Tech start-ups are getting a helping hand from an unlikely source: advertising agencies.
As marketers struggle to keep up with the next big mobile platform or device, advertising agencies now need to be as proficient in new technologies as they are in pitching clever ideas. Rather than wait for new technology to come to them, a few innovative ad firms have gone straight to the source and taken an equity stake in promising young tech companies.
Ad firms such as Ignited, Rockfish Interactive, and kbs+p have recently begun investing in media and technology start-ups. It makes sense, given that they already spend a good deal of time scouting media and tech start-ups to stay hip to the latest marketing technology. By investing in these businesses, agencies not only stand to make some money should they discover the next Twitter, but they can also tailor the new technology to the needs of their larger clients.
"Ad people are famous for making promises and then running back to the office and saying, 'How do we do that?', " says Eric Johnson, CEO of the El Segundo, California-based ad agency Ignited, which launched its investing arm, Ignited Labs, in 2010. "Now when I'm in a meeting with potential clients, I can say, 'Not only can we do that, but we've actually invested in a company that's making this technology.' "
Ignited has invested in six start-ups so far, selecting companies based on word-of-mouth recommendations or from pitches it has received from aspiring businesses. One of Ignited's first investments was in PixelMags, a Los Angeles-based business that makes a platform that allows magazines, catalogs, and advertisers to publish digital content on smartphones and tablet computers. Partnering with Ignited "was a strategic move for us," says PixelMags co-founder Ryan Marquis, a software-industry veteran and founder of two previous start-ups. "The ads we publish inside each magazine are a major part of our platform. We thought, If we could tap into Ignited's experience with advertisers and get some funding, it'd be a perfect fit for us."
To make that happen, Marquis and his co-founder, Mark Stubbs, submitted their financial statements to Ignited's Johnson and met with him to demonstrate PixelMags's technology. Johnson and his COO, Bill Rosenthal, evaluated PixelMags as an angel investor would, using criteria such as the founders' prior business experience, scalability of the company, and quality of the prototype. They also considered whether PixelMags would align with the needs of Ignited's customers, which include NBC Universal and the NFL. "If three of our clients can use the product, there are probably a lot of other people who can do the same," Johnson says.
PixelMags has raised two rounds of funding from Ignited Labs, totaling a few hundred thousand dollars. (In similar deals, Ignited has taken a 20 percent stake in the companies it has invested in. The investments have ranged from $50,000 to $500,000.) In addition to cash, Ignited also provides office space, manpower, and, most important, industry contacts. One of the first companies to run an advertisement on PixelMags's platform was Princess Cruise Lines, a former Ignited client. "We would have had a way harder time going to that client on our own," Marquis says. "Our relationship with Ignited got us in with them and gave our platform credibility."
For start-ups looking for funding, the protocol for pitching ad firms is much the same as for pitching traditional VCs, although there are some nuances. "Just like when entrepreneurs present to a VC and know what other start-ups they've invested in, it would serve entrepreneurs well to know who our customers are and the industries we're working in," says Dave Knox, chief marketing officer for Rockfish Interactive, which launched its investment arm, Rockfish Brand Ventures, last year. "If they can walk in and show us how it's immediately applicable to our partners, that's a plus in their column."
Obviously, not every start-up is a good fit for this kind of funding. Both Rockfish and Ignited have a narrow list of industries they are interested in. Mobile technology, digital commerce, and location-based technology rank high on Rockfish's list, while Ignited wants start-ups that are working on next-generation research, Facebook apps, tablet computing, and video technology. Businesses that do fit those molds should be prepared to teach as well. "We ask ourselves, 'By working with this team, can we learn something new about this space?' " Johnson says. "That's the X factor."