Skin In The Game

The Curious Phenomenon of Agencies and Start Ups.


(This is a chapter from the new Creative Social book, Hacker, Maker, Teacher, Thief: Advertising’s Next Generation. More info on the book at the bottom)

You know the story. Every time a start-up IPO’s or is sold for a billion dollars, often to another start up, the advertising industry collectively sighs, “We could have done that”. Most people that work in advertising are dreamers. So it’s no surprise that many agencies are flirting with the idea of making their own products and companies (let’s call them start ups for this chapter).

This chapter is about the people and agencies that have done just that. Some of them have worked. Many of them have not. In fact most of them have not — but that’s actually on par with the most successful start up incubators.

First a little background. Right now I am Head of Creative at a company called betaworks. We were started in 2007 primarily as a seed investment company for start ups in the social media world. We wrote the first check for Tumblr. It was for $50,000. When Tumblr recently sold that $50,000 was worth around about $6m. Not bad, although a lot of other checks tanked. But we have also built products. Some you will have heard of, Tweetdeck and bit.ly, possibly Chartbeat if you are a publisher. Recently we are building more and investing less. Last year we rebuilt and relaunched Digg and we also exposed the world to Dots — one of the most successful mobile games ever, currently over 30 million downloads.

Mark Drew

Before betaworks I was a Digital Creative Director at various agencies, big and small. But I was one of those people that said, ‘I could do that’. In 2008 I left my amazing job as Creative Director of Dare in London to be Creative Partner at Another Anomaly — the spin off of Anomaly that was supposed to just work on creating products and IP. It was a start up for start ups! After a year it folded. But Anomaly have had some success in the start-up and IP business. A lip balm called EOS that Anomaly helped produce and promote is now the best selling lip balm in the US, outselling established market leaders like Chapstick.

I was also part of the team that made ByLaurenLuke a make-up product fronted by Lauren Luke, a single mum from the North of England that we found on YouTube. For a time Lauren was very hot. The product was on sale at Sephora, Lauren had a column in the Guardian as well as her own nintendo game. It didn’t go on to achieve global success but I learned a lot and it changed Lauren’s life for sure. You hear of overnight product and start up sensations but for the most part that is a rarity. These things are very, very hard and take a lot of time effort and money. They are incredibly stressful too. So why on earth would any ad agency want to get into this game?

Since the pesky internet came along it has been increasingly hard for agencies to make money servicing clients the traditional way. The relatively easy profits made on a 30 second spot have disappeared. Technology has also made it easier for clients to shop around and reduce fees. Where once the agencies were in charge now they have to work harder for less money.

So agencies look to find new ways to make money. In the late 90’s agencies got a hard-on for behaving more like management consultants. Now an agency CFO sees something like instagram and even though he knows it’s not his agency’s core skill, god damn if there isn’t that little bit of him too that says, ‘$1bn. We could do that’. Look at it this way. What’s the alternative? Another meeting with procurement as they reduce fees yet again?

The other problem any modern agency has is retaining talent. As I said the best people in the industry are dreamers. We are ‘what if’ people. We have been trained to ask questions and think creatively. And now you can’t open the paper or facebook without reading about some young upstart making millions for a simple idea they had with a few buddies.

Agencies developing their own start-ups.

Droga5

One of the most successful agencies in the world, Droga5, was an early mover in the start up world. You may remember the online video shopping portal, Honeyshed? Although Droga were clearly the lead in HoneyShed, David Droga was ‘partner’ and ‘creative chief’ and people remember it as a Droga thing it was actually a joint venture between Publicis, Droga5 and production company, Smuggler. The press release said it was home shopping for the digital generation. The elevator pitch was probably more like ‘web QVC for hipsters’. Back in 2008 Honeyshed made big news. But soon the idea of a hipster girl trying to persuade you that a puma sneaker (A droga client back then) was perfect because “You can wear this to the club. You can wear this while you get jiggy. You can wear it just to have a latte” fell flat and after a year of pretty low numbers, never more than 7,000 visitors a month, it was shut down. Were Droga a little too ahead of the game? Back then people were still not that obsessed by online shopping and social media was not that big. There is a part of me that thinks this could actually work now.

