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PS24 Who invests in innovation?
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PS24 Who invests in innovation?
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Segment:0 .
WILL SCHWEITZER: OK, so in this session, we want to talk about, is this market still investable, who invests in companies in our space, why do they invest, what do they expect in return? So I have a few questions for our colleagues here, and then we'll have some time to open it up for discussion with you all, whether you want to ask a question or if we just want to get into discussion itself. So I don't think anybody up here needs introduction.
WILL SCHWEITZER: Sarah Tegen is the Senior Vice President and Chief Publishing Officer for American Chemical Society. Sven has many, many titles, but Managing Director of Full Stop and Reviewer Credits. Sven's also an angel investor. And Sourav is a Chief Strategy Officer for Cactus Communications and, recently, the Chief Growth Officer of Cactus Life Sciences. Glad I got that straight. So I'm going to start out with this kind of just ground setting question, which is, what types of investment do you or your organizations make, and is there kind of an underlying theme or hypothesis?
WILL SCHWEITZER: Sarah, do you to start?
SARAH TEGEN: Sure, I can start. So ACS makes some investments, makes a few acquisitions. I'd say, we're pretty early in our journey there, and just a little bit more than a year ago, we acquired Kronos app sort of to provide some infrastructure within the scholarly publishing industry. For us, when we think about investments and acquisitions, our orientation is a little bit different than a publicly traded company than a for profit company.
SARAH TEGEN: We're looking for things that are really going to help our community thrive. Where are the places that our authors, or editors, or reviewers, or readers really need some support to make their publishing journey, their research journey easier? So for us, I'd say, we're a strategic investor. We're not necessarily a financial investor, but we also aren't doing this for free and for the good of science either.
SARAH TEGEN: There's going to be some return on it for us. So that's just a quick bit about how we think about investing.
WILL SCHWEITZER: Thanks. Sven?
SVEN FUND: Well, early in the journey sounds even worse for me, I guess. So I have been investing with my small company in primarily very early stage startups. There have been four exits. I counted all of this for you. So there have been 17 investments so far. It's all angel investments, and thesis, or hypothesis, or whatever you called it will-- I only have a self observation, how I do it.
SVEN FUND: I don't really have a kind of thesis. So I am interested in investing in people, because it's so early stage. I mean, many of the companies or ideas I invest into are not even companies when people approach me. So there is no point in looking at Excel, really. There's a point in looking at market potential, but then at people, whether you trust them or not. I tend to invest into stuff that I, at least, feel I do understand, which is not always working out the way it should, and I'm trying to hedge risks by really small investments, which can start at $10,000 and go up to $100,000 to just give you an idea.
SVEN FUND: So it's really small bananas compared to what others do, I guess.
WILL SCHWEITZER: And Sven, were all those investments kind of in the STM space, or do some go outside?
SARAH TEGEN: There are a few exceptions, which is a organic wine trading platform, for example. But except for those things that are even more obscure than what I do in publishing, it's 80%, 85% in academic publishing, yeah.
WILL SCHWEITZER: We need to talk more about the wine business. Sourav?
SOURAV DUTTA: A few years back, Cactus actually thought about, OK, we are invested in one business. We've been doing that for 15 odd years. How do we grow from there? So we kind of came up with a framework, if you may. One was acquisitions that are capability acquisitions, which mean that they are a bunch of things that we do not have in-house capability to do, or if we had to build, it would take us a lot of time. So it might make sense to buy into those capabilities.
SOURAV DUTTA: So that is a capability acquisition. Second is a market share acquisition. So it might be it helps us penetrate a market, it helps us target a particular customer segment, and so on, and so forth. Even if you're trying to acquire a company for its brand, it's still a market share acquisition, because market share comes with the brand, right? So those were-- this is the more cliched way of thinking of M&A, right?
SOURAV DUTTA: Either do capability or do market share. What has also happened in the recent past is our industry, as a lot of conversations have happened over the last 36 hours now, that it is open to disruption. So the third lever that we are now looking at and we've been looking at actively for the last few years is, how do we hedge against disruption? And hedging against disruption is not just trying to build a contract capability, but probably also kind of say, hey, this might disrupt what we do.
SOURAV DUTTA: And I think somebody said in the morning session that we should be ready to disrupt ourselves. Sometimes, it's not that easy. So you say, OK, let me invest in somebody who could potentially be a disruptor, and I'm invested. And let's say, if that's the way the market trends, then we already have one leg in that boat. So those are three different levers. So I'll just-- on silo, which we acquired in 2020, some of you might know, was a capability acquisition.
SOURAV DUTTA: Mind the graph, which was an image creation platform, was a capability acquisition. Earlier this year, we bought a Swiss company, which is on the medical side of our business. It is a market share acquisition, because it gave us entry into the European market, and we have invested in a few startups, like Kudos, Scholarcy, a site we were invested in. We got bought over by Research Solutions and a few others.
SOURAV DUTTA: There are some in the room. I'm talking to a few others as well. So yeah, so those are our disruptive hedges or hedges against disruption. So that's largely the thesis that we follow, and everything, we kind of always test it against build versus buy. There is always a tendency to say, hey, this is too expensive to buy. We might as well build it ourselves.
SOURAV DUTTA: But there are pros and cons, right? There is also this probability of success that goes in, right? It's always more challenging, and it kind of gives you that high when you kind of build it yourselves. But there is also the probability of failure. So you kind of also balance that. So every such-- each of these three buckets have a build versus buy also every time. So that's largely the framework we follow at Cactus.
WILL SCHWEITZER: Thanks for sharing that. So for folks who are thinking about selling a company, or if you're a startup, this entire process is, like, filled with myth and lore, right? You have to have the perfect pitch deck. You're going to spend forever rehearsing it. There's an element of luck to this. You have to have really good bankers to advise you. So as a two part question, one is, as you encounter startups or if you look at a capability acquisition, how do you evaluate those businesses?
WILL SCHWEITZER: And then based on that, how you evaluate, what advice would you have for the startup leader or for the seller?
SARAH TEGEN: I'll start that. I would say there are a couple things. What we're looking for is a really good cultural fit. For us, some organization that is OK with being acquired by a non-profit organization or a big non-profit, a non-profit, nonetheless, that supports the mission of our organization like Sven said, like an Excel, is nice, but it only gets you so far, right?
SARAH TEGEN: I mean, it's really-- when you're looking at small stage startups, it's about the people who are there. It's not that you're buying their book of business necessarily. It's what can they offer you, are they going to fit in? And then, if I were giving some advice to folks, it's to be realistic about our market. I mean, we saw the pretty slides earlier from Will.
SARAH TEGEN: Our industry is growing slowly. Certainly, there are fluctuations in there, but it's a good, stable industry. So I don't think we should be expecting, like, enormous growth out of companies either. It's going to be steady, steady kinds of returns.
WILL SCHWEITZER: We'll definitely come back to that topic in just a minute. But, Sven?
SVEN FUND: As I said, and it sounds pretty romantic, I don't mean it that way. But I think I know, like, hiring a person for a job after half an hour, whether this, at least, as an idea can work out. Obviously, you never know whether somebody fails or not, as with hiring a team member. But I would say, it's really important, what this first impression is and also whether the founders have the determination to solve a problem in the industry in an industry that they, in some cases, don't completely understand.
SVEN FUND: Many of them join academic publishing. For many, it is the first job, basically, they really do or the first launch of a company. Many make the mistake of thinking that this is a B2C industry, but they learn quickly, because they're running out of cash, that it is not. So I would say, I mean, I think that's probably the value that you have as an angel investor, that you can tell people, you make your decisions as you want, but give me five examples of a B2C approach in academic publishing that is successful, and then we can talk, again, about your business.
SVEN FUND: And I think what you said, Sarah, is really important. This is not a unicorn industry. This is something which is also-- I guess- an element where you can all help is it takes awfully long in academic publishing to be successful. I can say that from my own involvement in reviewer credits. A lot of people are interested, and it takes two years to look at the business and see whether it survives, how it develops, whether others come, and so on, and only then you see activity.
SVEN FUND: So I think everybody could help in being a little bit without investing even, a little bit more responsive to these ideas, because just saying, "ah, that's a great idea, we'll think about it," doesn't bring any change. I think it's very clear that it is not a unicorn industry, that the big disruption that brings billions in a short period of time, like Tesla investment, or NVIDIA, or whatever it, is not going to happen here.
SVEN FUND: I think a lot of private equity or venture capital funds have made the mistake, assuming that and hoping for it. But it is a very cash rich and profitable industry, if you get it right, and I think focusing on that makes a lot of sense. So I see, over the last two or three years, two years probably, that a lot of startups are focused on getting cash flow positive in the first 12 to 18 months, for example, and that winning market share is not the ultimate goal really, but being profitable and surviving in this space.
SVEN FUND: So a little bit more of a kind of modest approach, I would say, compared to the big Silicon Valley activities.
WILL SCHWEITZER: Right. I mean, a modest approach in being default alive with cash flow positivity certainly helps in a market where it's tough to raise money. But, Sourav?
SOURAV DUTTA: Yeah, so I'll first answer as to what this industry is, right? Like, the four and a half years at Cactus are the four and a half years for me in this industry. So when I compare it with some other industry, let's say, consumer goods, I think this industry stands for purpose. This industry perceives a value of purpose higher than profits, right? Of course, there are players here.
SOURAV DUTTA: Of course, there are players here.
SVEN FUND: Whom are you're talking to usually?
