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September 15, 2006

Into the den

Was intrigued and amused to see an ex-colleague of mine, Steve Johnston, on the BBC programme Dragon's Den on Thursday night, pitching his StoryCode start-up. Steve was admirably sanguine about the moderate savaging he got on the show - at least his idea was deemed interesting enough to get one of the four or so 15-minute treatments on the show, rather than just being an also-ran dismissed within 10 seconds by Evan Davies. The highlight for me was when Steve admitted that the only business that StoryCode had done, and which he'd valued at £1m, was a £500 order from Foyle's. It was one of the more skewed valuations I've seen on the show (P/E ratio of 2,000, anyone?).

For those of you who didn't see the show, StoryCode is a collaborative filtering system for book recommendations, where readers rate the books they've read along 40 axes which describe the content of the book; the information is then used to correlate between books which have similar qualities and make recommendations to readers.

I happen to know, having known Steve for about 6 years, that the StoryCode idea isn't new; in fact, Steve was working on it when I first met him. It still retains some uniqueness, but the online bookselling industry (i.e. Amazon.com) has moved on quite a lot in that time, with Amazon in particular pioneering collaborative filtering ("People who bought this book also bought...") plus a lot of recommendation functionality in their site. But the company has other challenges, too. Here's my impression of them:

  1. The technology may be clever, but could probably be relatively easily replicated by Amazon
  2. The company's business model (licence software) is stuck in the '90s
  3. It's not a sustainable business at the moment, so no one is being paid for their efforts, meaning that investors would have to fund salaries (which never goes down well)
  4. It's not clear why people would bother to spend time rating books in the system

And here, for what they're worth, are my recommendations (not all of these are completely original thoughts):

  1. The exit strategy should be to sell the technology to Amazon (or possibly a competitor), and soon. They may buy it if by doing so they can save themselves time building something; building relationships with lots of book retailers will make this more difficult. So cultivating Amazon would seem like a good approach.
  2. The monetization strategy for the company needs to come from affiliate deals on sales of books (as pointed out by ex-Dragon Doug Richard), with a little contextual advertising (always the last refuge of the monetization scoundrel) thrown in. The market for the actual software itself is tiny.
  3. The company needs to start making (or at least taking) some money. This may (will) require some investment to drive more traffic to the site; if storycode.com starts to make a few thousand pounds of revenue a month through affiliate deals, it'll be an awful lot more attractive. Plus, it doesn't need a bloated 'management team'. StoryCode is a two-guys-in-a-garage thing which gets sold on for a couple of million(this isn't a pejorative remark) - not an old-style dotcom behemoth.
  4. They need to come up with an incentive system for entering ratings, and quick. Relying on people's goodwill is not enough. Some kind of points system, redeemable against actual books perhaps, is what comes to mind.

That's my twopence-worth. Steve, if you're reading this, I thought you did a great pitch - but there were rather a lot of holes.

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