Undeterred Droga continued to put out new products. They scored another PR success with Thunderclap, a social amplification tool that launched in 2012. The tool is a neat way for a person or cause to gather together to be heard. They call it ‘a crowdspeaking platform’. Thunderclap is still live but after a good start has struggled to grow. I’ll make an educated guess as to why that might be.

In the advertising business we are addicted to the new, the bright, the shiny. And like all addicts we don’t think clearly. So, we overestimate the amazingness of something. We get really excited and go the extra mile to make things happen. This can last for a while, a month, two months, maybe even a year. But think about the normal cycle of a campaign. You start a campaign thinking this is going to be the best thing ever. Same for new client relationships. Then the realities set in and if we are very lucky a campaign does well, sells some products, maybe wins some awards but that’s a rarity. I think the same thing happens with these agency start ups. Once that enthusiasm wanes and the product doesn’t do as well as expected (which is entirely natural) it’s very difficult to remain enthused.

Interestingly Thunderclap won Droga5 the Innovation Lion at Cannes in 2013. So while Droga may not have proved themselves as the start up kings they are the undisputed masters of Cannes. In 2009 Fallon won for a twitter client they built in house called Skimmer. And of course ‘Pay with a Tweet’ won the Cyber Grand Prix in 2011 for R/GA. Well, sort of, they hired the team that did it. Smart, if just from a PR point of view. Making your own product was en vogue and I think we awarded our peers because we thought that if we did then maybe we would get to work on similar projects.

Mother and why Brainstorms don’t work

David Weiner, the editor and creative director of Digg spent some time at Mother before joining his start up. Mother successfully launched a hot dog business and recently launched an app called Proust — a game where you and a friend place things you like or hate in order. It sounds silly, and it kind of is, but that is why it works.

Neither of these products have anything to do with any of their clients. David told me that Mother was good at fostering an environment where if you had an idea it shouldn’t be tossed out. What is interesting to me is that there was no official program. The worst thing in the world is when an agency or organization tries to force innovation into a timeframe. ‘Brainstorms don’t work’, David told me. The notion that ‘Thursdays at 2–4’ is innovation time is helpful for agency management but never works. Weird stuff happens when you least expect it. And you have to have a hierarchy that accepts that and is willing to act accordingly.

Forced Innovation Fails

On first inspection it’s true that it’s never been cheaper to make a product. An in-house team can pull together a prototype for an app in a couple of days. But there is a huge difference — a canyon — between a prototype and a successful product. At JWT we had what I would call a ‘forced innovation’ program called ‘Go Grants’. The idea (not mine, I must caveat) was that JWT would give $25,000 to an idea each quarter. On the face of it not a terrible idea and the first session was good fun. The idea that was chosen was pedometer for pets. Now, I had tried to pitch this very idea to Iams when I was at Saatchi a couple of years before. ‘Nike + for dogs!’ I asked the team if they were sure that no similar product existed and they assured me it did not and they were going to make it. For $25,000! Let’s just say that Go Grant disappeared very quickly. But the real point is not the money. The point is that the team got excited and then disheartened because it was a token gesture. No one really checked to see if there were products like this. No one was ever really prepared to spend the money required to make this product. No one ever really believed this was a product the agency would make. Programs like these do more harm than good. They promise everything and deliver nothing. There is no skin in the game.

Teehan + Lax and 37 Signals

Let’s look at two more examples from agencies that illustrate the problems and opportunities. Teehan + Lax is a great digital design agency. In 2008 one of the designers wanted an easier way to store and find images that he was using for a particular project. Long story short they built a product called Image Spark. By the end of 2012 had just under 50,000 user accounts. Very successful when you think about it. But in early 2014 they decided to shut it down. Jon Lax explains:

“Clayton Christensen, the father of disruptive innovation, says, “you can’t start a disruptive business from inside an incumbent one.” The incumbent business will always take the resources from the disruptive one.”

