Sramana Mitra: What about the business model? Your hypothesis at that point was that you were going to digitize these textbooks, you were going to do the customer acquisition on the B2C side, and you were going to take a commission off that sale. What was the business model assumption with the publishers?
Matt MacInnis: They were taking all the rest of the money. It was a royalty-based model where Inkling was keeping a percentage of the sale of these titles. The publishers had all the leverage. The publishers got to set the price. They unilaterally controlled the transaction value and we just got a percentage of that. In hindsight, they were totally off.
I don’t think they get the last laugh because their industry is about to implode or is already imploding. They already had the leverage and they took advantage of us early on.
Sramana Mitra: They were greedy. This was the model that you sold to Sequoia during your Series A.
Matt MacInnis: They kept bringing up unit economics again and again saying, “You’re going to have to figure this part out.” It was not an easy thing to figure out, as you can imagine.
Sramana Mitra: I would say that with the publisher giving you so little, your unit economics would never work out.
Matt MacInnis: I think they assumed that any number of things might happen. We could end up with such volume that we would get pricing leverage. There’s a number of different outcomes that you might have contemplated at that point. They were willing to suspend their disbelief early. Good on them because when it comes to Series A investing, you have to be able to suspend your disbelief, otherwise you wouldn’t invest in anything.
Sramana Mitra: That is not entirely true. Part of what’s happening in the industry right now is, it’s become cheaper to build companies. Series A investors expect that you’re going to do all your validation before coming to them. Their assumption of what they expect to see in a Series A business is very different from what it used to be.
Matt MacInnis: That’s true.
Sramana Mitra: How much money did you raise from Sequoia?
Matt MacInnis: I think it’s $17 million.
Sramana Mitra: Series A?
Matt MacInnis: Yes.
Sramana Mitra: Wow!
Matt MacInnis: It was a large Series A. Sequoia looked at the opportunity and said, “These guys are going to scale this up only if they’re able to get a lot of content into the business.” They figured that it was going to be a very capital-intensive play. We’ve raised a total of $93 million to this point.
Sramana Mitra: $17 million in 2010 with which you then went aggressively ahead and asked your publishers to put some titles online, and acquired customers in a B2C mode.
Matt MacInnis: Right.
Sramana Mitra: You said you went from ten titles to a thousand titles in the third year. Are we talking 2011 when you hit a thousand titles?
Matt MacInnis: That would be 2012.