The unpaved road of agency investing

Rick Webb has an especially interesting perspective on agency investing. He sold The Barbarian Group, a digital agency he co-founded, to Cheil Worlwide. Webb made angel investments in companies like Foursquare and Percolate. He has also advised tech companies like Tumblr on investment strategy.

His most recent book, Agency: Starting a Creative Firm in the Age of Digital Marketing, was published in January 2015. He’s now writing a book on the economics of the advertising industry.

Barry Lustig: Why is there a need for agencies to establish venture funds?

Rick Webb: First, agencies have lost their close relationship—and influence—over the most important and dynamic advertising mediums of the day. While broadcast and print media are cosy with advertisers, many of the platforms where the highly coveted youth demographic spend their time have a far less friendly relationship with them.
 
Having a venture arm that actively seeks early investment in the platforms and technology can provide an early inside advantage on accelerating the learning curve to effectively utilise that new platform and client access. Theoretically.  

Second, the ad industry was a solid career choice for aspiring creative talent in the past. It’s now is a pale option in terms of potential compensation and career challenges when compared to tech. There’s a brain drain running from the ad industry to the tech industry, and by boldly venturing into venture, so to speak, an agency can mitigate this to some extent. Theoretically.

Third, and potentially most importantly, savvy venture capital (VC) investments can radically transform the finances of a holding company. A $50,000 check in Uber’s first round would be worth over US$100 million today. The market caps of agencies and holding companies are relatively fixed to revenue, and stock growth is primarily through acquisitions or organic growth. Though no one’s actually pulled this off, VC investing potentially offers a third leg for growth. Theoretically.

BL: What opportunities do agency venture funds create for agencies?

RW: In short, access to the best deals, which are now in the private markets.

Tech companies are going public later and later, especially in the US, because of tighter regulations in public companies. Investment is by invitation only and the hottest startups typically only allow investment from known entities. You can’t buy into these companies if they don’t want to sell equity to you.

By developing a venture fund that has good relations with top-tier firms and acting as a benevolent, thoughtful 'strategic investor' alongside top-tier VC firms, it’s possible to get into these deals. Agencies then have an opportunity to bring new technologies and platforms to bear for their clients earlier and more cheaply than their competition. They can also be actively involved (with the right-sized cheque, of course) in any future M&A deals and have a de facto “first look” if and when the time comes for acquisition. All before that company ever hits the public markets.

BL: How do companies that receive investment from agencies benefit practically?

RW: Most agency VC funds are a complete fiasco. While the differences between private equity (PE) and VC are shrinking, they’re not one and the same, and the best tech firms can sniff PE folks pretending to be VCs from a mile away.

There are norms and conventions that VC follows that many corporate venture funds (not just in agency land) are terrible about following. Many agency venture funds fail from the get-go by not hiring well-respected tech VCs to actually run them. They hire, rather, someone from PE or M&A, who doesn’t understand how and why venture has its own conventions and practices. Then they fail to get into the best deals, because founders are rightfully wary.

VC culture is much more about helpfulness, mutually reasonable financial terms, and active assistance (not management) than traditional PE in my view.

Next, many corporate VC funds fail to work out proper goals at the outset, with the fund having no mandate or a very fuzzy one. This means that the companies are often unsure about whether they are “active” or “passive” investors. Or whether or not they expect a strategic benefit from their investments, or are simply holding them for financial reasons. And whether or not those financial reasons are short-term or long-term.

While I’ve seen many agency VC firms make good investments from a financial point of view, I have yet to see one where the agency is also a valued partner over the long-term. 

BL: What role do venture funds play in shaping the future of agency groups?

RW: We’ve seen some instances of VC funds being of assistance to agencies at the middle level. General Atlantic’s investment in AKQA comes to mind. The potential of assistance from VC firms to agencies is probably an inverted-U shape. At the early stages, small agencies should generally stay away from venture backing. In the middle ground, there can be some great opportunities for growth fuel from VC funds, much like PE. At the larger levels, VC funds are not very relevant or helpful to agencies and agency holding companies.

One area I see a lot of interplay is in the act of spinning a product out of an agency. While this has perils and challenges in its own right, venture capital can help here.

BL: What questions should an entrepreneur ask before accepting an investment from an agency VC, and vice versa?

RW: For founders: How will you help us? How will you really help us? How will you help us now, versus in six months, or in three years? Can I get in front of your clients? Can we be a certified partner? Do you expect a discount? Do you expect a seat on the board? Do you understand that you don’t own and won’t run this company? Can you get me in to pitch my startup to every one of your agencies?

For Agency VCs: If I put this in front of every one of my clients, what would they think? If my competitors did that, how would I feel? Can I be really useful to this company, or is it just a financial investment? If so, am I comfortable holding this investment for ten years?

BL: What recommendations would you give to agency investors?

RW: For individual venture practitioners within agencies: be a member of the community. Blog. Go to conferences. Take an interest in the careers of founders. Tweet. Don’t be predatory in your deals.

For agencies hiring VCs: hire someone like that.

This article is part of the Campaign Innovate series, a collection of articles that examine the way innovation, startups and technology are affecting the advertising and marketing industry.

Campaign Asia-Pacific has also launched the Campaign Innovate competition, an event that aims to provide a platform for Asia-Pacific's startups to pitch to some of the world's biggest brands.