As soon as Image Spark launched, the people who worked on it (the resources) went right back on to the work that paid the bills.

We are used to short term euphoria in agencies; pitch wins, award wins, even one great meeting — but find it difficult to maintain. Lax continues:

“This is actually what happens with most products. They are rarely complete failures nor are they complete successes. They limp into the world on launch and then the real work starts. The real work of maturing and scaling.”

37 signals is another web design agency. You have probably heard of 37 signals not for the client work they do but because they built Basecamp. The story of Basecamp starts out similar to Image Spark — it was an internal idea as a response to an internal problem — file management. But the key difference is that Basecamp was suitable for people outside of the creative industry. Basecamp had scale. This was not the original intention but by 2005 basecamp revenue surpassed web design revenue and 37 Signals suddenly worked out that they were a software company.

The story does not end there though. What is interesting is that 37 Signals went on to launch a lot more products Ta-da List (2005), Writeboard (2005), Backpack (2005), Campfire (2006), The Job Board & Gig Board (2006), Highrise (2007), Sortfolio (2009), the all new Basecamp (2012), Know Your Company (2013), and We Work Remotely (2013).

But in early 2014 they decided to scrap all that and just work on Basecamp. In fact they renamed the company to Basecamp. From their website:

“Because we’ve released so many products over the years, we’ve become a bit scattered, a bit diluted. Nobody does their best work when they’re spread too thin. We certainly don’t. We do our best work when we’re all focused on one thing.”

They are not just putting skin in the game they became the game.

BBH

BBH has a division called Zag that was set up pretty early in London to look at making products. I have found a huge difference between UK and US agencies with regards to entrepreneurialism. In the UK it’s sort of laughed at, possibly because the size of the market is so small. If you get 1% of any market in the US you potentially have a very healthy business.

BBH have not had a breakout hit in terms of making products*. Again, it’s easy to snigger at this ‘failure’ but that’s just the reality. It is incredibly hard and the odds are stacked against you from day one.

*I recently got a tweet from James Smith saying that actually Ila Security a range of stylish security alarms for women that Zag helped create was actually AIM listed and doing well.

From Agency to Going Solo

One agency person that has flown solo is Noah Brier. Noah was at Naked and Barbarian in New York before leaving to set up Percolate, a New York City-based technology company building the world’s first content marketing platform. While in the ad world Noah built a pretty interesting site called Brandtags which he sold to Solve Media. When I spoke to him he said this was just a great surprise because he had no plans to do anything with the side project and it gave him a little money to help build Percolate. Although Noah was at The Barbarian Group, which has had it’s own successes building products — they sold an iTunes visualizer to Apple and made Cinder, he never thought about doing percolate within Barbarian or any other agency. Why is that? Noah told me it’s because although on the face of it Percolate is related to the ad business it’s still a technical product. Fundamentally you need the technical chops to build an amazing product and agencies don’t have that.

Agencies and Accelerators.

JWT and Techstars.

I set up the first agency deal with the start up accelerator Techstars in 2011 when I was at JWT NY. Techstars has since done a number of deals in the marketing space. They have one with R/GA and Nike but let me explain exactly how the deal I signed worked.

CNN

We signed a two year deal for $30k. We got a fancy press release and a logo on their site in return for giving them time with eight of the most talented people in our agency. We split into two teams and then saw all the companies that went through Techstars for two years. Companies go through an intense 3 month program where they get a little capital but mostly advice from mentors. They then do a Demo Day where they ask for funding from VC firms. In 2011 maybe half the NY teams had funding before Demo Day, whereas in 2012 most companies were already funded (cue shouts of bubble) and Demo Day was more of a formality. Techstars NY seemed to work a little bit like provenance in Modern Art. Where if Charles Saatchi or Larry Gagosian likes you — then everyone else likes you. Start-ups, very much like modern art, are all in the eye of the beholder. You are buying potential.

