Making media investor deals work
Media has had a long history as a strategic investor in new and emerging businesses. There are several motivations for this from a media organisation’s perspective. As a founder however, media investor deals are almost always motivated by a desire to supercharge your business’ growth story and often they are considered to be a sure ticket to success!
But… media investor deals are not all one and the same.
After spending some 20 years working in media, I have witnessed firsthand the journey investments have taken following a media investor deal and come to the view that there are three dominate themes that influence the outcome of a deal when media is investing.
1. Sponsorship & Structure
Historically, an organisation’s media-for-equity (m4e) investment would have been led by an individual (executive) who personally sees value in your business and is prepared to sponsor the investment. That individual would be responsible for ensuring the deal terms, which may have performance targets, are fully met and that the underlying advertising commitments are delivered to your business through his or her organisation.
Whilst I have seen this model succeed, it tends to be the exception rather than the rule — for instance, if the proprietor of the media organisation is your sponsor (Lachlan Murdoch / REA). More often than not though, the sponsorship model presents a significant key man risk for your business, as executives tend to move on and/or priorities change.
Alas, all is not lost! Evolved media organisations — who see the true value in m4e as creating a new wave of great advertisers — are today introducing increasingly formalised and programmatic internal structures to drive long-term investment success. Often this comes in the form of a dedicated division or business unit responsible for building up a portfolio of investments, which ultimately may be held in a separately traded vehicle. Access to media inventory should be structured in a way that is fungible capable of being drawn down over time (more than a year) allowing experimentation with new channels — a ‘media bank’ if you will.
Structuring m4e investments in this way instils confidence that the media organisation understands media deals and is aligned with your longer term strategic marketing objectives. Having said that, a dedicated function may be a good first signal, but complete separation from an organisation’s media operations can present challenges in delivering media commitments.
My tip: Be sure you are dealing with a dedicated m4e function motivated to create value through investment e.g. ventures group, corporate venture capital division, strategy and business development department. Avoid operational leads as their priorities are likely to change.
2. Incentives & Integration
The success of any deal ultimately turns on its execution — m4e is no exception. Creative aside, successful execution of media deals is a function of inventory and sales support. As such the operational teams required to deliver media commitments need to be incentivised accordingly.
You should ensure that the non-cash component of any m4e deal is ascribed a value. Practically this means inventory is expressed as a dollar value (discounted from rate card) and ongoing sales support is incentivised. Typically sales staff, who are paid a mix of base salary and commission, will prioritise clients and initiatives that maximise short term incentive payments. The non-cash component of any media deal needs to be structured in a way that recognises this and rewards sales staff as if the m4e deal was a cash purchase.
The best m4e investments are synonymous with a cash media campaign. Inventory is premium (not remnant or distressed) and sales support is ongoing. The non-cash component should fit neatly into the media organisation’s existing systems and processes to present low integration risks.
My tip: Deal on existing commercial terms and check that sales staff will get paid their commission on the value of any ongoing commitments.
3. Capabilities & Cash
If your business is experiencing significant growth, chances are you have mastered the art and science of advertising in Facebook and Google. You know your unit economics and are comfortable with your customer acquisition costs. Above the line advertising (ATL) presents as a daunting and expensive proposition, and it is well-beyond your capability set.
Sound like you? If so, then m4e could be a great opportunity for your business.
In order to move from growth to scale-up, businesses need to leverage ATL. Fact. Even digital giants Uber and Airbnb advertise above the line. Structured correctly, m4e deals will de-risk your marketing function by making ATL channels available to you earlier (discounted inventory) and by building a strategic marketing function within your business over the course of the investment (capability transfer).
Seek investment from media organisations that refer to themselves as a strategic marketing partner. You want a partner who shares your ambition to become a great advertiser and invests in building that capability within your business. The best m4e investments will come from media organisations that (1) are focussed solely on marketing, (2) offer media inventory across multiple ATL channels, and (3) provide a dedicated capability to advise on channel strategy.
One final piece of advice — ATL will bring scale to your business in a way that Facebook and Google do not (less control), so you should raise cash in anticipation of this (and in parallel with any m4e deal) to meet heightened demands on your business.