SOURAV DUTTA: Of course, there are players here who make a lot of bottom line numbers, right? And we all know what we're talking about. But that has to be an alignment on purpose when an investor, an outside investor, a VC who is not from this sector, trying to invest in this sector, should not wait against a Tesla type opportunity, because then you are looking at it from the wrong lens. That's one, right? I just wanted to say that perspective.
SOURAV DUTTA: Now, within the industry you're looking at, I think, a plus one on what Sarah said, that the culture fit is a very important thing. We always look for culture fit whenever we are looking at a target. I think every time we have gone past the first stage of, hey, we want to invest in this company or we want to acquire this company, the first acid test that it has to pass is that there is a great culture fit.
SOURAV DUTTA: The second bit is, do the founders or does the founding team know what they are solving, right? A lot of time, they feel they are solving a certain problem, but they are not, right? And, thirdly, is there somebody who is ready to pay for that, right? A lot of times, we solve a problem. Fantastic, and it is for a very noble cause. But if there is nobody who is ready to pay for it, I'm sorry to say, the company survival is at risk, because how does it pay salaries?
SOURAV DUTTA: So it needs to have a payer at the end of the day. The payer could be a publisher, or a society, or could be a B2C. More often than not, it has to be a publisher. I agree with Sven on that, but there are companies who have been on the B2C side and have succeeded in this space, including Cactus, right? Cactus had 80% of its revenue as B2C revenues, a significantly sized company at that. So those are the three things, actually, those which we look at when we are looking at a company, right?
SOURAV DUTTA: Valuation comes much later. Valuation is-- again, because, like Sara mentioned, that it's not a high growth industry and you do not see the kind of-- like Sven mentioned, you don't see the kind of returns. One has to be creative with the valuation and the structure, right? You cannot say, "Hey, I value this company at $500 million, and I will pay it on day one." That doesn't happen in this industry.
SOURAV DUTTA: You have to be creative about how you structure. You have to predicate it on certain success points and then make it like a win-win situation for both the buyer and the seller, right? So those are technical nuances. I don't want to get into those, but valuation comes much later in the game. The first thing for us is to clear those three tests.
SVEN FUND: Can we fight or not?
WILL SCHWEITZER: Sure.
SVEN FUND: OK.
WILL SCHWEITZER: Not actual blows though. [LAUGHING] Popcorn?
SVEN FUND: So I would question this element of purpose in this industry. I would assume that every industry believes they have a purpose, whether it's food security, whether it is development of pharmaceuticals and drugs, whether it is mobility, whether it's entertainment. Nobody says, "I'm doing this, but it doesn't make any sense, really." So I'm not so sure whether I wouldn't take a more kind of capitalistic approach to investment and say, the return on the capital deployed needs to be attractive for kind of anybody in a field compared to your own core business plus to other industries, right?
SVEN FUND: So why would I invest into academic publishing if I wouldn't hope that, in my personal view, this is a defensive market, which I understand well, in contrast to blockchain technology for banks, or semiconductors, or whatever? I have no clue what that is and how it works as an investment thing. But, I mean, I think academic publishing is something which is easy to invest in, because it is pretty predictable.
SVEN FUND: I can already tell you-- and if you see who has made strategic investments and bought out startups, it's always the same 15 players. So it is unbelievably simple to do it and to build early on a kind of, if you want to call it, like, that equity story, that works as a startup entrepreneur, right?
SOURAV DUTTA: So I did not mean that other industries don't have purpose. I mentioned that the purpose is a little higher than a marshmallow making company, but that's what I'm saying. But coming on the return on capital employed, I think return on capital employed is a function of how you have employed the capital, which is where the valuation question and the structuring question comes in, right?
SOURAV DUTTA: So the same company, let's say, if I'm looking at company X and it is generating a revenue of-- I'm just picking up a number, $10 million. And, let's say, this is a tech company has repeatable revenue, and in some other industry, the VC industry, might say, it is 10x revenue, value it at $100 million. In this, the VC might come in and say, this is 5x revenue. The reason why he has diluted the value from the traditional tech startup is because he wants to make return on equity, return on capital employed, right?
SOURAV DUTTA: And again, I made it oversimplified when I said, OK, 10x versus 5x. But what I'm trying to say is there are creative ways of generating returns on capital when you're deploying the capital, and that is where the creativity of the VCs come in when they're looking at the sector, rather than saying, hey, let's compare this with-- I'm just making it up.
SOURAV DUTTA: --OpenAI. OpenAI is valued at whatever revenue. It's 100 times revenue. Will any startup in this space be valued at 100 times revenue? I'm not sure, yeah.
WILL SCHWEITZER: If you think you are, any of us would like to talk to you, but let's talk about return on capital and, actually, expectations in return for investment. We're obviously very different types of investors on the stage here. But for a lot of us in DC, we work for non-profit societies that have investments in real estate, large cash reserves, large investment portfolios that can generate a pretty nice return.
WILL SCHWEITZER: And I remember, when I was at a nonprofit, deciding to acquire a company, I had a calculator internal rate of return. So could we make more money buying this than we could if we just kept those dollars parked in an index fund? And there's always a bit of magical thinking, I think, that goes into making an investment, and you all are absolutely right. If any startup comes to you or any company comes to you with hockey stick growth expectations, we know it's crazy.
WILL SCHWEITZER: Whether you're selling to libraries or you're selling a solution to publishers, you know you have a 12 to 16 month growth cycle. You're not going to go from single digit growth one year to double digit growth the next year without a lot of investment, and things take time. And if this industry is only growing 2% to 3% a year, that puts some downward pressure, I think, on long term growth expectations.
WILL SCHWEITZER: So given the types of investors you all are, like, how do you think about the return? How do you justify putting either that cash, or extending kind of earn out structures, or other types of rewards in exchange for acquiring a company?
SARAH TEGEN: Well, it's one of those groups that's based here in DC that owns buildings which are worth, like, less than zero right now. Maybe not quite. The rate of return on a startup investment actually looks better than the real estate market today, but how do we think about that return? For us, the way we can sell it internally to our executive team, to our board is, what's it doing for the community?
SARAH TEGEN: Is this going to help nucleate the community? Is this going to help solve a problem that a researcher has? Is this going to help ACS be a larger, more influential organization globally? And we can worry a little bit less about what that return looks like, because we've got this mission component, which is great. We think about structuring an investment. Boy, we're pretty small potatoes in this, and when you're thinking about,like, cultural fit, I think you get startups then that have a similar kind of mentality to what ACS looks like in the kinds of returns, the kinds of structure of investments.
SARAH TEGEN: So it kind of works out, because I think we're looking for the right kind of kind of organization.
SVEN FUND: Well, for me, it's relatively easy. I don't have a board and an investment committee that's all being merged into one position, but--
WILL SCHWEITZER: Something tells me you're capable of arguing with yourself.
SVEN FUND: No, but it's really simple. For me, it's two things. It is, indeed, do I make a relatively risky market at the same or more than I would make with other risky investments, basically, in ETFs or whatever it might be, which are not that risky after all? And the second thing is fun, right? I mean, I am doing this, because I'm connected to people, particularly, and topics that I find relevant.
SVEN FUND: That's part of my focus, basically, and where I feel it's rewarding for me in one way or the other to interact with these people. And that's why, I think, it's probably not really helpful to most of you, because if you explain that to a board, they will say, this thing is not about fun, but let's be a little bit more substantial about things. But that's really relevant, and I think, also, since I kind of crossed this line of probably 10 investments or so, there is a networking effect, of course.
SVEN FUND: So you can see that these things are interconnected and that the topics for startups are comparable. Who is the buyer persona? How does this position in the market and a few other things?
SOURAV DUTTA: For us, I mean, I'll go back to the framework I mentioned a while ago. It's a build versus buy, right? So it becomes easier to kind of do build versus buy comparison, and also, so there are multiple approaches by which we come at a valuation range, if I may. So there is the traditional IRR approach. There's discounted cash flow approach. There's a comparables approach. There is also build versus buy, right?
SOURAV DUTTA: So we compare all of this. You kind get, like, a suite mean somewhere, and you say, OK, this is how we've arrived at a valuation. That's the more technical answer. But on startups, when we are looking at startups, I think what we are not looking at is what it is currently doing. We are actually looking at, like I mentioned, we are looking at as, like, a hedging strategy against disruption.
SOURAV DUTTA: So we are valuing the disruption value, right? If this actually disrupts, what's the value at risk? It has a more risk based model. It's a little complicated, but we kind of try quantifying it with the help of some numbers and understand the disruptive value of that startup. And we do active conversations with-- Sven, I did not do that with you. But yeah, with a lot of other startup guys, we kind of try and evaluate, OK-- and that is where the understanding of the founding team becomes very important.
SOURAV DUTTA: Do they understand what they are trying to disrupt? What is the disruptive value of the startup? Are they doing something which is easily replicable versus something that is defensible, has a strong moat around itself? So it goes into those conversations, and then we start thinking about, OK, now that we have agreed on these, OK, let's now try and evaluate.
SOURAV DUTTA: So it's a little bit complex. So for some of the startups who have spoken with me in the past, it has been slightly elongated because of this, because you're trying to understand these angles. It is not-- we are not investing to make financial returns out of it. We did make financial returns out of two exits we did. There were other companies who bought over the startup we had invested in.
SOURAV DUTTA: There was a company called DoDock, which is a Portugal, Boston based company, got bought over by Envision in the pharma space site, everybody knows got acquired by RSV. We had a significant stake in site, but the point I'm trying to make is we did not go in with the intent of making financial returns, but we made great financial returns.