We would help with branding and sometimes strategic issues. We would also make connections — a lot of the companies had some sort of media part to the business. If I’m honest I’m not sure how much we helped. On a scale of one to ten, maybe a two? Because it’s hard. Really fucking hard to run a business and really hard for an agency person to say something new and insightful when your previous experience has been selling soap powder rather than raising money or launching software.

One idea was that we would introduce the start ups to the JWT clients. It’s my experience that even though you would think that’s a big a draw for clients, it really isn’t. My advice on this would be — make sure the organization and everyone connected to the organization is genuinely ready.

R/GA and TechStars

R/GA seems to be taking a more long-term approach. They set up an accelerator program with the help of TechStars New York to focus on connected devices. This makes sense as R/GA has had some success with Nike Fuelband. The program is housed at the New York agency, with 10 companies given office space and limited access to R/GA resources such as strategists, developers and creatives. R/GA clients are also invited to mentor some of the start-ups. At the end of the program the companies did a demo day at SXSW 2014 in Austin and then another in New York. Both R/GA and TechStars will own a small part of the companies.

Wieden and PIE

Other agencies that are active in this area include Wieden and Kennedy with their incubator program in Portland. The Portland Incubator Experiment or PIE as it’s known is an ongoing collaboration between the agency and local entrepreneurs. On the site they ask, ‘What the hell does an ad agency know about startups’. Bullseye. I personally don’t believe that people in agencies have the right background to make that killer point about a startup. But that’s not the point. The point is that the very act of getting these people together and giving them a space might be enough of a catalyst to spark something great. PIE has been going for four years and has seen 40 startups go through the ranks. I’ll admit I had not heard of any of them — but again that’s not the point. We shouldn’t judge agency incubators by their ability to produce the next Instagram or Snapchat. Statistically speaking no one is producing the next Instagram or Snapchat.

I spoke with Renny Gleeson from Wieden who helped put the program together. He said it started because there was a lack of technical people in the agency. But there was a great deal of technical talent in Portland. Gleeson wanted to make sure whatever they did had a positive effect on the overall technical community in Portland. So initially it just became about giving these guys some space in the agency. After a period of time they began to get access to briefs from the agency. They would help out in a fairly ad hoc way.

“Like any good start up it has evolved” said Renny. From a fairly low key and fluid start PIE is now more of a program and has built in relationships with Wieden clients such as Coke, Target and Google. The start ups receive mentorship from these clients. Renny sees the program continuing to be fluid but acting as a sandbox as Wieden looks to forge relations with the new kinds of companies that operate in new business paradigms. There is a new generation of companies that will all need great ad agencies. One way to speak their language is to have internal, albeit, not permanent, expertise. That seems smart to me.

Why would start ups want to work with Agencies?

Steve Cheney is one of the more vocal start up guys. He was at GroupMe for a long time. He now heads up the New York office of Estimote, a low energy bluetooth ‘i-beacon’. He wrote a pretty famous post about why start ups should not talk to agencies. Basically a colossal waste of time. So I spoke with Steve. It wasn’t that Steve and GroupMe didn’t want to deal with brands he said. They did hundreds of deals with companies like Nike, Hulu and ESPN but Steve went direct. He felt that most of his agency contact was with ‘low level flunkies’ tasked with finding hot stuff to make the agency look good, ‘no one had any real power to do a deal’. Steve explained, ‘Even if this was to educate clients you’re going to be one page in a 100 page deck. So fuck that.’ Fair enough.

So how about the start ups that go through accelerators? And the accelerators themselves? Why would they want to work with agencies or brands? Well, first up there is the money. TechStars’ deal with Nike and more recently Disney are apparently worth millions. So kudos to them. I spoke with David Cohen, the founder of TechStars, about the other advantages beyond money. He said that he gets good mentors and sometimes gets work like strategy and creative for free (certainly true with JWT). I asked him if he thought it was a fad.

