Agencies Get Into the V.C. Business, But Why?

Investing isn't as easy as some think

Venture capital has again become a pretty cool gig—cooler, in fact, than advertising. Which may explain why in recent months, an influx of agencies has wandered into the risky business of investing in media startups.

There’s the recently launched Rockfish Brand Ventures and Redscout Ventures. Consigliere, started last year by former Deutsch Inc. chief strategy officer Mike Duda and Phoenix Suns star Steve Nash, is marketing a $20 million fund. Last month Kirshenbaum Bond Senecal + Partners launched KBS+P Ventures. Bartle Bogle Hegarty is raising $16 million through its newly formed Black Sheep Fund. And Method Inc. is rounding up $30 million for Method Ventures.

Media coverage of the trend paints the move as a win-win: startups get funds and agencies get to say they’re at the forefront of innovation. Everything, and everyone, is cool.

Except as any venture capitalist will tell you, investing is not that easy. Even though the strategies and structures of these new venture arms are widely varied, none mirror a traditional venture firm, and for that reason, none expect venture-like returns. And that’s where things get tricky.

"I don't think we've ever seen a case where all those investments were primarily motivated by money," says Chris Yeh, marketing vp for PBworks.

The idea of relationship capital, or buying access to innovative technology (and possibly new clients), creates a conflict that’s manifested in the structure of the fund. Agencies with outside investment need to consider fiduciary duties to limited partners ahead of potential benefits for their agencies. Meanwhile, agencies investing from their balance sheet haven’t necessarily hired dedicated investment professionals to conduct due diligence on new deals.

Rockfish and KBS+P Ventures plan to invest capital from their parent companies’ balance sheets, so their limited partners are, essentially, themselves. If their efforts ultimately lose money, the failure could technically be written off as a marketing cost—these are, after all, only small, seed stage investments. But the approach of "connection first, returns second" is a far cry from the competitive world of Sand Hill Road, where a break-even performing venture fund often means game over for its managers.

Rockfish Ventures Chief Marketing Officer Dave Knox says his fund doesn’t have a specific goal for internal rates of return or hold time. "We don't have LPs to answer to other than ourselves. We're doing this to be better for our partners and clients," he says.

Sentiment toward returns at KBS +P Ventures was similar. "We can sacrifice IRR to make sure we're on point with things our clients will find most interesting," says Darren Herman, the venture arm's managing director. 

Publish date: April 18, 2011 © 2020 Adweek, LLC. - All Rights Reserved and NOT FOR REPRINT