WILL SCHWEITZER: Right.
SOURAV DUTTA: Because we had valued it rightly, because we had thought through the disruptive value of that, and we had thought through that, even if, let's say, we were not to buy, there be potential buyers in the market who would be able to value that. So all of those kind of-- sorry, I'm making it way too complex.
WILL SCHWEITZER: Oh no.
SOURAV DUTTA: But that's how we are thinking about--
WILL SCHWEITZER: Right.
SOURAV DUTTA: Yeah.
WILL SCHWEITZER: I mean, I'm sure the returns were more than nice to have at some point. So all of you have talked about making investments for either solving a problem, for serving your community, advancing your mission as a way of thinking about how your existing business or this market could be disrupted. But a more philosophical question for you all, this industry has looked the same for 10 years, and there's been a lot of dollars deployed in it.
WILL SCHWEITZER: Why? Any thoughts?
SARAH TEGEN: Yeah, because we serve a guild. We serve lots of, like, academic guilds is what it is, right? And I think that the impetus to change in academia is slow at best. So I think that the way that you train graduate students today looks a lot like the way I was trained, 25 years ago. So I think one of the things that strikes me is that our industry continues to remain relevant as long as tenure and promotion remain relevant and that articles are the way that you get credit to get tenure and promotion.
SARAH TEGEN: So unless that pressure changes, I think we're going to see sort of a continuation of this market kind of in the same vein. Are we going to see certain shifts, because, now, we've got Gen Z kind of people who are postdocs, and young faculty, and stuff, and they think about the way that they interact with the web a little bit differently? Sure. I think we should be a little bit more consumer focused.
SARAH TEGEN: I think we need to be a lot more user friendly focused, but ultimately, we're in the business of certification, validation, dissemination, all of those great Asian words from 1650, right?
WILL SCHWEITZER: We'll be looking forward to the chemistry TikTok dances.
SARAH TEGEN: Oh, no, no, no one wants to see chemists dance.
WILL SCHWEITZER: This is fun.
SVEN FUND: I would be slightly more pessimistic, frankly. I think this industry just gets away with it. So there is no need to innovate from a perspective of profitability of returns. It seems to be OK, and we only innovate under pressure, which many industries do. So I think that's probably not worse here. So to your point, Sarah, I would say that research evaluation has changed quite a bit over the last 10 years, but publishing or funding, grant funding, but publishing didn't really respond to that adequately, I would say.
SVEN FUND: So I think there would have been many steps that we could have taken as an industry. And, finally, I would say some fields are vastly under-invested, right? I mean, if you look at the technology stack of a lot of companies, if you all go home and make yourself serious in front of your mirrors, I guess, you know where the problems are. So we shouldn't say that this is an industry which is technologically really invested to a point where it should be, even the different companies.
SVEN FUND: So I think in a company that is-- in an industry, sorry, that is as profitable and as well oiled as academic publishing is, every change means a risk to have less after that change than before. So I guess eliminating that risk is rational, but I wouldn't say that-- so in that respect, it's a very rational industry. But I would say that, yeah, it's surprising to me how stable the profitability of the industry, especially of the large players that care a lot about profitability in contrast to non-for-profits, or family owned businesses, or something like that for whom it's paramount.
SVEN FUND: And that profitability is stable and growing, if you look at not only your revenue slide in the morning. But if you put some of the valuations of companies and profit margins over the last 10 years there, you would see the same, right?
WILL SCHWEITZER: Right. Up and to the right, that sounds like a great case for greater reinvestment in our industry, actually. Sourav?
SOURAV DUTTA: Yeah, you know, the risk of speaking or being the third speaker in the panel after two illustrious speakers became real. I don't have anything to add, but I would like to add one case in point, which is this startup called Benchling, which a few of you might be aware of, right? So Benchling started off as a research bench for academia, and it very quickly pivoted to saying that we will serve corporates, and academia is actually our research lab, and this is where we test the product.
SOURAV DUTTA: This is where we build the stack, but we are not building the stack for academia. We are building the stack actually to pivot into pharma, and the moment they did that, their valuation was an astounding $6 billion, right? So 6 times the unicorn. So I think-- and I've been speaking with a couple of you across the last two days. I think the problem this industry has faced is all the things that both of you mentioned.
SOURAV DUTTA: It is also that it has been restricted to a smaller circle of influence, which is researchers concerned about their promotion, their pays, their grades, their life. If we increase that circle of influence to include a few other stakeholders and start catering to them, this pie will suddenly look a lot larger, maybe 10x larger. That is probably one of the ways, and it is stunning that we have some examples, like Benchling, which went to a larger sphere and got that valuation, but we don't see that happening across a lot of other startups, right, maybe?
SOURAV DUTTA: I don't know. This is a hypothesis I have, that probably, if this industry were to expand its circle of influence, it could get the valuations. That could be amazing.
SVEN FUND: I think that's a great point. If you look at H1, for example, as a network compared to others, like academia.edu, and ResearchGate, and so on, they also have a very high valuation, because they were able to kind of break out of that relatively limited market. I think that's a super interesting point.
WILL SCHWEITZER: So two more questions before we'll open up to the audience. One is, from your seats, are there areas in this market that need investment, that you would like to deploy money, if you could? And if you have a closing comment following that, we'd welcome it, and then we'll turn it over to the floor.
SARAH TEGEN: I think, Sven, you made a really good point about the underinvestment in tech stacks in our industry. So many of us, particularly in the nonprofit space, have outsourced the touch points with our researcher customers to third party vendors. So for us, we certainly see the opportunity to be closer to our customers, to better control that marketplace.
SARAH TEGEN: To, frankly, minimize the interaction with some of those third party vendors is something that's really important to us. So it's either twofold. So either reinvent your tech stacks for big players, or let us layer some stuff on top of it that gets us closer.
SVEN FUND: You want to go next?
SOURAV DUTTA: Thank you. Yeah, one area of investment is building tech stacks which could scale to other industries. Just connect to the previous point I made, right? So build a tech stack, of course. I think there is low incentive to build a tech stack, because your upside is limited. So that is that chicken and egg problem, right? And you keep blaming that they're not investing in the tech stack, but at the end of the day, everybody's like, why should we invest?
SOURAV DUTTA: We are already-- they're there everywhere, and everybody who wants us uses us. So building a tech stack that is scalable to other industries, if we spot such opportunities, we will go for it.
SVEN FUND: I'm interested in two things. One is a concrete one, I think, on the funding side. There is a lot of opportunity, because that's a very unstructured and transparent market to many. And I think with technology, that is not so difficult to structure. And, secondly, I'm really interested in seeing investments into true digitization, so not putting text online. I know some of you are very interested in data publishing, for example.
SVEN FUND: We have talked about that for a decade or longer, right? And I think really making progress there, where we also have now use cases with AI, where probably an LLM doesn't just want to work on text, but on data is really getting important. So I would hope that especially the large publishers that have the deep pockets for this would invest into that field.
WILL SCHWEITZER: Very interesting. Any questions for our panel? It's the post-lunch doldrums. No, it's all right. I can be on the move. It's fine. I won't trip.
SPEAKER 2: Sarah, what you said about serving the guild and that being a hedge against innovation, that resonates with me, and in the humanities, a big concern, a growing concern is the crisis in higher education, and especially now, the move toward adjunct and away from people who can really invest in a scholarly and research career, but also universities and colleges closing.
SPEAKER 2: So things that get at that core 10 year structure, that kind of drives everything we do, and I'm just wondering if that is on your radar, any of your radars as a potential just really cataclysmic disruption as you consider investing in scholarly and research publishing.
SARAH TEGEN: Ooh, I don't know that I've got an answer here. But I know that, as a global community, we as a national community, whatever, we are so much poorer if we don't continue to invest in the humanities, right? I mean, I think that the way that social scientists, humanities scholars think about the world is really different than the way that I approach it from an STM point of view. And I think, frankly, state legislatures that are cutting back on funding for state universities, the closing of small institutions, that's not great for us.
SARAH TEGEN: I mean, we also have to look at like, what are the population demographics, and what's the number of higher Ed institutions that any given country can support? And it's probably a little bit out of whack in the US. But I'm not sure that I have a great answer to what kind of cataclysm could be in front of us other than I hear your problem, I stand in solidarity with you, help me help you.
SPEAKER 3: So do you not see that crisis as the prospect of scientific research?
SARAH TEGEN: I think it's different in scientific research. I think, because there's so much more IP relevant research, that there's a bit more protective effect there.
SVEN FUND: Well, I would-- if I may add, I would say that what I find most striking as a problem is that there is a huge corpus of open access content in the humanities and social sciences as well. There is tons of books out there, open access books, which can't be effectively used in classroom situations, simply, because educators don't know about them in many cases and don't work with them properly. So look at a company, which is called Sylla. It just launched last week, S-Y-L-LA, and they match syllabi, basically, with licensed or open material, which is probably something that publishers don't like to hear.
SVEN FUND: But it should encourage them to publish more open access content, and then it's being linked in there as well. So I think that can bridge a, gap, basically, which is very obvious and where technology can easily help. Like, initiatives, like open syllabus and so on, I think, are doing great work there, and Sylla is based built on that, basically.
SPEAKER 4: Hi, thank you. So I'd like to pick up on what I thought was a really important point that you just made there, Sven, about why we haven't seen the level of disruption or change in scholarly publishing and why it looks much the same as it did a decade ago. And, taking your point, Sarah, about other things that haven't changed and so on, I wonder if there are other reasons for that as well. I'm thinking back to some of the points that Alex was making this morning about the fact that we're in a relatively stable, relatively profitable industry.
