website doesn’t mean that they’ve got more than a dozen customers. And other ones who look about the same in terms of their web presence, have actually got 5,000 customers, it’s sometimes hard to determine.

Joshua Tallent 

Yeah, so let’s talk about the vulnerabilities. So you have a section in your report on what you said vulnerabilities these startups run into. One in five of the startups has declared funding, a lot of them are very lean—you say even emaciated, kind of not just bootstrapped, but basically just very much emaciated. What do you think is the biggest vulnerability for a startup? Let’s say, somebody will listen to the podcast, they’re like, I love publishing. I’m a bookish kind of person, I’ve got this tech idea or this idea for supporting authors or publishers or whatever else. What do you think that someone in that situation should be thinking about before they dive into just launching the business and seeing what works?

Thad McIlroy 

That’s a great question. I was thinking just before our call, I’m gonna have a call tomorrow morning with a new startup who wants to, you know, just review their business plans with me. And they have described their business as being based on AI, artificial intelligence. And what I’ve seen with a number of the AI startups is what I call a solution in search of a problem. AI is exciting. Surely AI could do some profound things around publishing? And yes, indeed, I think it can. But the AI startups I’ve seen, for the most part, so far, sort of, like “Dazzle, dazzle, dazzle, we’ve got AI!” It’s like, okay, good. AI is interesting, it can be potent. Now, what is the problem that you’re trying to solve with your technology? And so that’s—that’s, I guess, in a way a clichéd question, but it is the core question, what is the problem you are trying to solve? And, you know, for most startups, that is, in fact, the kind of value—the metric, let’s say, for the value of the startup. There are than, you know, if you take a Facebook, for example: was it solving a problem or actually, you know, innovating outside of problem solving? And I would argue that, you know, it was a, an add on, in a sense, it was—we didn’t know, we had a problem, and this solution appeared and was like, Yeah, apparently, that was a big problem. So the real metric for you start up in this is for the potential for success is around, making sure that you can innovate outside of that—out of the immediate space. However, having said that, I think that the metric for the average startup is to have a really clear definition of the problem. And then make sure your solution is really targeted right in on that. I’ll leave it there.

Joshua Tallent 

Yeah, if the problem doesn’t exist, you’re spinning your wheels and spending money, that doesn’t make sense. And if you’re, if a problem does exist, and you’re not innovating on that problem in a way that publishers or your target market, whatever that happens to be, would actually see as a benefit to them, then you’re still gonna be spinning your wheels. So that makes a lot of sense. And as someone who—I mean, I was an entrepreneur, I exited, as you say, you know, it’s a, it is very important to find what the market really is before you go too deep. And I think that’s—I’ve talked to a lot of startups as well, myself in the past 10 years or 20 years, people who are looking for advice on ebooks or things like that especially, and there’s, there’s a lot of, there’s a lot of things that people try to do in the publishing space that just don’t work because they aren’t really innovative. Or they, they have some idea that’s so far outside the realm of, of normal, or kind of what people expect that you have to really work hard to sell it. You have to you have to try really hard to get people to see the benefit of that, compared to what, you know, what the people already using. So that’s an interesting, really interesting thing for people to remember.

Thad McIlroy 

Another thing to point out there is a factor I’ve seen amongst these startups, that’s troubling to me. They don’t do their market research. They really don’t. They don’t—they, you know, you if you were to look at their slide deck of what it is that they proposed the business to be, they have, you know, some kind of broad number that they grab off of, you know, whatever the Association of American Publishers—the market’s worth $20 billion. That’s not what the market’s worth to you. That’s not a meaningful metric at all. And so they’re not really understanding who their customers are from that perspective, either. They’re sort of like, “Well, every reader would enjoy this or every author could get some benefit from that.” Tell me more.

Joshua Tallent 

Right. Yeah. And that’s really important. Let’s talk about a couple of the summary findings that you have. You say that this list has grown significantly, just in the last five years, you have 40% more listings, than you had back in 2017. That’s a pretty big jump and actually bigger than I would expect right now, even though obviously, there’s a lot of stuff going on in the in the, in the tech world. Back when, you know, publishing jumped—you know, you mentioned the Kindle coming out. And that was a big bump at that point. That seemed to me, like the time when everybody really wanted to get in on the ground floor on, especially anything related to ebooks. What have you seen in that 40% of new ones in the last five years? What’s the trend? What are the types of startups that you’re seeing people kind of launch in the last five years?

Thad McIlroy 

Yeah, couple points there. Part of the reason why we’ve got 40% more is we did more homework ourselves. We’ve gotten better at trying to identify where the startup activity is, better at trying to suss out the companies that are playing in the space, better at defining what the criteria are to be included in our database. So to be, you know, straightforward about that. It’s not that there were, you know, 500 new companies that were formed in the last five years, the number of new formations in the last five years, I haven’t pinned that down. But let’s say it’s in the 100 to 150 range, maybe could even climb up close to 200 that have actually started within the last five years. So that’s still pretty significant activity, but it’s not 400. In terms of where the startups have been locating themselves, there’s, I guess what I would consider innovation on the one side, and repetition on the other side. Let’s go on the innovation side for a moment. So as mentioned artificial intelligence, that brought about two dozen startups into the field. This, you know, the latest greatest blockchain/NFTs/cryptocurrency, that whole space has brought three dozen startups in, and that’s mostly in the last year, which is extraordinary. Fan Fiction. People don’t know that there are dozens of little WattPads out there. They think WattPad’s totally dominating the space while they are dominating a lot of other startups are claiming little snippets of this space. And the space is so large that just capturing a snippet of it is enough to make a viable business. The move towards visual media has been important. So the graphic novels and the online cartoons, that kind of thing has brought in a lot of startups. And finally, audio has been big, of course, as we all know, and a lot of companies are trying to find a way to innovate in the audio space.

