Publification : A Solution in Search of a Problem

Publification : A Failure in Two Countries

Publification is a startup created with great fanfare as a spin-off from Indilo Wireless, with a goal to provide a browser-based e-publishing solution. In other words, if you wanted to read a book but didn't want to install an app, you can read it directly from your browser. Its apparent appeal to authors is that authors receive a higher percentage of royalties (revenues) compared to major publishing platforms like Amazon Kindle or Apple Books.

The company is touted as a great Estonian success. They are listed as a success story on the Tallinn Technology Park website, and in October 2012 they were one of the winners at the Forbes Equity Club startup competition.

Was It a Failure?

Is this a failure? After all, their website is up and running and looks to be open for business. However, there have been few posts on their blog, their Twitter account is mostly retweets, and they have made no new product announcements lately. Most importantly, everyone listed as a member of their management team now have other jobs. More on that later.

So while the site may be up, we don't see much activity and would categorize this as a zombie startup, which in our view is a failure.

 

The Idea

At first glance, this seems like a good idea. The publishing industry (book publishers) seem to be making nice profits, and only a small percentage of the revenue from each book sale ends up with the authors. Why not come up with a solution to cut out the publisher and deliver more profits to the author? A win-win, right? The publishing industry is as old as, well, the printed Bible itself, so maybe existing publishers are too slow to adapt to the changing market.

However, it's not that simple. Publishing companies do bring a lot to the table for most authors, including an understanding of marketing, promotion and distribution.

By marketing, we mean an understanding of the market. Let's say you want to write a cookbook about healthy eating. Sounds good, right? Everyone wants to eat healthy these days. It's not that simple though. A publisher likely has a good understanding of target groups (working mothers? elderly? children?), as well as other books on the market, and what is selling well, and where there are gaps. We know one author where he was paid a six-figure advance on a book, and then the publisher decided to put the release on hold as the market timing wasn't right.

Then there is promotion. Let's say you've written world's best book. How will people find out about it? Should this be promoted to business travelers? As beach reading? Publishers know the right promotional channels that will yield the best results.

Finally, there is distribution, which can account for up to 50% of the book's retail price. Retailers, whether it be online or brick-and-mortar, need to get paid for their side of the transaction.

So even if the royalty rate is lower by going through a publisher compared to selling direct, an author is likely to make more money overall because they will sell much higher volume through the typical publishing model.

The end result is that in the publishing industry, unless you're an extremely famous author like J.K. Rowling or John Grisham, an author is a price-taker instead of a price-maker. In other words, authors accept the deals offered by publishers because it's the best overall option, and they have limited negotiating power.

Want to see this in real life? This article about Publification from October 2011 touts their planned release of Alan Moore's new book No Straight Lines. However, if you go to the author's website, you'll see he's promoting the book for purchase on Amazon, not Publification. Why would he do this? Our guess is Amazon has a much wider distribution, so even if the author earns a lower percentage, it's on much larger sales, resulting in more money in the author's pocket.

Note we're not not big fans of publishers and the publishing industry. There is a lot of room for improvement, but it is likely going to come from a company with large market clout, like Amazon's publishing arm.

 

The Technology

Even worse than Publification's idea was the technology itself. All they offered was a browser-based tool for reading e-books. There's nothing wrong with this, and it does offer more interactive features than other e-book readers, but it's still a solution in search of a problem.

E-books work well for consumers when the whole process is at least as simple as the alternative (a physical book). Amazon's Kindle service is a perfect example of this. You easily buy the desired e-book on their site, and it's automatically downloaded to all your devices. So you can read it on a Kindle reader, or the Kindle Reader app for your smartphone or tablet. In fact, just like Publification, you can read e-books using just a browser, with the Kindle Cloud Reader.

So from a customer perspective, which would you choose? The option that lets you read an e-book on any device or browser you like (Kindle), or the option that restricts you to only your browser (Publification)? We think the choice is clear.

 

Management

Normally, we don't focus too much on specific members of the teams of companies that we profile, since we're not on a personal vendetta, and often we've met the people involved (makes a lot more sense that we're anonymous now, eh?). We're making an exception in this case, since the team is an important factor in explaining this company's failure.

First, a brief history so we can get some dates in order. The company seems to have started in May 2011, when Marius Arras, Rait Ojasaar, and Janek Priimann went to the UK after the company was accepted into Springboard, which is a multi-month Cambridge-based incubation program which culminated in a final presentation to potential investors in August 2011. According to his LinkedIn profile, Janek left the company shortly after that, while Yrjo Ojasaar (Rait's brother) joined as CEO around the same time.

The company was fairly active from Fall 2011 until the end of 2012, so we'll focus on that period.

Now let's look at what the 4 members of the team were up to during that time:

• Yrjo Ojassar, CEO & Co-Founder.
• Myoton AS - Advisory Board Member
• Tallinn Technology Park - Entrepreneur Coach
• Solon Partners - Partner
• Prototron - Investment Board Member
• Software Technology and Applications Competence Center - Advisory Board Member
• Tartu University DDVE Program - Co-Founder and Lecturer
• GameFounders - Mentor and Advisor
• Startup Wise Guys - Mentor and Advisor
• Marius Arras, CPO & Co-Founder.
• Indilo Wireless - Partner and Board Member
• nodeSWAT.com - Co-Founder and Managing Partner
• Solon Partners - Partner (according to Solon webpage)
• Rait Ojasaar, CFO / COO & Co-Founder
• IronCurtain Entertainment - Hands-on Investor
• Indilo Wireless - Member of the Board and Investor
• Solon Partners - Managing Partner
• Myoton - VP of Business Development
• OCDesk - Co-Founder
• nodeSWAT.com - Co-Founder
• Harri Siirak, CTO & Partner
• Indilo Wireless - Software Engineer
• nodeSWAT.com - Partner & Mission Architect

It's clear that most of the members of the team, with the possible exception of Harri Siirak (who was involved in the other ventures only for a short time overlapping during the time period in question), had a lot of other things going on, and one might question their priorities. Yes, we realize that some of these activities are just in a mentor or advisory role, but that all takes time. Are these people really devoted to Publification full-time? In particular, the Solon Partners affiliation raises questions for us, as 3 of the 4 Publification team members were also 3 of the 4 Solon Partners partners at the same time.