SPEAKER 4: It gives us an opportunity, arguably, a responsibility, to innovate in ways that create a better system of scholarly publishing, sharing of research. I think there are signals out there that what we're doing aren't working, or they're, at least, increasingly disconnected from key audiences, whether it's librarians, whether it's researchers, number of signals about that. Arguably, in some ways, the lawsuit that was launched a week or two ago is a signal of a sort of disconnect or perceived misalignment of what some publishers are doing with the values of science, with the values of research.
SPEAKER 4: So I think there is a pretty good case that there is a pressure out there, a need for us to innovate, if we're to really stay aligned and to meet those needs. And I just wonder if you have any sort of thoughts on that as opportunities of how we think about innovation.
SVEN FUND: Well, if I may, I think there is an interesting point. You mentioned Kronos app, which has been my competitor against or able as CCC did. I think that is a very small field, which is basically metadata and payment information to organize this mass of articles, APCs, whatever the business model is, hitting libraries and being managed by libraries, which are usually not very agile in managing these kinds of upcoming and new trends.
SVEN FUND: And I think what we have been doing there, even though I'm not arguing for a new case law here, but I'm just trying to say what we did. I think very carefully was stay competitors in the market, make sure that there are different offerings, make sure that customers have real choice, but at the same time, innovating together, basically, into one direction that wouldn't kind of hinder competition. So I think it's really important that the industry does more of that, and Allison, to your point that publishers, also, as I said earlier, shorten their decision making cycles, that some people just say, look, here's a sandbox, 20,000 articles behind the paywall, open access, metadata, whatever you want, and whatever.
SVEN FUND: It's GDPR compliant, play with it, try it out, ask your questions, because it gives publishers a lot of information back on how startups think and what the challenges are, right? So I would say, for example, open LX, and the fact that this corpus of metadata and related content was opened really unlocked a lot of innovation at the end of 2021. And I think publishers could have had that five years earlier if the very careful trials that have been there would have been a little bit more kind of energetic and a little bit more open.
SVEN FUND: So I would say it is-- that's the good news. It is in the industry's hands. It's in your hands to make a difference. It is not something that somebody in Washington, meaning politicians, or in Brussels, or elsewhere has to decide. It's not about deregulation. It is just about doing it, and I think that's not so difficult.
WILL SCHWEITZER: I mean, that's a very clear call there. I think there was another question over here. I didn't see it. Théo?
SPEAKER 5: I'll go even broader. I wanted to touch base on something that you, Sarah, said about the role of publishing and publishers in academic career evaluation. So last week, in a different venue, we had a discussion about separating the role of publishers from content dissemination to academic career evaluation and what will be the new role of publishers. So with that mentality of paradox then, if we really succeed, and move the field forward, and separate these two tasks, what will be fundamental for us to invest in if we really remove what is the focus on journal impact factor or, really, career evaluation for people?
SARAH TEGEN: Right. So you're saying that the certification part of what we do is no longer important, OK? I think that the audience then that we can serve is that researcher who's wearing that content consumption kind of hat, right? We hear all the time from researchers, we don't need any more journals in our field. There are enough journals. What I hear when someone says that to me is not, "We don't need more journals." It's, "I don't have enough time to consume the information that's out there." So what is it that we as an industry can do to really help those researchers find the information that they need to hone in on the interesting questions that they want to ask in order to make discoveries to advance humanity?
SARAH TEGEN: So I think that's how I would think about pivoting our industry a little bit.
WILL SCHWEITZER: Coming to you, Paul.
PAUL: This is a little bit of a comment and a question, but I'd love to get the thoughts from the panel. If we look kind of historically at our industry and the major threats or the major disruptions that have happened-- I'm not old enough maybe to go back 1,500 years. But if I look at open access, and then I look at research integrity, those issues, and now, we're looking at having questions about should we be blocking Google from consuming our content, the big shifts and that will drive innovation tend to be very defensive.
PAUL: They're trying to defend the moat and preserve what we have, and the graphs that you showed me earlier on, yes, the funding into research is growing. But the percentage that we are taking from that pool is pretty consistent. Yes, we are growing, because it's growing, but we're not growing ourselves. As a founder, creating a company, trying to create value, create innovation, oftentimes, it can be challenging when you're not one of the defensive lines, when you're something different.
PAUL: And there's a mindset, I think, within the industry that's very defensive and often isn't open minded to think about, to pick up on Sourav's point, how do we serve beyond the audience we've historically done? All the Asian words that you mentioned, we consistently just do them. We don't add new ones in, and I suppose the question I have for the panel is, what's it going to take for real innovation to thrive and for us to shift that defensive mindset?
PAUL:
SVEN FUND: That's one for you. [LAUGHING]
SPEAKER 6: Can I ask it another way? Because that question, I think, is really powerful.
WILL SCHWEITZER: Sure.
SPEAKER 6: Hi. Can you get a little bit? Hi, Sarah from AIP. To ask it another way, how are you thinking about-- is there a world where innovation and investment takes place to sort of proactively engage in the transformation that all of these organizations are hedging against? Is there some opportunity, or either investment, or otherwise, where instead of trying to slow this change, there's actually financial benefit in accelerating it?
SPEAKER 6: Maybe that's another-- I don't want to restate your question. Maybe it's my own question, but why aren't we leaning in-- where is the opportunity to lean into the change, understanding that it's going to be massively disruptive for most of our businesses, given the fact that there seems to be a trajectory, where we're fighting against moving in? Excuse me. Thank you.
SPEAKER 6:
SVEN FUND: Yeah, well, I have probably one example, which is not about disruption, really. And by the way, I'm having a little bit of issues sometimes with the concept of disruption, but that might just be my European soul. I don't know. But I know you have to be disruptive here to be heard in this country. As you know, I'm working a little bit since two years on peer review.
SVEN FUND: The first reaction, the idea is to build a platform, which is cross publisher peer review, which, first of all, gives the reviewer the opportunity to say, I don't want to review for these journals, publishers, whatever, and I do want to review for others, so that we better understand what researchers want. And, secondly, it is meant to better understand who is most suited for a specific review for publishers, who is responsive, who is an expert on which level, what's the H index, what's the experience and these kinds of things.
SVEN FUND: Almost every publisher responds to the cross publisher idea by saying, but this is our reviewers. But it is not your reviewers. There is no researcher in the world, I would say, that is Stephen's reviewer or Sarah's reviewer, but it is this response. First of all, it's difficult enough. It's defensive enough. Let's not make it more complicated around peer review, right?
SVEN FUND: And that's understandable. So I think-- and again, we are seeing a lot of anti-competition issues being discussed, and I'm not favoring them and not asking for more problems there. But I think kind of releasing some of these views, where people, basically, are really defensive about their things, I think that's the best thing to go. I mean, it's not disruptive, but it would address a lot of issues.
SVEN FUND: If you would standardize peer review, a minimum standard for whatever has to happen in peer review, why are there publishers with 2,000 journals that have 2,000 processes on peer review? That cannot be good, and it shows that you never thought of the researcher that always has to understand this is an ACS, RIC, Wiley, Elsevier, God knows what journal. So why not make it simple for people, a little bit like entering a car through the left or right door, if you are in Britain, and take this steering wheel, and get going, right?
SVEN FUND: You don't want to, first of all, find out whether you have to climb from the roof or how you get into this thing. And I think that is something, which is pretty simple in the industry and where we probably have to go for more standards in a way, simple standards, easy standards that are not only technology driven, but also processes. And, particularly, since this industry contracts in size, if you take out the inflation rate, which you didn't do in your slide, then, I think, it makes sense to really consolidate and see where you can really create value as an individual publisher, and it is not by coming up with a new peer review mechanism or something like that.
SVEN FUND: I guess there are 50,000 other examples like that.
WILL SCHWEITZER: Yeah, math is hard, Sven. [LAUGHING]
SARAH TEGEN: No, no, no, it didn't serve the argument. I got it.
SOURAV DUTTA: Let me answer it in a slightly different way. I think the players that are making profits in this industry do not have any reason to change, and they will still keep making the same profits. This is not true for other industries. That is what is preventing change.
WILL SCHWEITZER: I'm going to exert some moderator privilege here to provide my perspective, Paul, which is fear and short termism, right? Very few places I've worked in my career have taken a long term view. In fact, it's been really rare, and really early in my career, where you would have a publisher who would say, "go launch important journals in this interdisciplinary area of research, we might care if we break even in 10 years," that doesn't exist anymore.
WILL SCHWEITZER: If you're a publicly traded company, you're worried about your one time sales ahead of a quarterly close for stock price, right? A lot of us in our day to day jobs are told to cut costs, find a little bit of margin. And I want to go back to Alex and Sarah's talk this morning. It starts with kind of our ethos. It starts with our leadership and risk taking mentality, which is, if we accept that we're playing a long game and we are fortunate enough to have organizations that can support small bets and investments, I think a lot would change in this market, and it is much a mindset thing as it is anything else.
WILL SCHWEITZER: And I'm guilty of it too. I did the same thing as a publisher for a very, very long time. OK, Sarah, Sven, Sourav, thank you all very much for a really interesting panel. Thank you to the audience for hanging in with us after a sugar crash from lunch. We'll have coffee and a break now, but please, join me in thanking this group.
WILL SCHWEITZER: [APPLAUSE]
Segment:0 .