“I don’t think it’s a fad — I think even big companies like being close to innovation, and Techstars provides them a quality filter and context to do this.” “But”, he continued, “I think it will come and go to some extent. Like the hotness of the start up market itself. The smartest agencies will engage in good times and bad, consistently and reasonably.”

And on the subject of whether agencies should develop their own start-ups he was pretty clear: “Most don’t try. The good ones are helping their clients”.

Agencies as Funds?

So would an agency ever fund a start up from scratch? There have been examples of networks investing in start-ups. In June 2006 IPG paid $5 million for a 0.4 percent stake in facebook. They later sold that holding for approximately $227 million.

One agency has set up a fund in this space, KBS+ in New York. They set up KBS+ Ventures to invest in early stage entrepreneurs focusing on advertising and marketing technologies. Some of the companies they have invested in are SocialFlow (a social targeting and content company we created at betaworks) and RewindMe, a TechStars New York company that looks at past behaviour in order to give rewards. KBS also wrote a (free) book called Creative Entrepreneurship that collects a lot of articles from the key start up players such as Paul Graham, Dave McClure and Fred Wilson. It remains to be seen how the investments will pay off but it seems more like a talent and training play.

Start Ups as Agencies

Read any article about advertising right now and you will see stuff about native advertising and inevitably Buzzfeed is in there somewhere. Whether you have a fondness for listicles or not there is no doubt that Buzzfeed is taking budgets from agencies. Buzzfeed gives lessons to agencies. As does Tumblr. At betaworks we are starting to work with clients like GE, Samsung, Pepsi and Subway — on a number of very different projects.

If you are a client what’s cooler? To work with an agency that has been around for 100 years or a few months? Where do you think you are going to learn the most? A listicle may not be amazing but when tenure is only 18 months you might not be looking to do something amazing. You might be wanting to learn something for the next job.

Conclusions

When Nike + was unveiled all those years ago, it was rightly heralded as a breakthrough piece of work. Agencies no longer merely advertised product they could make product. That was a dream come true for a lot of us dreamers. We would make our own product and make the most awesome campaign — because we would be the client. I think that is where a lot of this comes from. The desire to eliminate the tedious client process that most of us have to deal with. Sadly, as I hope I have shown it’s a lot harder than it looks. Nike+ worked because two of the most innovative and cash rich companies in the world wanted to make that happen. This was not an agency initiative — although agencies were needed to complete the story. When you look at the scarcity of other success stories — even within the agencies that have managed to launch products and businesses — it is tempting to say that these things only work if you have the resources and philosophy of Nike and Apple.

But this trend is not going away. So should agencies stick to what they are good at, even when it’s harder to make money, or should they roll the dice?

My point of view is that it depends entirely what the agencies motives are. It’s fine to just want to dabble, impress some clients and get a press release, as long as everyone involved knows that. There is no pretense.

On the other hand if an agency has a hankering to make the next instagram then everything needs to be set in place. A budget. A serious budget. A stand alone team, that probably includes weirdos from outside of adland. No client work, not ever. Even that make or break pitch. And an agency management that stays 100% behind the team no matter how badly they fuck up. If you are managing an agency and have the stomach for that, you’re willing to put skin in the game, then Godspeed! – I truly wish you well.

James

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The above text was taken from the new Creative Social book, Hacker, Maker, Teacher, Thief: Advertising’s Next Generation.

I wrote this at the start of 2014 as hopefully a fairly in depth look at the relationship between agencies and start ups. It may already be out of date — such is the nature of the business. I welcome any comments or additions.

Hacker, Maker, Teacher, Thief, is the fourth Creative Social book and features chapters from 35 leading crestive directors and business owners. Some of the topics we cover are; what does the industry need to do today (not tomorrow) to stay valuable and relevant? Is digital collaboration the death of idea ownership? And should we make things people want rather than make people want things? It is available to purchase right now. You should probably buy a copy. I’m going to.