Following our recent article on agency labs, it is becoming clear that agencies are becoming increasingly active in supporting and developing startups. What's in it for the agency, and what's in it for the startup?
We asked two people whose remit is to develop startups from within their existing businesses: Ian Priest of Chime Ventures, and Neil Munn of the Black Sheep Fund, a joint venture between BBH's innovation arm Zag and Spark Ventures.
Tell us about the background to the creation of your agency's venture.
IP: I went into advertising with HHCL, becoming MD as it was bought by Chime. I left to start up VCCP, which in 2002 won the O2 account and launched the brand. My partners and I grew that, and we won a number of clients after O2, including ING Direct and Coke Zero. VCCP was bought by Chime in 2005. After a year away, I came back to VCCP, and was interested in doing something else. Chris Satterthwaite, the CEO of Chime, and I considered where the group is going in the next five years. Chime's existing companies will grow, and there will be areas where we could acquire - but we could also develop startups. So, we decided that I would lead Chime Ventures, which is aimed at backing startups in the area of communications.
NM: The decision that we took when I came on board was to run two streams of business as BBH: let's continue to run a very successful, client-facing communication services business, but alongside that, run an assets-and-IP business. We paraphrase that as the "agency" and the "principal" models. In the "principal" - assets-and-IP - model, rather than work on someone else's brands, we take those same strategic creative consumer understanding skills, and deploy them against building brands for ourselves.
What that does for us as a business, is that it opens us up to different types of revenue stream and business modelling, but the thing about it is that it makes us better at operating our core model. If you're a client, and you're sitting across the table from people that have been involved in creating businesses from scratch - in facing the pressures of retailers, in facing the pressures of inventory management, in facing the pressures of raising money - you are actually a much more compelling business partner for your day-to-day client, than if you have just been involved in communications services and a client-agency relationship.
How does your agency's venture work?
IP: Chime Ventures backs entrepreneurs to start and build their own ventures in communications.
At Chime, we have a track record of creating companies from scratch. You learn what works and what doesn't, so it's not like we're doing this afresh. The objectives are to grow a number of companies, probably 2 or 3 a year. We are aware of how quickly the communications world is changing; obviously, our agencies will evolve, but there will be new opportunities for new types of propositions or services to come to the marketplace, where new businesses may be better than existing businesses to adapt to the environment.
Chime's position is about being the modern communications group, so this is underpinning that, and it's also about backing new talent as well as retaining existing talent. VCCP Health is a good example. We set it up with a Senior Account Director at VCCP, who wanted to start his own company. A particular area that he wanted to go into was health, and we backed him with a creative who was headhunted from pharmaceuticals; we put them together and created VCCP Health.
All of these propositions should be focussed around clients. It's not about coming up with something that isn't client driven. Many of these opportunities are often built around the client, or have a client in mind as they're evolving it. What we're providing is expertise in communications; that's what we have a lot of experience in. We will provide a lot of client contact, office space, and financial backing.
Some entrepreneurs will start up completely on their own, but there will be some thinking about it, and going out on their own is challenging. We support complete startups, or existing companies where we help to build them. There is no fixed way of doing it. Because we have a lot of entrepreneurs here at Chime, we will be able to understand what they're going through. We're keen on growing successful businesses, but making sure that there's a fair cut for the entrepreneurs as well as for Chime.
NM: BBH is a very successful business, but a lot of people would say that really successful businesses own their own assets. The only assets that BBH "owns" is its people - in that it never really owns them, but the talent base is the asset. We are all aware that with the rise of the procurement specialist and the fragmentation of media, it's important that agencies find a way to really capitalise on their added value.
Zag's focus is in what we call "brand lag" - our take in looking at where consumer activity is shifting. Don't try to change consumer behaviour because that's expensive and time-consuming - try and be fast at responding to such changes. We should be able to spot interesting consumer trends that we should be able to capitalise on, in the context of Zag. It is an investment business; we are investing our time and our money into building businesses and brands. The core model [of BBH] works with client's budgets, so psychologically, Zag is different. A logical progression of investing our time in our own brands, is the Black Sheep Fund - let's invest our time and money in other people's brands, where we believe that we can influence the outcome.
Ian Priest, Chime Ventures
What is the economic and creative context?
NM: Since we started Zag, I have wanted to find a way for us to operate in the VC / Private Equity arena. We think that we can play a key role in that space, in terms of helping Private Equity companies to not only evaluate the asset that they are looking to buy, but also to consider how they are going to create more value for it.
We have always wanted to find a partner that is really like-minded; the cultures of investment and creative houses are naturally very different. The idea of setting up a joint venture together might be seductive, but when you get down to it, it could be hard to work together. In Spark, a highly entrepreneurial VC house, we have found a partner that can be both rational, but also intuitive in terms of the way that it looks at investments - and can appreciate the role that creativity can take in moving those businesses forward.
What we're doing with this is contributing to the small business economy. We're there as a source of funds. There has been a flight of capital towards mid-stage lower-risk businesses because of the economic climate, which left a gap at the early-stage end. We think that we can go into that space. We effectively have a double-due-diligence capability, because we have got two different types of business looking at an investment situation; we both have separate streams of dealflow through our own ecosystems; and we can influence the chance of success in a business.
Someone may come to us with a business to which we can make an investment, but actually, that business would really move through the gears if they could get an introduction to a client, which we can facilitate. Obviously the business has to provide something that they want, but we can broker opportunities.
IP: It's that quote from IBM: "The next 5 years will hold more change for the advertising industry than the previous 50 did". You always think that it's changing more than it ever has, but when you step out and step back in again – look at social, and how quickly that's become mass. The marketplace is changing more than it has done for a long time. Change provides opportunities: the digital and real worlds are meshing. Technology is more of a part of everyone's lives, but over the last 25 years, marketing services companies haven't necessarily been that technological. We're going to have to embrace that a lot more.
For example, we launched VCCP Search 3 years ago; that has software at the heart of it. More and more, you're going to have that. Technology is increasingly going to drive media: with biddable media, for example. Also, data is going to become much more important; most creative agencies didn't rely too much on data. Now, it's going to become a lot more available, and at the heart of commercial enterprise.
How you collaborate will be important, whether with suppliers or with creative people from different industries. In the past, agencies have often been rather protective.
There will also be new business models. Client procurement departments are, in terms of the relationship with agencies, driving as much value as possible. As a creative industry, we have not been very creative in terms of our business modelling. So, instead of being based on inputs - ours - we will take more being based on outputs. We may get involved in brands, and take a cut of the brand, rather than be paid for our input on an hourly basis. If it wins, we all win.
Does your agency's venture also facilitate internal culture change?
NM: The culture at BBH has always been one of restlessness, so it's not a cultural shift in that respect. Zag is the agency's biggest step forward for investment in its own right. That's where the agency really took a leap of faith: to establish a business, to hire people externally, and to commit money to make it a success.
I expect there to be lots of continuous innovation, but the broad, strategic building blocks of agent and principle won't change now. It's a case of building up the principle side, to go along a very healthy agency side. The inventions are our own; we have taken investments in return for sweat equity; and we're now going to take stakes in startups in return for cash. This business, if it's true to its "Black Sheep-ness", will always be looking to Zag to set the agenda. That's why people work here.
IP: Social will blur the difference between PR and advertising. They're old-fashioned demarcations. Media is, in some ways, an old-fashioned word. What's happening in the marketplace is going to change our industry, and Chime Ventures is about making sure that we're at the forefront.
Chime Ventures will provide something of a spearhead in terms of how we evolve our offerings, propositions, people, and ultimately our culture. It's got to be from within. It's a good time at the moment, because the market is changing, and the industry and our models need to evolve.
This vocabulary is changing as we are evolving. How we produce things is really interesting. A classic advertising agency would hire a production company to do a 30 second TV ad that would cost £350k. Now, with the way content is distributed, you have got to do it quicker, better, and cheaper. You've got to evolve.