WILL SCHWEITZER: OK, so in this session, we want to talk about, is this market still investable, who invests in companies in our space, why do they invest, what do they expect in return? So I have a few questions for our colleagues here, and then we'll have some time to open it up for discussion with you all, whether you want to ask a question or if we just want to get into discussion itself. So I don't think anybody up here needs introduction.
WILL SCHWEITZER: Sarah Tegen is the Senior Vice President and Chief Publishing Officer for American Chemical Society. Sven has many, many titles, but Managing Director of Full Stop and Reviewer Credits. Sven's also an angel investor. And Sourav is a Chief Strategy Officer for Cactus Communications and, recently, the Chief Growth Officer of Cactus Life Sciences. Glad I got that straight. So I'm going to start out with this kind of just ground setting question, which is, what types of investment do you or your organizations make, and is there kind of an underlying theme or hypothesis?
WILL SCHWEITZER: Sarah, do you to start?
SARAH TEGEN: Sure, I can start. So ACS makes some investments, makes a few acquisitions. I'd say, we're pretty early in our journey there, and just a little bit more than a year ago, we acquired Kronos app sort of to provide some infrastructure within the scholarly publishing industry. For us, when we think about investments and acquisitions, our orientation is a little bit different than a publicly traded company than a for profit company.
SARAH TEGEN: We're looking for things that are really going to help our community thrive. Where are the places that our authors, or editors, or reviewers, or readers really need some support to make their publishing journey, their research journey easier? So for us, I'd say, we're a strategic investor. We're not necessarily a financial investor, but we also aren't doing this for free and for the good of science either.
SARAH TEGEN: There's going to be some return on it for us. So that's just a quick bit about how we think about investing.
WILL SCHWEITZER: Thanks. Sven?
SVEN FUND: Well, early in the journey sounds even worse for me, I guess. So I have been investing with my small company in primarily very early stage startups. There have been four exits. I counted all of this for you. So there have been 17 investments so far. It's all angel investments, and thesis, or hypothesis, or whatever you called it will-- I only have a self observation, how I do it.
SVEN FUND: I don't really have a kind of thesis. So I am interested in investing in people, because it's so early stage. I mean, many of the companies or ideas I invest into are not even companies when people approach me. So there is no point in looking at Excel, really. There's a point in looking at market potential, but then at people, whether you trust them or not. I tend to invest into stuff that I, at least, feel I do understand, which is not always working out the way it should, and I'm trying to hedge risks by really small investments, which can start at $10,000 and go up to $100,000 to just give you an idea.
SVEN FUND: So it's really small bananas compared to what others do, I guess.
WILL SCHWEITZER: And Sven, were all those investments kind of in the STM space, or do some go outside?
SARAH TEGEN: There are a few exceptions, which is a organic wine trading platform, for example. But except for those things that are even more obscure than what I do in publishing, it's 80%, 85% in academic publishing, yeah.
WILL SCHWEITZER: We need to talk more about the wine business. Sourav?
SOURAV DUTTA: A few years back, Cactus actually thought about, OK, we are invested in one business. We've been doing that for 15 odd years. How do we grow from there? So we kind of came up with a framework, if you may. One was acquisitions that are capability acquisitions, which mean that they are a bunch of things that we do not have in-house capability to do, or if we had to build, it would take us a lot of time. So it might make sense to buy into those capabilities.
SOURAV DUTTA: So that is a capability acquisition. Second is a market share acquisition. So it might be it helps us penetrate a market, it helps us target a particular customer segment, and so on, and so forth. Even if you're trying to acquire a company for its brand, it's still a market share acquisition, because market share comes with the brand, right? So those were-- this is the more cliched way of thinking of M&A, right?
SOURAV DUTTA: Either do capability or do market share. What has also happened in the recent past is our industry, as a lot of conversations have happened over the last 36 hours now, that it is open to disruption. So the third lever that we are now looking at and we've been looking at actively for the last few years is, how do we hedge against disruption? And hedging against disruption is not just trying to build a contract capability, but probably also kind of say, hey, this might disrupt what we do.
SOURAV DUTTA: And I think somebody said in the morning session that we should be ready to disrupt ourselves. Sometimes, it's not that easy. So you say, OK, let me invest in somebody who could potentially be a disruptor, and I'm invested. And let's say, if that's the way the market trends, then we already have one leg in that boat. So those are three different levers. So I'll just-- on silo, which we acquired in 2020, some of you might know, was a capability acquisition.
SOURAV DUTTA: Mind the graph, which was an image creation platform, was a capability acquisition. Earlier this year, we bought a Swiss company, which is on the medical side of our business. It is a market share acquisition, because it gave us entry into the European market, and we have invested in a few startups, like Kudos, Scholarcy, a site we were invested in. We got bought over by Research Solutions and a few others.
SOURAV DUTTA: There are some in the room. I'm talking to a few others as well. So yeah, so those are our disruptive hedges or hedges against disruption. So that's largely the thesis that we follow, and everything, we kind of always test it against build versus buy. There is always a tendency to say, hey, this is too expensive to buy. We might as well build it ourselves.
SOURAV DUTTA: But there are pros and cons, right? There is also this probability of success that goes in, right? It's always more challenging, and it kind of gives you that high when you kind of build it yourselves. But there is also the probability of failure. So you kind of also balance that. So every such-- each of these three buckets have a build versus buy also every time. So that's largely the framework we follow at Cactus.
WILL SCHWEITZER: Thanks for sharing that. So for folks who are thinking about selling a company, or if you're a startup, this entire process is, like, filled with myth and lore, right? You have to have the perfect pitch deck. You're going to spend forever rehearsing it. There's an element of luck to this. You have to have really good bankers to advise you. So as a two part question, one is, as you encounter startups or if you look at a capability acquisition, how do you evaluate those businesses?
WILL SCHWEITZER: And then based on that, how you evaluate, what advice would you have for the startup leader or for the seller?
SARAH TEGEN: I'll start that. I would say there are a couple things. What we're looking for is a really good cultural fit. For us, some organization that is OK with being acquired by a non-profit organization or a big non-profit, a non-profit, nonetheless, that supports the mission of our organization like Sven said, like an Excel, is nice, but it only gets you so far, right?
SARAH TEGEN: I mean, it's really-- when you're looking at small stage startups, it's about the people who are there. It's not that you're buying their book of business necessarily. It's what can they offer you, are they going to fit in? And then, if I were giving some advice to folks, it's to be realistic about our market. I mean, we saw the pretty slides earlier from Will.
SARAH TEGEN: Our industry is growing slowly. Certainly, there are fluctuations in there, but it's a good, stable industry. So I don't think we should be expecting, like, enormous growth out of companies either. It's going to be steady, steady kinds of returns.
WILL SCHWEITZER: We'll definitely come back to that topic in just a minute. But, Sven?
SVEN FUND: As I said, and it sounds pretty romantic, I don't mean it that way. But I think I know, like, hiring a person for a job after half an hour, whether this, at least, as an idea can work out. Obviously, you never know whether somebody fails or not, as with hiring a team member. But I would say, it's really important, what this first impression is and also whether the founders have the determination to solve a problem in the industry in an industry that they, in some cases, don't completely understand.
SVEN FUND: Many of them join academic publishing. For many, it is the first job, basically, they really do or the first launch of a company. Many make the mistake of thinking that this is a B2C industry, but they learn quickly, because they're running out of cash, that it is not. So I would say, I mean, I think that's probably the value that you have as an angel investor, that you can tell people, you make your decisions as you want, but give me five examples of a B2C approach in academic publishing that is successful, and then we can talk, again, about your business.
SVEN FUND: And I think what you said, Sarah, is really important. This is not a unicorn industry. This is something which is also-- I guess- an element where you can all help is it takes awfully long in academic publishing to be successful. I can say that from my own involvement in reviewer credits. A lot of people are interested, and it takes two years to look at the business and see whether it survives, how it develops, whether others come, and so on, and only then you see activity.
SVEN FUND: So I think everybody could help in being a little bit without investing even, a little bit more responsive to these ideas, because just saying, "ah, that's a great idea, we'll think about it," doesn't bring any change. I think it's very clear that it is not a unicorn industry, that the big disruption that brings billions in a short period of time, like Tesla investment, or NVIDIA, or whatever it, is not going to happen here.
SVEN FUND: I think a lot of private equity or venture capital funds have made the mistake, assuming that and hoping for it. But it is a very cash rich and profitable industry, if you get it right, and I think focusing on that makes a lot of sense. So I see, over the last two or three years, two years probably, that a lot of startups are focused on getting cash flow positive in the first 12 to 18 months, for example, and that winning market share is not the ultimate goal really, but being profitable and surviving in this space.
SVEN FUND: So a little bit more of a kind of modest approach, I would say, compared to the big Silicon Valley activities.
WILL SCHWEITZER: Right. I mean, a modest approach in being default alive with cash flow positivity certainly helps in a market where it's tough to raise money. But, Sourav?
SOURAV DUTTA: Yeah, so I'll first answer as to what this industry is, right? Like, the four and a half years at Cactus are the four and a half years for me in this industry. So when I compare it with some other industry, let's say, consumer goods, I think this industry stands for purpose. This industry perceives a value of purpose higher than profits, right? Of course, there are players here.
SOURAV DUTTA: Of course, there are players here.
SVEN FUND: Whom are you're talking to usually?
SOURAV DUTTA: Of course, there are players here who make a lot of bottom line numbers, right? And we all know what we're talking about. But that has to be an alignment on purpose when an investor, an outside investor, a VC who is not from this sector, trying to invest in this sector, should not wait against a Tesla type opportunity, because then you are looking at it from the wrong lens. That's one, right? I just wanted to say that perspective.
