If Facebook conducts an IPO in mid-2012 as expected, the ad holding company Interpublic Group will be cheering, thanks to a $5 million investment it made in the startup back in 2006. IPG cashed out half its stake in August 2011 for $133 million, but its remaining stake could be worth nearly $400 million if the Facebook IPO generates $10 billion in cash and sets a market capitalization of about $100 billion, as anticipated. IPG’s original stake in Facebook represented just under 0.5 percent of the company.
At the same time, executives at WPP may be gritting their teeth. Over the years WPP has made a score of venture investments compared to IPG, yet none has enjoyed anywhere near that return. The next highest would be WPP’s 3 percent stake in Omniture, which was worth more than $50 million when Adobe acquired the company in 2009, says Amy LaBan, managing director of investment banker Petsky Prunier.
The disparity shows how luck plays a role in the uneven venture investments of ad holding companies and sheds light on inherent weaknesses in the VC practices of big ad conglomerates. Risk is certainly inherent in these deals, as with all VC investments, and for every Facebook or Omniture, there are plenty of losers. An extreme case was Spot Runner, which WPP ended up suing for $13 million in 2009 after investing $10 million in 2006. IPG, incidentally, was also a minority investor.
Some say the VC downside is greater for ad holding companies. The IPG and Facebook deal is the lucky exception that proves the rule, according to Tim Hanlon (pictured), previously CEO of Velociter, overseeing venture investments for IPG. From 2005 to 2009, he handled tech investments for Publicis. This year Hanlon founded The Vertere Group, an emerging media consultancy.
Innovative tech startups don’t have trouble getting investors these days, so what kind of investors they take on is important, he says. Startups have to ask what strategic value an ad holding company investor offers them. In essence, “How valuable was IPG to Facebook?”
The tech innovation business and ad services businesses “are like oil and water – they practically repel each other,” Hanlon contends. “For technology companies, a holding company is a morass of agency brands and entities – which is counter” to a startup’s need to be nimble and fast moving. And in the C-suite, agency networks can barely stomach the risk of startups, he says. An agency holding company saying it is investing in innovation is “disingenuous.”
“They [only] put up with the uncertainty as a defensive way to stay relevant in the marketing field. Such investments are fundamentally at odds with their service industry business model,” states Hanlon. As a result, many tech startups are now “questioning the motives of agency companies as investors,” he says.
Indeed, in the last two to three years Omnicom and IPG have made few minority investments, Havas has no venture investments of note, and Dentsu only rarely makes a minority or venture investment in North America, per Petsky Prunier.
In 2009 IPG overhauled its investment process and put together a new team to oversee it. “IPG isn’t a VC fund – we look to invest [only] in companies that have a strategic benefit for us and our clients, which is exactly what Facebook was when we began our relationship with it,” says Tom Cunningham, IPG’s VP of communications and strategy.
Among the holding companies, WPP has been by far the most active in taking minority stakes in companies, with investments in about 18 technology startups. “We see ourselves as, in part, being a strategic venture capitalist in new media,” Martin Sorrell, WPP CEO, told ClickZ. The goal of WPP Digital is to invest in companies that improve the group’s digital understanding and give WPP agencies and clients access to digital experts.
In Nov. 2011 Publicis struck an unusual limited partnership with France Telecom Orange. Rather than have an in-house VC fund, the fund has a separate manager and plans to raise funds from outside investors. When the fund was announced, Publicis CEO Maurice Lévy insisted that digital startups need more help from large, established, bureaucratic players. “Young companies with game-changing ideas need a major venture capital fund. I hope that soon we’ll be swiftly joined by others so that we can operate on an even more massive scale.”
John Prunier, Petsky Prunier partner, says the reality is that ad holding companies make venture capital investments “because they are not technology businesses and to own the tech companies outright would deviate too far their business models and competencies.”
As for the benefits to the tech start-ups, the answers are more vague. Agency networks can provide startups with “commercial momentum by being supportive of their growth,” says Prunier. In one example, Buddy Media, which got $5 million from WPP in 2010, was elevated to become a preferred vendor of WPP agencies. Says Buddy Media CEO Michael Lazerow, “The WPP investment helps our shared clients develop their social media presences as part of the wider marketing mix…and helps us accelerate our business.”
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