A small, entrepreneurial publishing company is celebrating after one of its titles won Book of the Year in the Costa (formerly Whitbread) Book Awards.

The Tenderness of Wolves by Stef Penney is now expected to power its way up the best-seller lists - and power its publisher into profit.

Although the novel is, I'm sure, a great read, I'm more interested in the story of the company behind it. And Quercus Publishing is an interesting entrepreneurial case study. It was founded in May 2004 by Mark Smith and Wayne Davies - who both had highly respected careers in publishing, having held senior positions in well-known publishers including Orion.

The interesting points for us to note about their business are:

  • They entered a market that they knew an awful lot about. This has been found time and again to be a critical factor in the success of fast-growth startups, and it will have given them the credibility to raise the money.
  • From the start they built a sustainable revenue model: where so many other start-up publishers just pin their hopes on getting good sales through retail outlets, Quercus made contract publishing a core part of the business - and in fact they focused only on this until they had got the business up and running. That is, they produced custom books for corporate clients - which included some major retailers. In the industry this is seen as less glamorous and less "literary", but it pays! This gave the company cash-flow positive, guaranteed sales, and underpinned the rest of the business.
  • When they did decide to diversify into trade publishing (selling books under their own brand through bookshops), they reduced their risks again by bringing in an accomplished consulting editor, and partnering with an American publisher so that costs were shared between the two partners, and the books could be published on both sides of the Atlantic.
  • Their first 'trade' titles were simply republished versions of some of the books they had published in their contract publishing work - meaning that most of the costs had already been covered, and again reducing their risk.
  • They started the business as 'Smith Davies Publishing' - only settling on their distinctive 'Quercus' brandname later in the company's life - proving it's better to just get on with 'doing it' than spend months pondering different brand names, as so many start-ups do!
  • For at least the first year of the business they were the only full time members of staff. They used freelancers for the design and editorial process of their books, and outsourced printing and distribution. They didn't even boost their egos by getting a PA. This allowed them to keep costs tightly under control - absolutely vital in a startup.
  • In their first year in business they paid themselves quite modestly - around £25k of pay and benefits in kind between them, and they even loaned money back to the company! I've seen so many startups trying to build director's salaries of £30k, £40k and even more into their business plan and then wonder why the numbers don't stack up. Even when you're hitting the ground running with th eindustry contacts and experience that these guys had, you're not going to be able to take much money out of the business in the first year or two. You're not getting a new job, you're investing your time in a business that will become so much more valuable in time. In their second year they gave themselves suitable salaries for their roles, but then waived a large portion of these salaries.
  • A year after starting they attracted their former boss, Anthony Cheetham (who was the founder of both Orion and Century publishers), to join their board and become their mentor. This gave them huge credibility in the booktrade, allowing them to punch way above their weight as a new publisher.
  • They did an initial placing of shares in 2005 after their first year's trading. This allowed them to raise £420,000 by selling just under 16% of the company. You can see the prospectus for this share offer at this link, which is a great example of how to raise funding for a fast-growth company. After the expenses of the placing this gave them just over £350k to build the business with. This share placing valued the business at just over £2.5m.
  • They registered the shares in their company for EIS relief - and this probably played a key part in helping them to attract investors. The Enterprise Investment Scheme is a fantastic government initiative to encourage private investors to back small companies. Investors who bought shares would be able to claim back tax relief on their investment, and any potential downside is mitigated by further tax-relief if the business fails. Together these reliefs mean the investor is only risking about 50% of the sum they invest - and they get an instant return on their investment of around 20%.
  • From an early stage they set their sights on floating the company, giving a clear exit route to investors. They achieved this in amazingly quick time, when they listed the company on the Plus market (previously Ofex) on the 24th October 2006 - setting a record for that market by raising £2.8m in their initial placing. See the Quercus Listing on the Plus Market.
  • They were prepared to back their hunches and take a punt on books they believed in. The Tenderness of Wolves was spotted by one of the director's wives who worked for a big publishing house. She tried to publish it there, but was over-ruled - so passed it to her husband.

So, in summary, I think the key steps to their success were:

  1. They made sure they had the knowledge and experience about their market, for their own good and to impress investors, by bringing in an experienced chairman and outside expert help - in addition to their already excellent knowledge of the market.
  2. They ensured they were well funded, with a clear strategy for continued funding and then exit. Too many startups run out of cash too easily.
  3. Focused on a low-risk, cash positive line of business in the early days before taking any riskier steps.
  4. They kept costs tightly controlled, and used freelancers to allow them to scale up for particular projects. They didn't let their egos run away with their wallets.
  5. They focused on getting sales for their books, not just on publishing them and hoping the world would buy.
  6. When they did enter the trade publishing market they reduced their risk considerably by limiting the number of titles they published, republishing books they had already published under contract, forming a key partnership, and bringing expert help.

Quercus presents an inspiring case study for any entrepreneur with ambitions to create a company that will grow fast, make its mark in its industry - but stay focused.

As I write, the company has a market capitalisation of £6.37m.

I'll be watching them with interest from now on.

It's interesting, but off-topic, to note that The Tenderness of Wolves features the Canadian landscape as a major part of the novel - but the author is agorophobic, and has never been there. She wrote it in the confines of the British Library, and just looked up what she needed to know.