Ad-Venturing
Changing industries make fascinating bedfellows.
“Unfortunately, in our business, we get paid like we’re doing our clients’ laundry.” -Lee Clow
Though the quote is not new, its sentiment holds true two years after Lee Clow first appeared on camera. Advertising’s revenue model sits stagnant, ripe for disruption, and for the industry to compete in the world, which now seeks creative thinkers and problem solvers the way it pursued MBAs in the 80's and 90's, it must make changes.
Also in flux, venture capital is experiencing well-documented shifts, as the VC economy right-sizes itself after the dot-com boom. Large funds are providing services for their portfolio companies, seeing the advantages of lending a helping hand to grow their investments. Smaller funds, traditionally higher performing, are now expanding their footprint beyond the stronghold of Silicon Valley and making investments in a new breed of startup in some less-expected markets.
Today’s startup is built on technology, not building technology.
This emerging class of entrepreneur builds on the technological foundation laid by decades of Silicon Valley-backed successes by creating businesses that are focused on technology-enabled commerce, communications, and content. Capital requirements to start a business have shrunk significantly, but the value that entrepreneurs expect from their investors extends far beyond a check and a board member. A study conducted by Upfront Ventures suggests that marketing and customer acquisition rank highly as desired traits for early investors, as do operational and industry experience.
Observed at a macro level, these elements begin to fit together. VCs looking to outperform partnered with advertisers seeking performance based compensation investing time and money in commerce and communication based businesses could generate some fantastic results.
There’s a difference between doing it and doing it right.
Agencies investing in startups is not new. The road is littered with the corpses of innovation, incubation, and venture projects designed by agencies that thought that by simply standing outside smoking e-cigs they would look like one of the cool kids. Innovation projects that openly state they aren’t about generating financial returns are destined for the deadpool. An agency ecosystem is not designed to support the type of work that goes into a startup, nor is an agency equipped to act as a VC firm, and if it’s not billing hours, someone will eventually ask, “Why are we doing this?”
As VCs begin to build out services inside of their firms, they are mostly focused on technology and back-office. The value that brand-focused designers and storytellers can bring to portfolio companies, especially in early stages and crowded markets, is enormous. Not only does excellent communication design differentiate a startup from its competition and define the brand and value proposition, but it greatly accelerates the rate at which one can acquire customers or users and vet your product. This value, when negotiated upfront, can result in a superior position in the portfolio company or in preferred access to deals in a competitive investor environment.
Even as an entrepreneur, there are advantages. By aligning capital and creative interests with those of the founder through equity, you are positioned to get the best work out of creative partners. You won’t have to worry about arguing over hours or wondering if anyone is paying attention on the other end, as creatives will make their money alongside your investors.
Over the last year, we’ve begun exploring what’s possible with this model.
Beginning in early 2013, 80amps raised money from The Martin Agency, who serves as an LP. We’ve built a portfolio of companies that range from consumer goods and products to marketing tools for a new breed of e-commerce sellers from genetic marker tests to a platform for sourcing custom sound and music.
While it may not be clear at first, the commonality among these companies is that they are all consumer-facing or enable consumer communication. In this, we’re fortunate to have an LP in The Martin Agency that we can tap for resources, be it an opinion, an introduction, or the occasional helping hand.
So far, we’ve seen success in a couple of areas.
What’s worked incredibly well for us, when compared to projects that are lead by agencies, is that we’ve continued working and growing without any oversight or effort by the agency. Not a single pitch, campaign, or client has derailed our focus.
The agency has also benefitted from our efforts. Some of those pesky agency ideas that people love and that could be something but that no client can ever get their head around finally have a home and a team that’s dedicated to growing ideas into scalable businesses, which stand on their own. Additionally, some of the portfolio companies that we bring in are able to solve major agency problems.
In comparison to VC, we’ve also had some pretty fascinating wins. First, we’ve taken equity positions in our portfolio companies that are beyond what a pure financial investment would have earned. By providing our professional services alongside the team (and in one case as the team) operating the company, we earn equity through the value that our work creates.
Second, and related to the first point, the work that we’ve done with our portfolio companies has moved the needle for them. From research and strategy to design and management, our efforts have moved the companies up the curve (hopefully) faster than had the teams worked alone or in a capital-only environment.
We’ve still got more to do.
If there’s anything that I’ve learned in the two years (including pre-fundraising work) that I’ve put into 80amps, it’s that there’s really not a model for what we’re trying.
Much of the work we’ve done has only been accomplished due to our ability to pull together a great team or the right resources when we need them. Over time, some of the practices and processes have fallen into place, and the best of those are now replicable.
We haven’t yet attempted to raise a fund, rather we’ve invested our seed capital to prove the concept. Now, many of our portfolio companies are raising or are about to raise money,
A fund incorporating creative partners alongside venture partners can be successful. The investment and operational experience and access to capital that a skilled VC provides solves for the agency’s natural blind spot when it comes to early-stage ventures. The thinking and work of a talented creatives and strategists solves for domain expertise in consumer communication and content. The fund structure creates compensation for all partners to reap the benefits of the work based in ownership, not service.
Will this revolutionize VC? Probably not. But, it can improve outcomes for those who are pioneering early stage investing in a new breed of startup.
Will this be the savior of the ad industry? Not a chance. This model won’t generate the cash required to support a large agency, nor will it provide services at the scale needed by the largest clients. It does, however, allow for talented creatives to be compensated based on the long-term value of their work, creating and developing early-stage brands, instead of as if they have just delivered finely pressed shirts.
I propose this strange and improbable partnership as the next step for the most creative thinking of advertisers and investors – the type of person who looks at an upstart, sees what could be, and says, “I believe.”
