PUBLISHED MAY 2017
by Thad McIlroy, Electronic Publishing Analyst
November this year will mark the 10th anniversary of the launch of the Amazon Kindle e-reader. Most of us associate the event with something larger: the launch of the modern era of e-book publishing. And, closely linked to that, the launch of the enormous self-publishing industry that has changed the publishing business.
Less often noticed is that the disruption created an opportunity for a generation of entrepreneurs to launch new ventures that could build on industry upheaval. Hundreds of new companies have launched in the last decade in search of the opportunities that accompany change.
In 2012, I participated in a panel on the topic of book publishing startups at the O’Reilly Tools of Change Conference. I realized that, as an industry, we hadn’t been paying much attention to the topic. How many startups were there? What were their missions? How large were they? Were they succeeding? I decided I’d investigate.
I started collecting data. There was already a listing, just names and URLs, maintained by Michael Bhaskar. He’d spotted 300 companies. I dug a little deeper and began to gather additional information about each company. When I published my report in January this year, I had some 900 names. But not just names. For each company, I assessed the type of product offered, the company mission statement, investment raised, and whether they were still in business.
What Is a Book Publishing Startup?
I wanted to study the impact of new businesses on the trade publishing industry. This was mainly because the self-publishing wave has had most of its impact on trade publishing. Educational and STM publishing have their own share of startups, but the dynamics of those industry segments are quite different.
What is a book publishing startup? It’s a loose definition. In theory, of course, it’s a new business of any sort. And, as defined above, a business that was started since roughly 1997. But I also recognize a kind of existential notion of a “startup” versus just a new business (“startupedness”?). The internet is an essential enabling platform for all of these companies. Startups often see themselves as a new type of business.
The startups mostly target independent authors, not established publishing companies. Self-publishing is huge, so it’s no surprise. I estimate that there are upward of 500,000 active self-published authors in the US (many earning just a few dollars a year). The self-publishing business now represents some $500 million in annual consumer spending, the vast majority of that fiction e-books. This is the market that most of the startups are chasing.
It’s interesting how few of these startups target the traditional publishing industry. I’m not sure what this tells us. One issue is the mostly flat sales across traditional publishing. The opportunities aren’t obvious in an industry that’s stopped growing. Self-publishing seems to be where the action is.
What Kind of Companies Are Startups?
I determined 15 categories to classify the startups. The most prominent ones are Tools & Services, Original Content, Social, Discovery, Education, Children’s, and Subscriptions. I would have liked to have been more precise but realized I’d soon have over a hundred categories, many with just a few entrants. So I cut a broad swath.
For example, when you look at companies classified as “Tools & Services,” you’ll find everything from a “PDF to EPUB converter” to “Cloud-hosted publishing tools.” “Retail” is any service that brings books from distributors to retailers or retailers to readers. There are about 70 each for “Social” and “Discovery”—based mostly on whether one of those terms appears in the short description of the company.
How Big Is the Book Publishing Startup Business?
The total funds raised by all 900-plus startups is only $945 million. Compare that to the over $50 billion invested by venture capitalists across all sectors in 2015 alone. Only 15 percent of the companies have received funding. And a large chunk of the cash has gone to a handful of companies—Wattpad raised $67 million, Scribd nearly $50 million. If counting just the investments at $10 million or less, only $220 million has been committed. That’s a median investment of just under $1 million for companies that received $10 million or less.
Nearly a third of the companies on my list are no longer in business. Six percent of the companies managed an exit of some sort—they merged or were acquired. Japan’s Rakuten (an Amazon competitor) is the big spender: $330 million to acquire Kobo and $410 million for OverDrive, the library e-book/audiobook supplier.
Why Are so Many Startups Failing?
I realized that “failure” is a loose term when it comes to business. These days, just standing still can be tantamount to failure.
CB Insights pays close attention to this question and notes that “startup death is surprisingly hard to identify. Many startups are essentially dead but limp along for years in zombie-like fashion.” They found that 55 percent of failed startups raised $1 million or less. Of the failures, 71 percent lasted less than two years after their last funding round.
Why are they failing? Analyzing reports of failed startups, CB Insights found that the No. 1 reason was the lack of a market need for their product (42 percent reported) followed by running out of cash (29 percent). More generally, US Bureau of Labor Statistics show that most businesses that fail do so within the first two years (34 percent). After four years, 56 percent have failed.
And so the 30 percent failure rate of book publishing startups is lower than industry norms. Something to be proud of?
Where Are Publishing Startups Heading?
It’s not only the traditional publishing industry that’s hit a wall. Self-publishing is slowing down. There are too many authors with too many new books and a backlist that never goes out of print. The demand for great books is solid, but the supply has gone through the roof. In the last year, we’re starting to see more and more reports of authors who are bailing—they just can’t make a living at it.
But I remain optimistic. Literacy rates continue to improve across the developing world. English as a first or second language is spoken by 1.5 billion people. Some 300 million new students study English each year. It’s a goldmine for the next set of startups that help authors and publishers reach out with the words they want to read.
Thad McIlroy is an electronic publishing analyst and author based in San Francisco and Vancouver, British Columbia. His site, The Future of Publishing, provides in-depth coverage on the broad publishing industry. His most recent books are The Metadata Handbook (co-authored with Renée Register) and Mobile Strategies for Digital Publishing. McIlroy provides consulting services to publishing and media companies, including MIT Press, Microsoft, Pearson, and Disney.