Joshua Tallent 

Yeah. And the mix you—you mentioned, too, that the mix is more toward authors than publishers. Seems like a lot of these are, like—you specifically just mentioned fan fiction that’s obviously very author-centric or writer-centric. I’m curious if you have besides the fan fiction side, what are some of the other things that you’re seeing tools and startups that are focusing on publishers specifically, how where are the where’s the publisher innovation happening?

Thad McIlroy 

There’s not a heck of a lot of it. Where publishers—you know, the pain point that I hear from publishers and you, you’re closer to this than I am. But you know, a lot of the pain points are always, of course, related to marketing, broadly. But that means more specifically, these days, they recognize that marketing isn’t a broad endeavor, you have to get very specific, you have to get into niches, you have to build community, you have to develop mail lists, you have to be more data-centric. And so a number of startups are playing around trying to help publishers in that area. That little segue there is that, you know, with the domination of the largest publishers in our industry, so much of the—they tend to be very closed shops, and they try to innovate internally so that mutes the opportunity for startups trying to—you know, if you can’t make a sale into one of the big fives, you can’t make a big sale. So you have to come up with a technology that’s going to work more broadly with smaller publishers. And that requires a different kind of business model. I’ll pause there, too. I can prattle on for hours.

Joshua Tallent 

No, that’s good. Yeah, I think that’s an important point. And one of those things that you know, and I think maybe some of these publishers have been burned in the past so much by the startups that they thought, Okay, this is going to work. And then maybe I could, we could, we could do that. But it doesn’t work the way they expect. or the startup doesn’t succeed the way… I know I saw quite a bit of that happening back in the early ebook days that there were a lot of startups around ebooks, and a lot of publishers kind of got—I wouldn’t say bamboozled, but definitely got burned a little bit when it came to, is this really going to work? And how can—we’re going to make these really robust ebooks that have all this functionality in them that nobody wanted to buy. You know, those kinds of things were not uncommon back then. So I could see publishers wanting to say, Well, we know our business pretty well. Let’s think about it internally and see if we can, we can do some of these things on our own.

Thad McIlroy 

Yeah, they’re very arrogant in that way, I feel. You know, it’s—publishing is my industry, I love it. But a, you know, I get frustrated that there’s not enough innovative spirit, in many cases, in the publishing community. And there’s, you know, to any publisher, listening to this podcast, it’s like, go out and explore some of these startups, you can sort by the ones that are just focused on publishers, the ones are just focused on authors, you can easily sort within the database and look at some of these startups that even if they’re not someone you want to invest in or buy services from, look at the ideas that they’re engendering and try and determine whether or not there’s some real opportunity internally to adopt some of this.

Joshua Tallent 

Yeah, that makes sense. Well, with that we’ll point people to the report and to the database. So I’ll have links to those in the show notes where people can go and get access to, to the database. I’m interested in the Publishers Weekly connection. How did they get involved in this, and what’s the relationship there?

Thad McIlroy 

I’ve been reading for PW for a number of years. And Jim Milliot, the editor-in-chief, and I got talking earlier this year about the report. He was aware of it, but we hadn’t talked about it in depth. And we talked about it at length and Jim said what PW would like to have more coverage of innovation in the publishing space, and this seems like an ideal vehicle. Why don’t we take over the publication of the report? “I couldn’t be more delighted,” I said to Jim, and at the same time, he said, Why don’t you join as a contributing editor with a focus on startups and publishing innovation? “Delighted as well.” So I signed up for that. So it’s going to be possible for PW readers to turn to PW as a more authoritative source to learn about the most interesting startups. We covered one of the NFT startups last month, a fascinating company called book.io. You’ll—next year, you’ll read about a lot of very fascinating companies through PW on a quarterly basis, we’re gonna do a quarterly supplement.

Joshua Tallent 

That’s awesome. Great. So Thad, thanks for coming on. I appreciate you chatting with me about this. I’m really excited to see what people think about it. And hopefully we’ll get some, get some good responses and people will start to understand more about the startup side of things. Where can listeners of the show follow you online and read more of your work?

Thad McIlroy 

The best place is to go to my main website, thefutureofpublishing.com. And you’ll see linked right from the homepage, the report and links into PW. That’s a good starting point.

Joshua Tallent 

Cool. Very good. All right. Thanks a lot good chatting with you, as always, and I’m sure we’ll have you back on for another thing at some point in the future.

Thad McIlroy 

I hope so. Thanks, Joshua. Good to see you.

Joshua Tallent 

That’s it for this episode of the BookSmarts podcast. If you like what you’ve heard, please leave a review or rating and Apple Podcasts or Spotify or wherever you listen to the podcast, and also please share the podcast with your colleagues. If you have topic suggestions or feedback about the show, you can email me at joshua@firebrandtech.com. Thanks for joining me and getting smarter about your books.