My tip: Ensure your m4e deal looks to build ATL marketing capabilities within your business rather than rely on the media organisation to do it for you. Raise cash alongside any non-cash media investment.
With each of the above factors securely in place, it is significantly more likely that a media investor deal will meet your business’ expectations. With one or more not secured, you may become so hamstrung by failed media commitments, business opportunity costs, and an inevitable media exit from the members register, that your business will effectively need to start again.
Why we like marketplaces and marketing's role
So far this year Scaleup Mediafund has invested in two digital marketplaces, Bettercaring.com.au and HeyYou. This has led a number of people to ask us: why marketplaces?
So with that in mind, I wanted to summarise the elements of marketplaces that matter most to us and the role marketing plays in building your marketplace.
Marketplaces are great business models
There is an abundance of literature on this topic, but for us it comes down to three key themes:
- Marketplaces compete for a ‘winner takes most’ end state, typically resulting in two or three players only in a given category.
- Marketplaces generally have low working capital requirements and consequently very high returns on capital.
- The adoption and proliferation of identity and m-commerce makes marketplaces and transactions more viable.
Marketplaces also have the well-documented advantage of ‘network effects’. Network effects in our view is more complex than ‘lots’ of buyers and sellers; it is a ‘density’ of buyers and sellers within a geography, route, time or community.
Because, marketplaces on most occasions must solve the problem of transaction friction (shorthand for time, cost and experience). With reduced friction, true value is created. Hence density is critical to ensure sustainability in the business model and ongoing returns.
Three tiers of marketing
Most new marketplaces are asking buyers and sellers to act differently through the business – this is a change in behaviour, which we all know is one of the hardest things to achieve and where marketing is most valuable. We think of marketing in three tiers:
- Build SEO and optimise to reach a target level of buyers, sellers, visitation and transaction (usually this is low target and is more about product-market-fit considerations).
- Next, start scaling through paid marketing that is performance based – most likely SEM, social and referral based.
- After reaching the next set of KPIs, marketing can push hard and create true density, through awareness and consideration marketing to build the brand. This is where above-the-line-channels (ATL) of television, radio, print, outdoor and display ads play a dominant role.
An investment across all three tiers (at the appropriate stages of your business’ lifecycle) is required to create a large and winning marketplace position.
The role of marketing
Marketing drives density, trust and mindshare.
In our view, a lot of businesses we see need to invest more aggressively to drive supply and demand on platform and achieve a tipping point of density. So why the absence of marketing investment? The answer usually is (aside from capital), metrics where early profitability and unit profitability numbers don’t make sense, i.e. customer acquisition costs (marketing and sales) exceeds margin (transaction take).
It may be tempting to interpret negative economics as symptomatic of an unattractive and non-sustainable investment. But before doing so, remember that marketplaces – by their very nature – require density and once a certain threshold is reached, the network effects will drive unit costs down and business sustainability becomes more obvious. True density will be achieved when all three tiers of marketing are firing effectively.
Trust is a fundamental humanistic property of all successful marketplaces. There are lots of ways to build trust within a marketplace – transparency, community, ratings systems, accreditation and guarantees. Marketing also creates trust by messaging the marketplace’s function and story.
All new marketplaces spend on performance channels (SEO, SEM and Social), but very few spend on radio, television, outdoor or print. Most buyers and sellers attribute little trust to a marketplace that is advertising solely on a performance channel (e.g. SEM). They know that SEM is a low commitment or cheap entry price channel and that the business could be backed by anyone.
In contrast, ATL channels together with PR have the creative and storytelling space and carry weight or substance in consumers’ minds. Advertising ATL implies the marketplace is the winner with depth in its business and real funding, which ultimately instills trust.
Finally marketplace leakage (where buyers and sellers take their transaction off platform) will bleed value. Marketing plays a role here by building mindshare among buyers and sellers thereby increasing switching costs and driving transaction frequently.
Here are some of our favourite articles on the topic of marketplaces if you wish to read on: