Combining capital and creativity to catalyze growth.

There’s a common misunderstanding outside of marketing circles about what ‘brand’ is. It’s often viewed as somewhat ‘fluffy’. It’s how we talk about what our company does, what our ‘brand values’ are, or what our ‘brand promise’ might be. Those are definitely some outputs from brand strategy, but the process of getting to these requires real research and in many cases informs the fundamental strategic direction of a business. Any brand project requires a rigorous analysis on the company’s business, industry forces and trends, the competitive landscape and its customer base. These areas may traditionally have been considered to lie within the bounds of business or commercial strategy. Scoped to consultancies, not agencies. But in reality, a these worlds bleed into one another. A good strategic agency can do the job of a consultancy, but the agency brings a more creative, cultural context to its analysis.

This sort of analysis is particularly needed when doing any sort of brand positioning work, especially prevalent when working with early stage companies. Pre-seed and seed stage startups have no legacy product, no existing strategic trajectory and perhaps a limited understanding of their audience. At this stage, there’s ample opportunity to identify and go after whitespace in the market, or to mould a product or business model around customer problems (not just technical solutions). Although resources are thin, adaptability and flexibility is high.

As I’ve studied and practiced processes and methodologies in venture capital, I’ve discovered some striking similarities between brand strategy and VC due diligence. In essence, they’re both short and deep dives to quickly understand the business and its opportunities for growth. They’ll both unearth difficult questions and surprising insights. They’ll rely on both quantitative and qualitative data to understand a startup’s growth strategy and to form hypotheses about where it should go. While due diligence may focus on some upstream considerations that brand strategy may not (like financial modeling, unit economics, market size, founding team, etc), anything that is related to the product experience (e.g. product design, business model, etc) or the Go To Market strategy (e.g. distribution, partnerships, marketing) will see a fair amount of overlap. They’re natural bedfellows. It’s therefore surprising that there is still such a separation between venture capital and agencies. In this post, I want to provide some context about why agencies should be more involved in the startup ecosystem and what sort of models they could employ.

A fragmented industry

The agency landscape is dominated by a number of holding companies (as shown in the below image), with an increasing amount of consolidation, driving efficiencies and economies of scale. What this chart doesn’t really capture is the true volume of independent agencies. It’s estimated that in the US alone, there are around 15,000 agencies. Yet I’d estimate that the number of agencies who also work in the venture space is confined to double digits.

Acquisitions of agencies occur, but it’s not all that common and the multiples are generally low thanks to modest margins. It’s difficult to achieve outsized returns when your business model is built around hourly rate cards.

One way to achieve outsized returns, outside of professional services, is investing in early-stage companies. Granted, it’s (much) riskier, more capital intensive and requires a long-term appetite. So perhaps it’s not surprising that few agencies have sought to apply their core competencies in the context of venture capital. I believe there’s a huge amount of untapped potential in the overlap between these two worlds - both in terms of societal impact and financial returns.

VCs constantly tout that, beyond the capital, they’re “here to help”. There’s endless satirical content on Twitter on this trope. A personal favourite:

Agencies, on the other hand, are actually in the business of professional services. “Adding value” is their core competency. In the context of startups, this can take the following forms:

• Commercial, brand and product strategy

• Brand, product and experience design

• Software development

• Marketing, partnerships and community

• Business development by connecting startups to their client network

Much of the above has been dubbed ‘creative capital’. There’s even a dedicated website.

A recipe for success

It’s no secret that most startups fail. VC follows a Power Law, where returns are asymmetrically distributed - meaning that the bulk of returns are made by small number of investments. Firms can’t reliably pick successful investments. They build failure into their models - expecting between a third and a half of their investments to go to zero. But what if a VC firm, beyond providing capital (and “helping”) could actively influence the performance of their portfolio companies through services rendered? Could returns follow a more normal distribution curve, lowering risk and increasing overall returns?

It should be noted that consulting firms all shifted into this space a long time ago. Take for example BCG Digital Ventures, Leap by McKinsey, Deloitte Ventures or Accenture Ventures, just to name a few.

A few brave agencies follow suit, not happy with leaving an outsized opportunity on the table. Most of these would fall into the category of either Accelerator or Corporate Venture Capital (CVC), but only make up a fraction of either one. Both of these categories are small parts of the venture ecosystem themselves.

There are numerous models that agencies can employ. Some follow a single model fairly strictly, others take more of a fluid, multi-faceted approach. Specifics for the unit economics in each of these models are hard to come by. There are some industry rules of thumb, but that becomes hazy once you incorporate professional services in addition to capital.

Capital for the funds don’t have to be sitting in agency accounts. There are external sources for capital, including holding company coffers, from Limited Partners (UHNWIs, VC funds, pension funds, family offices, insurance firms, etc) or a combination of the two. As with any LP - GP agreement, terms on fees and carry are subject to negotiation. For a modest sized fund, fees should be able to cover some basic operating costs, including agency resourcing.

Agency models include creative capital — resources that are dedicated to portfolio companies, which may span strategy, creative, design, engineering, etc. There are opportunity costs associated with this — by allocating those staff members, the agency can’t use them on paid client projects. But creative capital provides ‘cheap equity’ - this gets agencies on the cap table for far less than if they were providing capital alone.

Here are how some folks are spearheading this way of working:

Payment in equity

This is relatively straightforward in principle. Services rendered in exchange for x% of the company. Agencies like Red Antler and And Rising have built their businesses around this and in fact from a creative perspective really defined the look and feel for an entire generation of tech startups.

Accelerator

These are cohort based programs that run once or twice each year. The cohorts progress through a curriculum that is designed to impart knowledge, improve products and generally end in a pitch to a wider network of investors.

Accelerators often have corporate sponsorship for a specific vertical. R/GA Ventures is doing numerous of these, including with Mars (petcare) and REI (outdoors).

Venture Studio

Agencies identify promising business areas, source a founding team then invest capital and personnel to build a company. This is a high involvement business, but the studio will take a big stake in the business. Studios will usually run in sprints with a number of founder teams across a portfolio.

Examples of this include West, while not categorized as an agency, is a brand-focused venture studio that stands out on the sector. R/GA Ventures, in addition to its accelerator programs, has had a number of venture studios, collaborating with corporate partners such as LA Dodgers (sport), GSK (health) and Verizon (media).

Investment Fund x Agency

This is a model that includes a stand alone VC fund (raised from LPs) with a stand alone agency. The agency has its own clients, but also services portfolio companies from the fund. Bullish is one such example, with $12m AUM. Ideo Ventures is another. This feels like an extremely sensible entry point for many agencies. The challenge will be in raising the fund from LPs without a prior investment track record. That said, with a smart approach and extensive network, this is an extremely feasible, risk-off way in.

VC Firm - Agency partnership

Sometimes a symbiotic relationship is the best approach. An agency can act as an LP in a fund but has an active say in investment strategy based on their view of the opportunity. The fund can send portfolio companies to the agency. An example of this is Frog & Tuesday Capital. Tuesday manages Frog’s capital and looks after deal flow. Frog provides ‘design credits’ for portfolio companies that Frog has invested directly in. Tuesday sends their (non-Frog) portfolio companies to Frog for revenue generating design work.

VC DAO

One model that is starting to surface, but is still nascent, steps away from the agency structure and leverages a collection of individual contributors through a DAO, although the agency could be the acting GP. This could feasibly work either in a more traditional contractual relationship or be managed completely on-chain for companies who are more web3 native.

GPs raise a traditional fund from LPs, but also arrange a collection of domain experts. These are consulting contributors who span brand and experience and are brought in as needed to help portfolio companies. These contributors could work in consumer insights, community building, tokenomics, product or service design or storytelling, for example. They are incentivised and rewarded via earned carry on a contribution basis. Fees may be a sticking point for some.

We’re seeing models like this surface from VCs, not consultancies or agencies. Examples include The Melon and Bessemer Ventures’ Steel DAO.

Agencies of change

To do any of this well requires investment of both capital and personnel. Many will point out that agencies are generally stretched for resource at the best of times, so how could they possibly prioritize work that might return a gain 10 years from now? This is a valid question and may prohibit many creative shops from these sorts of activities. One thing I would highlight is that agencies pitch for new accounts, for free, all of the time. Data indicates that agencies win roughly 50% of the accounts they pitch for. Losing amounts to a sunk cost with zero return and a (tired) demoralised team. Between pitching and investing creative capital, I know where I’d place my chips.

Neither VCs, technical founder teams nor consultancies are experts in using brand as a lever for growth. But for creative, digital and innovation agencies, that’s their bread and butter. It’s not just the logo and visual aesthetic of the company that is relevant here, nor the user interface on the app. More importantly, how can the startup really identify and resonate with their best-fit customers, identify market whitespace based on consumer trends or tap into culture for outsized influence? Brand makes a meaningful difference, especially for early stage companies. We’re no longer living in the reality of ‘minimum viable products’ anymore. A ‘minimum lovable product’ is the cost of entry for any startup, in any vertical.

Agencies have the opportunity to help startups unlock growth not only by building a differentiated business, brand and product vision, but by helping those startups be immediately memorable with the right audiences and leveraging client networks for corporate partnerships or acquisition. Agencies can help clients access companies, technologies and innovations that could change their industries. It’s a multi-sided win, but one that requires agencies to lift their eyes towards a 10 year horizon, get comfortable with managing risk and see themselves as capital managers as well as creative stewards.