Neil Munn, Zag
Is such a venture necessary for agencies?
IP: The more forward-thinking groups will do it.
I'm sure that people will come to the same conclusions, because the market is changing; the relationship between consumers and brands is changing; and we all need to evolve to make sure that we're understanding the link between consumers and brands as effectively as we have done in the past.
Chime has never bought a bona fide digital agency. What we've done is brought individuals into our agencies, and "digitalised" our people, rather than buy an agency and put it in the corner. You've got to get that balance of new disciplines core to your offering, and specialist services within your group. It's important you get that balance right. As the industry is changing, it's something that you'll see more of.
What is the view of investors and leadership?
NM: Our management is very excited about what we're doing, how we're trying to do it. The concept of an advertising agency even having a discussion with a private equity business might seem peculiar. Through the growth of Zag, we're not just able to have discussions with VCs, we're able to set up a joint fund with them. That's radical.
IP: Chime Ventures is one part of the story of how the business is evolving.
Our investors have been very supportive of the concept, and have realised that we have done it in the past, but this is putting more resource against it. It's not as if we have suddenly gone into it. Some of our businesses created in the past five years have been startups within our broader offering.
It's about whatever works best. We will either start companies up and ensure that they are as future-proof as possible, or we're going to evolve existing companies to make sure they're future-proof. It can be either way.
We're very conscious of being very client-driven, and learning from the past: how others have done it, and how we've done it. It's very easy to jump on fads. You've got to be mature enough to look at what's going on and look at what the best approach is, given where you think that the market is going, and what clients will want.
Is there a desire from clients to rapidly build expertise in certain areas?
IP: Social is a good example of rapid evolution. Clients are asking for expertise in that particular area. Do they go to a specialist, or can they get that from their general advertising agency? This isn't necessarily trying to drive it either way, it's approaching it for the best fit going forward. There is no pre-determined way of doing it.
NM: Part of Zag's added value for BBH is the commercial returns that we aim to generate, but it also helps to sharpen our positioning.
The Black Sheep Fund is a great example of doing something different, innovative and pioneering. That's what Nigel Bogle's DNA of this business is... being restless, setting the agenda: it's very consistent with that. It also attracts interesting talent into this business. We want to be smart from a commercial point of view.
What's in it for your organisation, and what's in it for startups?
NM: Firstly, there is a source of financial investment. Secondly, there is access to some very smart minds who can work with them to give them a better chance of success - and that works on two dimensions. It works on the pure Spark dimension; they have seen businesses such as Lastminute and Moshi Monsters grow from infancy, so they have the investor experience that businesses can lean on in terms of the challenges of growth.
Then, through our skills and expertise, they will have access to people that can help them better understand their consumers, and articulate their proposition in the simplest, most relevant, most differentiated way.
IP: My objectives are to help Chime to carry on growing, and contributing to that growth in terms of what we have helped create: whether it be standalone units, or new services within existing units that we have helped bring to life. We have a financial objective, as well as an organisational one, in playing our part to evolve Chime.
It's an interesting mix of me as an entrepreneur working with a group: getting the best of both worlds. That's what I'm hoping that an entrepreneur will see and get from Chime Ventures: the backing of a bigger group, but with the ability to have their own identity. I'm looking for people who are prepared to take a risk. This allows for a bit of risk with a bit of support.
There aren't many organisations, especially in the VC world, who specialise in marketing services. Either you get networks who buy companies, like Engine, or you get VCs who back startups. We're taking a bit of both: focussed on the communications world, but giving them the financial and non-financial backing to be able to meet their aims as well as Chime's - so it's mutually beneficial.
Neil Munn is the Chief Executive of Zag, the brand invention business of Bartle Bogle Hegarty. Further information on Zag and the Black Sheep Fund is available at zaginvention.com.
Ian Priest is the Head of Chime Ventures, part of Chime Communications plc. Further information on Chime Ventures is available at chimeventures.com.