Sramana Mitra: This thinking behind your startup is happening while you were still at Apple?
Matt MacInnis: For probably six or nine months, we explored and brainstormed whether there was a viable business here.
Sramana Mitra: Your observation that the future of textbooks was not just digitization of what already existed was the impetus to think about Inkling and what you wanted to do differently at Inkling.
Matt MacInnis: Yes, I was walking into classrooms as part of my work. I saw students with laptops but not using them because the textbook was taking their attention. You see this insane paradox where you had spend $200 on this state-of-the-art technology to explore a topic freely and be engaged, but instead the teachers were telling them to close them and open the textbooks. It was absurd.
As an outsider looking in, you can’t help but think, “There has to be a better way here.” A bunch of us believe that the iPad was going to be a foundational technology that was going to enable an entirely new mode of learning. We turned out to be partially right in that assumption. It has just taken a lot more time and energy.
Sramana Mitra: When you started Inkling, what was the value proposition that you went to market with?
Matt MacInnis: It’s a two-sided market. On the supply side, you have to go work with publishers because, as a startup, you’re not going to build the entire higher education curriculum all by yourself. We went out and partnered with Pearson, McGraw-Hill, Cengage, Wiley, and Elsevier to get them to bring their bestselling textbook titles to our platform. The way we did that was we got permission from one of them to build a demo. We had designed our software. We had built the application on the iPad. This was before the iPad had even come out.
When the iPad shipped in April of 2010, we had our software running and we were able to go and meet with the publishers. They all got very excited by that. It was very easy for us to convince them to give us the assets around their bestselling titles. The first challenge was getting the content. We solved that with the publishers. The second problem was going to be scaling that.
When they give you 1,200-page books, you have 1,200 pages of stuff. It has to be error-free. At the end of the day, if you’re just replicating what was on paper, where is the additional media going to come from? That posed a whole new class of issue for us, which was the software side. How are we going to build a scalable content platform that lets us build interactive, digital media at scale for this whole new world. We ended up investing years into building a collaborative content platform that allowed us to work directly with the publishers to build high-quality content.
In the first year, we had 10 textbooks. It’s a tiny number. All 10 were beautiful and error-free. We won a lot of critical acclaim. In the second year, we had a hundred. The year after that, we had a thousand. It started to pick up. In 2012, we did something like $10 million in digital book sales. Problem number one is designing end user experience and number two is scaling production of the content. Problem number three is making it work economically.
I remember one of my early investors from Sequoia talking about unit economics. I didn’t even know what he meant by unit economics. As it turns out, when you sell $120 digital textbooks and you get to keep 15% of that, you don’t get a lot of money leftover to do customer acquisition to compete with the other digital providers and develop the technology. All the R&D and transaction expenses were coming out of that narrow margin. We just couldn’t see where we would be making money. Then this interesting thing happened. Starbucks called us. They wanted to use our software.