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Disintermediation

Free book publisher draws big investor Add to ...

Disintermediation is reshaping the world as we know it, and Union Square Ventures, the New York-based venture capital firm behind such breakout stars as Twitter and Zynga, is convinced the number of radical changes will only compound.

“We’re just at the beginning of this amazing social transformation,” says Union Square partner Albert Wenger. “It has everything to do with disintermediating historic institutions that were really (only) there to bundle processes and regurgitate information.”

While disintermediation sounds complex, it is simply a term for cutting out middlemen. Take YouTube, for example. Record companies used to choose which artists had their songs heard by the public. Now artists can post music online for any listeners to find.

New sectors are falling prey to the burgeoning trend.

Kickstarter, for instance, cuts out the need for foundations and arts councils. Historically these groups have collected money and then handed out funding to creative companies they deemed worthy. Kickstarter allows users to choose where they want their donation to go.

Americans Elect is doing something similar. Rather than allow political parties to influence the men or women who appear on their election ballots, this site hopes to get Internet-user backed candidates onto ballots in all 50 states during the 2012 presidential election.

As disintermediation spreads, Union Square is betting that book publishing could be the next big domino to fall. To get ahead of the curve, the firm has just announced its investment in Wattpad, a small Toronto company. Founded a few years ago, Wattpad has surpassed one million users by allowing authors to publish their books on the Internet, at no cost to readers or writers. (Union Square has partnered with W Media Ventures and Golden Venture Partners, Toronto's newest venture-capital fund, collectively investing $3.5-million.)

Wattpad is more than just a low-cost publisher. It also provides a forum for users to offer feedback on what they've read, and in some cases even request that their favourite authors write about certain subjects. This highly engaged user base blew Union Square away, Mr. Wenger says.

He adds that storytelling is a “very deeply engrained human desire,” and Wattpad caters to this urge.

While it is rare for a Canadian company to attract such a high-profile venture capital investor, Wattpad isn’t Union Square’s first Canadian investment. It previously invested in Waterloo-based Kik Interactive, a social messaging app that operates much like BlackBerry Messenger and WhatsApp. Kik grew so quickly that Research in Motion filed a lawsuit against the company, claiming Kik was based on much of RIM’s intellectual property. (The founder briefly worked at RIM.)

Although Union Square won’t say whether any other Canadian firms are on its radar, it knows Wattpad won't be the last disintermediator they invest in. Any industry that has middle men “is still subject to that disruption,” Mr. Wenger points out.

Follow on Twitter: @timkiladze

 

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