SOURAV DUTTA: Now, within the industry you're looking at, I think, a plus one on what Sarah said, that the culture fit is a very important thing. We always look for culture fit whenever we are looking at a target. I think every time we have gone past the first stage of, hey, we want to invest in this company or we want to acquire this company, the first acid test that it has to pass is that there is a great culture fit.
SOURAV DUTTA: The second bit is, do the founders or does the founding team know what they are solving, right? A lot of time, they feel they are solving a certain problem, but they are not, right? And, thirdly, is there somebody who is ready to pay for that, right? A lot of times, we solve a problem. Fantastic, and it is for a very noble cause. But if there is nobody who is ready to pay for it, I'm sorry to say, the company survival is at risk, because how does it pay salaries?
SOURAV DUTTA: So it needs to have a payer at the end of the day. The payer could be a publisher, or a society, or could be a B2C. More often than not, it has to be a publisher. I agree with Sven on that, but there are companies who have been on the B2C side and have succeeded in this space, including Cactus, right? Cactus had 80% of its revenue as B2C revenues, a significantly sized company at that. So those are the three things, actually, those which we look at when we are looking at a company, right?
SOURAV DUTTA: Valuation comes much later. Valuation is-- again, because, like Sara mentioned, that it's not a high growth industry and you do not see the kind of-- like Sven mentioned, you don't see the kind of returns. One has to be creative with the valuation and the structure, right? You cannot say, "Hey, I value this company at $500 million, and I will pay it on day one." That doesn't happen in this industry.
SOURAV DUTTA: You have to be creative about how you structure. You have to predicate it on certain success points and then make it like a win-win situation for both the buyer and the seller, right? So those are technical nuances. I don't want to get into those, but valuation comes much later in the game. The first thing for us is to clear those three tests.
SVEN FUND: Can we fight or not?
WILL SCHWEITZER: Sure.
SVEN FUND: OK.
WILL SCHWEITZER: Not actual blows though. [LAUGHING] Popcorn?
SVEN FUND: So I would question this element of purpose in this industry. I would assume that every industry believes they have a purpose, whether it's food security, whether it is development of pharmaceuticals and drugs, whether it is mobility, whether it's entertainment. Nobody says, "I'm doing this, but it doesn't make any sense, really." So I'm not so sure whether I wouldn't take a more kind of capitalistic approach to investment and say, the return on the capital deployed needs to be attractive for kind of anybody in a field compared to your own core business plus to other industries, right?
SVEN FUND: So why would I invest into academic publishing if I wouldn't hope that, in my personal view, this is a defensive market, which I understand well, in contrast to blockchain technology for banks, or semiconductors, or whatever? I have no clue what that is and how it works as an investment thing. But, I mean, I think academic publishing is something which is easy to invest in, because it is pretty predictable.
SVEN FUND: I can already tell you-- and if you see who has made strategic investments and bought out startups, it's always the same 15 players. So it is unbelievably simple to do it and to build early on a kind of, if you want to call it, like, that equity story, that works as a startup entrepreneur, right?
SOURAV DUTTA: So I did not mean that other industries don't have purpose. I mentioned that the purpose is a little higher than a marshmallow making company, but that's what I'm saying. But coming on the return on capital employed, I think return on capital employed is a function of how you have employed the capital, which is where the valuation question and the structuring question comes in, right?
SOURAV DUTTA: So the same company, let's say, if I'm looking at company X and it is generating a revenue of-- I'm just picking up a number, $10 million. And, let's say, this is a tech company has repeatable revenue, and in some other industry, the VC industry, might say, it is 10x revenue, value it at $100 million. In this, the VC might come in and say, this is 5x revenue. The reason why he has diluted the value from the traditional tech startup is because he wants to make return on equity, return on capital employed, right?
SOURAV DUTTA: And again, I made it oversimplified when I said, OK, 10x versus 5x. But what I'm trying to say is there are creative ways of generating returns on capital when you're deploying the capital, and that is where the creativity of the VCs come in when they're looking at the sector, rather than saying, hey, let's compare this with-- I'm just making it up.
SOURAV DUTTA: --OpenAI. OpenAI is valued at whatever revenue. It's 100 times revenue. Will any startup in this space be valued at 100 times revenue? I'm not sure, yeah.
WILL SCHWEITZER: If you think you are, any of us would like to talk to you, but let's talk about return on capital and, actually, expectations in return for investment. We're obviously very different types of investors on the stage here. But for a lot of us in DC, we work for non-profit societies that have investments in real estate, large cash reserves, large investment portfolios that can generate a pretty nice return.
WILL SCHWEITZER: And I remember, when I was at a nonprofit, deciding to acquire a company, I had a calculator internal rate of return. So could we make more money buying this than we could if we just kept those dollars parked in an index fund? And there's always a bit of magical thinking, I think, that goes into making an investment, and you all are absolutely right. If any startup comes to you or any company comes to you with hockey stick growth expectations, we know it's crazy.
WILL SCHWEITZER: Whether you're selling to libraries or you're selling a solution to publishers, you know you have a 12 to 16 month growth cycle. You're not going to go from single digit growth one year to double digit growth the next year without a lot of investment, and things take time. And if this industry is only growing 2% to 3% a year, that puts some downward pressure, I think, on long term growth expectations.
WILL SCHWEITZER: So given the types of investors you all are, like, how do you think about the return? How do you justify putting either that cash, or extending kind of earn out structures, or other types of rewards in exchange for acquiring a company?
SARAH TEGEN: Well, it's one of those groups that's based here in DC that owns buildings which are worth, like, less than zero right now. Maybe not quite. The rate of return on a startup investment actually looks better than the real estate market today, but how do we think about that return? For us, the way we can sell it internally to our executive team, to our board is, what's it doing for the community?
SARAH TEGEN: Is this going to help nucleate the community? Is this going to help solve a problem that a researcher has? Is this going to help ACS be a larger, more influential organization globally? And we can worry a little bit less about what that return looks like, because we've got this mission component, which is great. We think about structuring an investment. Boy, we're pretty small potatoes in this, and when you're thinking about,like, cultural fit, I think you get startups then that have a similar kind of mentality to what ACS looks like in the kinds of returns, the kinds of structure of investments.
SARAH TEGEN: So it kind of works out, because I think we're looking for the right kind of kind of organization.
SVEN FUND: Well, for me, it's relatively easy. I don't have a board and an investment committee that's all being merged into one position, but--
WILL SCHWEITZER: Something tells me you're capable of arguing with yourself.
SVEN FUND: No, but it's really simple. For me, it's two things. It is, indeed, do I make a relatively risky market at the same or more than I would make with other risky investments, basically, in ETFs or whatever it might be, which are not that risky after all? And the second thing is fun, right? I mean, I am doing this, because I'm connected to people, particularly, and topics that I find relevant.
SVEN FUND: That's part of my focus, basically, and where I feel it's rewarding for me in one way or the other to interact with these people. And that's why, I think, it's probably not really helpful to most of you, because if you explain that to a board, they will say, this thing is not about fun, but let's be a little bit more substantial about things. But that's really relevant, and I think, also, since I kind of crossed this line of probably 10 investments or so, there is a networking effect, of course.
SVEN FUND: So you can see that these things are interconnected and that the topics for startups are comparable. Who is the buyer persona? How does this position in the market and a few other things?
SOURAV DUTTA: For us, I mean, I'll go back to the framework I mentioned a while ago. It's a build versus buy, right? So it becomes easier to kind of do build versus buy comparison, and also, so there are multiple approaches by which we come at a valuation range, if I may. So there is the traditional IRR approach. There's discounted cash flow approach. There's a comparables approach. There is also build versus buy, right?
SOURAV DUTTA: So we compare all of this. You kind get, like, a suite mean somewhere, and you say, OK, this is how we've arrived at a valuation. That's the more technical answer. But on startups, when we are looking at startups, I think what we are not looking at is what it is currently doing. We are actually looking at, like I mentioned, we are looking at as, like, a hedging strategy against disruption.
SOURAV DUTTA: So we are valuing the disruption value, right? If this actually disrupts, what's the value at risk? It has a more risk based model. It's a little complicated, but we kind of try quantifying it with the help of some numbers and understand the disruptive value of that startup. And we do active conversations with-- Sven, I did not do that with you. But yeah, with a lot of other startup guys, we kind of try and evaluate, OK-- and that is where the understanding of the founding team becomes very important.
SOURAV DUTTA: Do they understand what they are trying to disrupt? What is the disruptive value of the startup? Are they doing something which is easily replicable versus something that is defensible, has a strong moat around itself? So it goes into those conversations, and then we start thinking about, OK, now that we have agreed on these, OK, let's now try and evaluate.
SOURAV DUTTA: So it's a little bit complex. So for some of the startups who have spoken with me in the past, it has been slightly elongated because of this, because you're trying to understand these angles. It is not-- we are not investing to make financial returns out of it. We did make financial returns out of two exits we did. There were other companies who bought over the startup we had invested in.
SOURAV DUTTA: There was a company called DoDock, which is a Portugal, Boston based company, got bought over by Envision in the pharma space site, everybody knows got acquired by RSV. We had a significant stake in site, but the point I'm trying to make is we did not go in with the intent of making financial returns, but we made great financial returns.
WILL SCHWEITZER: Right.
