Ad Agencies Investing in Startups
For the past few years, I’ve watched a few agencies and holding companies invest in emerging companies primarily within the digital media space. One area that I’m responsible for at work is to be an expert in the digital media space and if an opportunity arises for corporate developmental opportunities, I can bring the right stakeholders at work and our holding company and talk about investments/acquisitions/etc. I was reading a blog post recently about agencies trying to be more like VCs and I wanted to respond.
I’m still wrestling with the notion of advertising agencies investing in startups. There are a few reasons why I’m having trouble with this:
- Agencies should be media neutral, so investing in companies creates potential conflicts/liabilities
- Most agencies have no idea about corporate development within the startup world
- What money would the agency use to invest in the company? Would the money come from it’s clients or on off the balance sheet? How would the financial part work?
- The Venture Capital model is fairly hit driven, 1-2 portfolio company exits make up for the miss-rate of the entire portfolio. Will agencies be making enough investments to make up for the potential misses? Hit driven model.
- Do agencies add any value to startups other than ad dollars (that’s very positive) and potential introduction to their clients?
Just a few thought starters, what are yours..?
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Category: Advertising & Marketing
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April 27th, 2008 at 12:55 pm
Frankly I’m not a fan of ad agencies getting into the VC game at all. The main reason I am uncomfortable is your point #1, the fact that agencies neeed to be media neutral and their investments can create potential conflicts of interest. When Brand Managers are evaluating the recommendations of their agency, they cannot be concerned about what ulterior motives might exist in the reco. We need to be able to have complete trust in a recommendation and not be questioning the real reason they are making the reco. Additionally, it is concerning because in the end, the brands are the ones paying for these investments. Agencies are funding their investements with the profit of the fees they charge us. Then their investments have the potential to pay off based our support of a businesss. Yet their clients won’t receive any of the rewards if an investment pays off. Agencies acting like VC’s cause more questions than answers. I will say I have no problem with an agency taking an equity stake in one of their clients, but they should not be investing in media properties.
April 27th, 2008 at 7:44 pm
Dave, as you rightly noted, there are some serious conflicts. However, I do believe that agencies will be investing in both infrastructure plays and potential startups in the not too distant future (Sorrell and WPP is already down this path along with other agencies…)
April 28th, 2008 at 12:02 am
As Darren points out, the cat is out the bag on this. In today’s agy business, new revenue and profit opportunities must be evaluated and considered. Given the potential rewards, agencies looking to maximize their own value to marketers will continue seeking out strategic investment opportunities. Full disclosure and transparency should help minimize conflicts. Right Media and DoubleClick are other precedents. Mike Walrath founded Right Media in 2003 as a digital media agency prior to developing RMX. In 1996, DoubleClick’s first investor was Bozel/PoppeTyson.
April 28th, 2008 at 7:14 am
[...] Posted on April 28, 2008 by Dave Knox Lately there has been some good discussions about other companies acting like Venture Capitalists, especially ad agencies. Personally I have major concerns if an [...]
April 30th, 2008 at 11:04 am
interesting.
my thoughts is that agencies bring specific skills of brand development and communication in exchange for a share of the ip is the way it is most likely to work. so investing their not in expensive time rather than hard cash.
ps agencies are pretty far from media neutral!