Putting their many interests aside, there is another important detail here: no one on their team has experience in the publishing industry!

Show Me the Money

So let's re-cap what we have so far. We have a company with a bad idea, bad technology, and an inexperienced management team that is involved in other projects at the same time.

Would you invest in this? We wouldn't. Thankfully for them, and unfortunately for the taxpayer, EAS comes to the rescue, with 121,151 euros in funding:

Now here's where it gets interesting. As part of the Springboard program, teams automatically receive a small investment, so they get a $20k seed investment (13,910 euros at the exchange rate then).

Then, a couple months later, in December 2011, they receive $150k (112,260 euros) from Northstar Ventures. As stated on Northstar's website: "Northstar is a venture capital company dedicated to building successful high growth businesses across the North East of England." [emphasis added]. Also stated on their website is that much of their funding is backed by European Investment Bank and European Regional Development Fund -- in other words, EU taxpayer money.

Now hold on a minute. Isn't Publification an Estonian company? That's the requirement to be eligible for funding from EAS. Or are they a British company, located in the North East of England, since that's the requirement for investment from North Star? Or maybe they moved from Estonia to England?

According to EAS records, the two projects listed above were dated June 2011 and July 2012, and the Northstar funding occurred in December 2011, right between those events.

Does something smell fishy to you? It does to us. From where we sit, it appears this company managed to set up shop in both the UK and Estonia, for purposes of receiving EU funds from both sources. That's like taking a tortilla chip, dipping it in salsa, taking a bite, and then dipping the same chip back into the salsa. That's double-dipping! You can do that at home when no one is around, but companies shouldn't be doing this.

Add it all up, and we have 247,321 euros gone to waste.

(As an aside, the Northstar investment is not listed on their site, however in an August 2012 interview, Yrjo Ojasaar confirmed the investment.)

Too Close for Comfort?

Besides this questionable funding arrangement, there's another red flag that pops up in our auditor-like minds.

The way EAS funding for companies usually works is they pay up to 50% of the costs, and the company pays the other portion. The goal here is that the companies receiving the funding also have to share in the risk.

So let's say a company has in their plan that they will spend $1,000 on marketing. Their marketing supplier will give the company an invoice for $1,000, which the company then pays in full, and submits documentation to EAS. EAS then reimburses the company $500 of the sum (50%).

From our experience working with other companies that have received EAS funding, a common "trick" is to have the supplier invoice for double the amount, and then give that difference back to the company later. So let's say the company planned to buy $500 worth of marketing services. They would put $1,000 in their plan they submit to EAS, and the supplier would provide $500 worth of services but invoice for $1,000. The company pays the $1,000 to the supplier, and submits the invoice to EAS and gets $500 back. Meanwhile, the supplier also gives back $500 (perhaps minus a small handling fee), so the company effectively didn't have to pay anything.

What concerns us here is most of the management team from Publification was also working in Solon Partners at the same time, and had connections with other companies as well, like Indilo Wireless. It would be very easy for them to conduct a transaction like the one described above. Note we are not saying they did so. We have no evidence of this and we want to make that clear. We are merely pointing out that because of the close relationships the team had with other companies they managed, this would be very easy to pull off. We know the people at EAS are avid readers of our blog, and they do have access to this data. We'd be interested to know what they find, though sadly EAS does not have a good track record when it comes to enforcing the rules.

Where did the money go?

We're talking about fairly large sums of money here, especially for Estonia where the average salary is around 900 euros per month, and also when considering the short period of time involved. How did they burn through nearly 250,000 euros in 18 months?

Let's think about this further. In an IT business, the largest costs are usually for employee salaries and product development (both are somewhat related). However, in this case, we see that nearly all the members of the company had other jobs at the same time, so salaries weren't that important. On top of that, as far as we can tell, the product was already fairly well-developed around the time they entered Springboard.

As for overhead costs, they are touted as a success from the Tallinn Technology Park, so we assume they had access to the cheap office space and related resources there.

So how would you spend this amount of money, which is over 13,000 euros per month? Marketing and sales, perhaps? A bit more product development? That's what we'd do, but we still can't figure out how they burned through that much money in such a short period of time. We see little evidence of any major marketing initiatives, nor any major sales results, and only minor product development advances. Again, the auditor in us makes us really wonder how this money was spent and if any of it was directed to their other companies, but unfortunately we just don't have access to the data to figure that out.

Is the Government Part of the Problem?

So let's go over what we have here. Nearly 250,000 euros, almost all of it taxpayer money, have gone to waste, on a company with a bad idea, bad technology, and questionable management with no industry experience.

A quick Google search would result in the LinkedIn pages of the team members, and it would be clear they were working on other projects at the same time, and had no publishing industry experience. Why were they given any money at all?

It's not just a one-time mistake either. There were multiple funding events over 18 months, and each time there was an opportunity to do the simplest of Google searches to realize what was going on.

Maybe it's time to leave investing to experts in the free market?