SOURAV DUTTA: Because we had valued it rightly, because we had thought through the disruptive value of that, and we had thought through that, even if, let's say, we were not to buy, there be potential buyers in the market who would be able to value that. So all of those kind of-- sorry, I'm making it way too complex.
WILL SCHWEITZER: Oh no.
SOURAV DUTTA: But that's how we are thinking about--
WILL SCHWEITZER: Right.
SOURAV DUTTA: Yeah.
WILL SCHWEITZER: I mean, I'm sure the returns were more than nice to have at some point. So all of you have talked about making investments for either solving a problem, for serving your community, advancing your mission as a way of thinking about how your existing business or this market could be disrupted. But a more philosophical question for you all, this industry has looked the same for 10 years, and there's been a lot of dollars deployed in it.
WILL SCHWEITZER: Why? Any thoughts?
SARAH TEGEN: Yeah, because we serve a guild. We serve lots of, like, academic guilds is what it is, right? And I think that the impetus to change in academia is slow at best. So I think that the way that you train graduate students today looks a lot like the way I was trained, 25 years ago. So I think one of the things that strikes me is that our industry continues to remain relevant as long as tenure and promotion remain relevant and that articles are the way that you get credit to get tenure and promotion.
SARAH TEGEN: So unless that pressure changes, I think we're going to see sort of a continuation of this market kind of in the same vein. Are we going to see certain shifts, because, now, we've got Gen Z kind of people who are postdocs, and young faculty, and stuff, and they think about the way that they interact with the web a little bit differently? Sure. I think we should be a little bit more consumer focused.
SARAH TEGEN: I think we need to be a lot more user friendly focused, but ultimately, we're in the business of certification, validation, dissemination, all of those great Asian words from 1650, right?
WILL SCHWEITZER: We'll be looking forward to the chemistry TikTok dances.
SARAH TEGEN: Oh, no, no, no one wants to see chemists dance.
WILL SCHWEITZER: This is fun.
SVEN FUND: I would be slightly more pessimistic, frankly. I think this industry just gets away with it. So there is no need to innovate from a perspective of profitability of returns. It seems to be OK, and we only innovate under pressure, which many industries do. So I think that's probably not worse here. So to your point, Sarah, I would say that research evaluation has changed quite a bit over the last 10 years, but publishing or funding, grant funding, but publishing didn't really respond to that adequately, I would say.
SVEN FUND: So I think there would have been many steps that we could have taken as an industry. And, finally, I would say some fields are vastly under-invested, right? I mean, if you look at the technology stack of a lot of companies, if you all go home and make yourself serious in front of your mirrors, I guess, you know where the problems are. So we shouldn't say that this is an industry which is technologically really invested to a point where it should be, even the different companies.
SVEN FUND: So I think in a company that is-- in an industry, sorry, that is as profitable and as well oiled as academic publishing is, every change means a risk to have less after that change than before. So I guess eliminating that risk is rational, but I wouldn't say that-- so in that respect, it's a very rational industry. But I would say that, yeah, it's surprising to me how stable the profitability of the industry, especially of the large players that care a lot about profitability in contrast to non-for-profits, or family owned businesses, or something like that for whom it's paramount.
SVEN FUND: And that profitability is stable and growing, if you look at not only your revenue slide in the morning. But if you put some of the valuations of companies and profit margins over the last 10 years there, you would see the same, right?
WILL SCHWEITZER: Right. Up and to the right, that sounds like a great case for greater reinvestment in our industry, actually. Sourav?
SOURAV DUTTA: Yeah, you know, the risk of speaking or being the third speaker in the panel after two illustrious speakers became real. I don't have anything to add, but I would like to add one case in point, which is this startup called Benchling, which a few of you might be aware of, right? So Benchling started off as a research bench for academia, and it very quickly pivoted to saying that we will serve corporates, and academia is actually our research lab, and this is where we test the product.
SOURAV DUTTA: This is where we build the stack, but we are not building the stack for academia. We are building the stack actually to pivot into pharma, and the moment they did that, their valuation was an astounding $6 billion, right? So 6 times the unicorn. So I think-- and I've been speaking with a couple of you across the last two days. I think the problem this industry has faced is all the things that both of you mentioned.
SOURAV DUTTA: It is also that it has been restricted to a smaller circle of influence, which is researchers concerned about their promotion, their pays, their grades, their life. If we increase that circle of influence to include a few other stakeholders and start catering to them, this pie will suddenly look a lot larger, maybe 10x larger. That is probably one of the ways, and it is stunning that we have some examples, like Benchling, which went to a larger sphere and got that valuation, but we don't see that happening across a lot of other startups, right, maybe?
SOURAV DUTTA: I don't know. This is a hypothesis I have, that probably, if this industry were to expand its circle of influence, it could get the valuations. That could be amazing.
SVEN FUND: I think that's a great point. If you look at H1, for example, as a network compared to others, like academia.edu, and ResearchGate, and so on, they also have a very high valuation, because they were able to kind of break out of that relatively limited market. I think that's a super interesting point.
WILL SCHWEITZER: So two more questions before we'll open up to the audience. One is, from your seats, are there areas in this market that need investment, that you would like to deploy money, if you could? And if you have a closing comment following that, we'd welcome it, and then we'll turn it over to the floor.
SARAH TEGEN: I think, Sven, you made a really good point about the underinvestment in tech stacks in our industry. So many of us, particularly in the nonprofit space, have outsourced the touch points with our researcher customers to third party vendors. So for us, we certainly see the opportunity to be closer to our customers, to better control that marketplace.
SARAH TEGEN: To, frankly, minimize the interaction with some of those third party vendors is something that's really important to us. So it's either twofold. So either reinvent your tech stacks for big players, or let us layer some stuff on top of it that gets us closer.
SVEN FUND: You want to go next?
SOURAV DUTTA: Thank you. Yeah, one area of investment is building tech stacks which could scale to other industries. Just connect to the previous point I made, right? So build a tech stack, of course. I think there is low incentive to build a tech stack, because your upside is limited. So that is that chicken and egg problem, right? And you keep blaming that they're not investing in the tech stack, but at the end of the day, everybody's like, why should we invest?
SOURAV DUTTA: We are already-- they're there everywhere, and everybody who wants us uses us. So building a tech stack that is scalable to other industries, if we spot such opportunities, we will go for it.
SVEN FUND: I'm interested in two things. One is a concrete one, I think, on the funding side. There is a lot of opportunity, because that's a very unstructured and transparent market to many. And I think with technology, that is not so difficult to structure. And, secondly, I'm really interested in seeing investments into true digitization, so not putting text online. I know some of you are very interested in data publishing, for example.
SVEN FUND: We have talked about that for a decade or longer, right? And I think really making progress there, where we also have now use cases with AI, where probably an LLM doesn't just want to work on text, but on data is really getting important. So I would hope that especially the large publishers that have the deep pockets for this would invest into that field.
WILL SCHWEITZER: Very interesting. Any questions for our panel? It's the post-lunch doldrums. No, it's all right. I can be on the move. It's fine. I won't trip.
SPEAKER 2: Sarah, what you said about serving the guild and that being a hedge against innovation, that resonates with me, and in the humanities, a big concern, a growing concern is the crisis in higher education, and especially now, the move toward adjunct and away from people who can really invest in a scholarly and research career, but also universities and colleges closing.
SPEAKER 2: So things that get at that core 10 year structure, that kind of drives everything we do, and I'm just wondering if that is on your radar, any of your radars as a potential just really cataclysmic disruption as you consider investing in scholarly and research publishing.
SARAH TEGEN: Ooh, I don't know that I've got an answer here. But I know that, as a global community, we as a national community, whatever, we are so much poorer if we don't continue to invest in the humanities, right? I mean, I think that the way that social scientists, humanities scholars think about the world is really different than the way that I approach it from an STM point of view. And I think, frankly, state legislatures that are cutting back on funding for state universities, the closing of small institutions, that's not great for us.
SARAH TEGEN: I mean, we also have to look at like, what are the population demographics, and what's the number of higher Ed institutions that any given country can support? And it's probably a little bit out of whack in the US. But I'm not sure that I have a great answer to what kind of cataclysm could be in front of us other than I hear your problem, I stand in solidarity with you, help me help you.
SPEAKER 3: So do you not see that crisis as the prospect of scientific research?
SARAH TEGEN: I think it's different in scientific research. I think, because there's so much more IP relevant research, that there's a bit more protective effect there.
SVEN FUND: Well, I would-- if I may add, I would say that what I find most striking as a problem is that there is a huge corpus of open access content in the humanities and social sciences as well. There is tons of books out there, open access books, which can't be effectively used in classroom situations, simply, because educators don't know about them in many cases and don't work with them properly. So look at a company, which is called Sylla. It just launched last week, S-Y-L-LA, and they match syllabi, basically, with licensed or open material, which is probably something that publishers don't like to hear.
SVEN FUND: But it should encourage them to publish more open access content, and then it's being linked in there as well. So I think that can bridge a, gap, basically, which is very obvious and where technology can easily help. Like, initiatives, like open syllabus and so on, I think, are doing great work there, and Sylla is based built on that, basically.
SPEAKER 4: Hi, thank you. So I'd like to pick up on what I thought was a really important point that you just made there, Sven, about why we haven't seen the level of disruption or change in scholarly publishing and why it looks much the same as it did a decade ago. And, taking your point, Sarah, about other things that haven't changed and so on, I wonder if there are other reasons for that as well. I'm thinking back to some of the points that Alex was making this morning about the fact that we're in a relatively stable, relatively profitable industry.
SPEAKER 4: It gives us an opportunity, arguably, a responsibility, to innovate in ways that create a better system of scholarly publishing, sharing of research. I think there are signals out there that what we're doing aren't working, or they're, at least, increasingly disconnected from key audiences, whether it's librarians, whether it's researchers, number of signals about that. Arguably, in some ways, the lawsuit that was launched a week or two ago is a signal of a sort of disconnect or perceived misalignment of what some publishers are doing with the values of science, with the values of research.
SPEAKER 4: So I think there is a pretty good case that there is a pressure out there, a need for us to innovate, if we're to really stay aligned and to meet those needs. And I just wonder if you have any sort of thoughts on that as opportunities of how we think about innovation.
SVEN FUND: Well, if I may, I think there is an interesting point. You mentioned Kronos app, which has been my competitor against or able as CCC did. I think that is a very small field, which is basically metadata and payment information to organize this mass of articles, APCs, whatever the business model is, hitting libraries and being managed by libraries, which are usually not very agile in managing these kinds of upcoming and new trends.
SVEN FUND: And I think what we have been doing there, even though I'm not arguing for a new case law here, but I'm just trying to say what we did. I think very carefully was stay competitors in the market, make sure that there are different offerings, make sure that customers have real choice, but at the same time, innovating together, basically, into one direction that wouldn't kind of hinder competition. So I think it's really important that the industry does more of that, and Allison, to your point that publishers, also, as I said earlier, shorten their decision making cycles, that some people just say, look, here's a sandbox, 20,000 articles behind the paywall, open access, metadata, whatever you want, and whatever.
SVEN FUND: It's GDPR compliant, play with it, try it out, ask your questions, because it gives publishers a lot of information back on how startups think and what the challenges are, right? So I would say, for example, open LX, and the fact that this corpus of metadata and related content was opened really unlocked a lot of innovation at the end of 2021. And I think publishers could have had that five years earlier if the very careful trials that have been there would have been a little bit more kind of energetic and a little bit more open.
SVEN FUND: So I would say it is-- that's the good news. It is in the industry's hands. It's in your hands to make a difference. It is not something that somebody in Washington, meaning politicians, or in Brussels, or elsewhere has to decide. It's not about deregulation. It is just about doing it, and I think that's not so difficult.
WILL SCHWEITZER: I mean, that's a very clear call there. I think there was another question over here. I didn't see it. Théo?
SPEAKER 5: I'll go even broader. I wanted to touch base on something that you, Sarah, said about the role of publishing and publishers in academic career evaluation. So last week, in a different venue, we had a discussion about separating the role of publishers from content dissemination to academic career evaluation and what will be the new role of publishers. So with that mentality of paradox then, if we really succeed, and move the field forward, and separate these two tasks, what will be fundamental for us to invest in if we really remove what is the focus on journal impact factor or, really, career evaluation for people?
SARAH TEGEN: Right. So you're saying that the certification part of what we do is no longer important, OK? I think that the audience then that we can serve is that researcher who's wearing that content consumption kind of hat, right? We hear all the time from researchers, we don't need any more journals in our field. There are enough journals. What I hear when someone says that to me is not, "We don't need more journals." It's, "I don't have enough time to consume the information that's out there." So what is it that we as an industry can do to really help those researchers find the information that they need to hone in on the interesting questions that they want to ask in order to make discoveries to advance humanity?
SARAH TEGEN: So I think that's how I would think about pivoting our industry a little bit.
WILL SCHWEITZER: Coming to you, Paul.
PAUL: This is a little bit of a comment and a question, but I'd love to get the thoughts from the panel. If we look kind of historically at our industry and the major threats or the major disruptions that have happened-- I'm not old enough maybe to go back 1,500 years. But if I look at open access, and then I look at research integrity, those issues, and now, we're looking at having questions about should we be blocking Google from consuming our content, the big shifts and that will drive innovation tend to be very defensive.
PAUL: They're trying to defend the moat and preserve what we have, and the graphs that you showed me earlier on, yes, the funding into research is growing. But the percentage that we are taking from that pool is pretty consistent. Yes, we are growing, because it's growing, but we're not growing ourselves. As a founder, creating a company, trying to create value, create innovation, oftentimes, it can be challenging when you're not one of the defensive lines, when you're something different.
PAUL: And there's a mindset, I think, within the industry that's very defensive and often isn't open minded to think about, to pick up on Sourav's point, how do we serve beyond the audience we've historically done? All the Asian words that you mentioned, we consistently just do them. We don't add new ones in, and I suppose the question I have for the panel is, what's it going to take for real innovation to thrive and for us to shift that defensive mindset?
PAUL:
SVEN FUND: That's one for you. [LAUGHING]
SPEAKER 6: Can I ask it another way? Because that question, I think, is really powerful.
WILL SCHWEITZER: Sure.
SPEAKER 6: Hi. Can you get a little bit? Hi, Sarah from AIP. To ask it another way, how are you thinking about-- is there a world where innovation and investment takes place to sort of proactively engage in the transformation that all of these organizations are hedging against? Is there some opportunity, or either investment, or otherwise, where instead of trying to slow this change, there's actually financial benefit in accelerating it?
SPEAKER 6: Maybe that's another-- I don't want to restate your question. Maybe it's my own question, but why aren't we leaning in-- where is the opportunity to lean into the change, understanding that it's going to be massively disruptive for most of our businesses, given the fact that there seems to be a trajectory, where we're fighting against moving in? Excuse me. Thank you.
SPEAKER 6:
SVEN FUND: Yeah, well, I have probably one example, which is not about disruption, really. And by the way, I'm having a little bit of issues sometimes with the concept of disruption, but that might just be my European soul. I don't know. But I know you have to be disruptive here to be heard in this country. As you know, I'm working a little bit since two years on peer review.
SVEN FUND: The first reaction, the idea is to build a platform, which is cross publisher peer review, which, first of all, gives the reviewer the opportunity to say, I don't want to review for these journals, publishers, whatever, and I do want to review for others, so that we better understand what researchers want. And, secondly, it is meant to better understand who is most suited for a specific review for publishers, who is responsive, who is an expert on which level, what's the H index, what's the experience and these kinds of things.
SVEN FUND: Almost every publisher responds to the cross publisher idea by saying, but this is our reviewers. But it is not your reviewers. There is no researcher in the world, I would say, that is Stephen's reviewer or Sarah's reviewer, but it is this response. First of all, it's difficult enough. It's defensive enough. Let's not make it more complicated around peer review, right?
SVEN FUND: And that's understandable. So I think-- and again, we are seeing a lot of anti-competition issues being discussed, and I'm not favoring them and not asking for more problems there. But I think kind of releasing some of these views, where people, basically, are really defensive about their things, I think that's the best thing to go. I mean, it's not disruptive, but it would address a lot of issues.
SVEN FUND: If you would standardize peer review, a minimum standard for whatever has to happen in peer review, why are there publishers with 2,000 journals that have 2,000 processes on peer review? That cannot be good, and it shows that you never thought of the researcher that always has to understand this is an ACS, RIC, Wiley, Elsevier, God knows what journal. So why not make it simple for people, a little bit like entering a car through the left or right door, if you are in Britain, and take this steering wheel, and get going, right?
SVEN FUND: You don't want to, first of all, find out whether you have to climb from the roof or how you get into this thing. And I think that is something, which is pretty simple in the industry and where we probably have to go for more standards in a way, simple standards, easy standards that are not only technology driven, but also processes. And, particularly, since this industry contracts in size, if you take out the inflation rate, which you didn't do in your slide, then, I think, it makes sense to really consolidate and see where you can really create value as an individual publisher, and it is not by coming up with a new peer review mechanism or something like that.
SVEN FUND: I guess there are 50,000 other examples like that.
WILL SCHWEITZER: Yeah, math is hard, Sven. [LAUGHING]
SARAH TEGEN: No, no, no, it didn't serve the argument. I got it.
SOURAV DUTTA: Let me answer it in a slightly different way. I think the players that are making profits in this industry do not have any reason to change, and they will still keep making the same profits. This is not true for other industries. That is what is preventing change.
WILL SCHWEITZER: I'm going to exert some moderator privilege here to provide my perspective, Paul, which is fear and short termism, right? Very few places I've worked in my career have taken a long term view. In fact, it's been really rare, and really early in my career, where you would have a publisher who would say, "go launch important journals in this interdisciplinary area of research, we might care if we break even in 10 years," that doesn't exist anymore.
WILL SCHWEITZER: If you're a publicly traded company, you're worried about your one time sales ahead of a quarterly close for stock price, right? A lot of us in our day to day jobs are told to cut costs, find a little bit of margin. And I want to go back to Alex and Sarah's talk this morning. It starts with kind of our ethos. It starts with our leadership and risk taking mentality, which is, if we accept that we're playing a long game and we are fortunate enough to have organizations that can support small bets and investments, I think a lot would change in this market, and it is much a mindset thing as it is anything else.
WILL SCHWEITZER: And I'm guilty of it too. I did the same thing as a publisher for a very, very long time. OK, Sarah, Sven, Sourav, thank you all very much for a really interesting panel. Thank you to the audience for hanging in with us after a sugar crash from lunch. We'll have coffee and a break now, but please, join me in thanking this group.
WILL SCHWEITZER: [APPLAUSE]
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Exit Clip Mode
You have requested to see a portion of the video outside of the clip.
Click OK to switch to the full video or click if you would like to stay inside the clip. You can always go back to the clip with Tools and Clip Mode