Media for equity — the practice of media companies offering startups advertising in return for a stake in the company — has been a relatively unknown part of the corporate venture landscape. But but there is now increasing interest in this model for consumer-focused startups looking to scale up.
“It is picking up, we’re seeing a lot more investment happening than, for example, five years ago. In terms of both funds and media companies, there is a surge of activity,” says Diana Florescu, founder and CEO of media-for-equity services provider MediaForGrowth.
“Compared to even five years ago, we don’t have to actively go out and chase companies to look at this model. They are coming to us and there is a clear inbound of enquiries and requests about how to raise media capital.”
Several new funds have sprung up this year. Sinclair and Televisa Univision provided $50m for a US-based Mercurius Media Capital fund in May, while specialist regional funds like German Media Pool have been joined in recent years by the likes of Australia’s Scaleup Mediafund.
The idea is simple: instead of investing cash in a startup, a media company takes equity in return for providing ad space on television or radio, in print or on billboards, sometimes but not always for preferential rates.
“Broadcast TV is great because it really does give you scale and reach”
Vinay Solanki, Channel 4 Ventures
“Broadcast TV is great because it really does give you scale and reach, and that’s where it becomes a difference to these companies,” says Vinay Solanki, who runs Channel 4 Ventures, the media-for-equity arm of the eponymous UK television channel. But in practice you need to be above a certain size to form your own media-for-equity fund, he says.
“I think the smaller and more fragmented it gets, the more it becomes substitutional, or the same as digital marketing. And that’s where maybe the smaller media players might not be able to justify it.”
How you set up the unit is also important, Florescu says. There needs to be firm direction from above and a good relationship with the corporate’s established ad sales team, who could potentially see the model as unwelcome competition for their activities.
“How you structure this kind of vehicle inside the company is crucial,” she adds. “Most of the time, we’ve seen funds shut down within a year of incorporation inside those media companies because there was no alignment between the vision of the CFO and the business units, especially the sales and advertising team.”
How do you know if media for equity is right for you?
Media for equity isn’t suitable for every startup – it works best for consumer-facing business, although it can also be useful for fintech, travel, healthcare and even enterprise software startups targeting small and medium-sized businesses. There’s also a sweet spot when it comes to the size of the company, says Niko Waesche, co-founder and managing partner of German Media Pool.
“It’s usually a startup that’s a bit more mature,” he says. “It won’t be a seed company, firstly because the company needs to be able to deal with accelerated customer requests coming through the media we provide. If it’s a very small company, they might not be able to cope.
“Another reason is that it’s often very good to start playing with digital marketing before moving into above-the-line marketing later, because you can do a lot of smaller-scale marketing using digital marketing. We would like our companies to already be very experienced in digital marketing, have a sizeable customer base and be ready to expand before they arrive at our doorstep.”
Digital marketing played a very big role in the crop of venture-backed companies that emerged a decade ago when the app economy was booming, Solanki says. But those startups are now the incumbents and the advantages a newer company can get through just through mobile connectivity and product design aren’t there anymore. The cost of acquiring customers through digital channels has become so expensive that it eventually becomes a dead end.
“So, what that suggests is that you’ve got a pool of companies – I think it’s several hundred companies in the UK and several hundred in the US – which are being created and which can’t necessarily access capital for marketing needs via digital anymore because it’s not efficient for them,” he adds. “They have to look at alternatives. That’s the reason we’re growing right now.”
The other limitation is how the startup fits into the public profile of the investor. German Media Pool works with more than 40 media partners in Western Europe and says the firm thinks twice about areas like gambling, which Solanki echoes.
WEBINAR
Vinay Solanki will be one of the speakers on our webinar Media for equity: Why it can work for your startup on September 11, 2024.
For Channel 4, which has a variety of magazine-type programming, a more natural fit might be affluent lifestyle products or services, such as a recent investment in second-hand furniture marketplace Vinterior.
That often fits into the areas VC investors see as most ripe for big returns, but simply selling to those richer customers is not enough. The days when you could create a billion-dollar company out of selling upscale luggage may be gone – and there is a larger group of viewers outside that economic bracket and who often have larger problems that need to be solved.
“You have to think about what you’re going to deliver to these groups that serves their needs,” says Solanki. “And that is a much harder question. Of course, you can create lots of health and beauty products for smaller groups of affluent people with disposable income, and they’ll buy them. So that’s great, but that’s not innovation in my view.”
Areas Channel 4 Ventures is exploring in a bid to solve what Solanki sees as the ‘great problems’ include income inequality, access to education, personal debt reduction and services aimed at customers over 50. It launched a scheme called Untapped earlier this year focusing on traditionally underserved founders in areas like gender, ethnicity, education, location and socio-economic or employment history.
Moving across borders and into new areas
Media for equity is also a very useful way of breaking into new markets. The likes of Uber and Airbnb used it when they entered India, while mapping technology provider What3words has struck deals with multiple media backers in different regions. Paradoxically however, media-for-equity investors themselves tend to be concentrated in single national markets.
“Media has traditionally been very country-oriented,” Waesche says. “Of course, there are a few media groups that are international – RTL, NBCU, Warner Bros Discovery – but even they mostly organise their sales on a national level.
“National sales teams are basically interacting with the companies. Big global advertisers like Unilever usually work with global agencies, and even global agencies buy on a national level. We have an industry that is very fragmented. That’s why we’re strong in Germany, through television, print and radio, but it’s much more difficult to build this on an international scale.”
Tax issues are also tricky to navigate on a multinational level, Florescu says. MediaForGrowth is looking to form cross-border partnerships but building the optimal tax structure can take up to 50% of the time it spends on setting up a fund for one of its clients.
And while the area is expanding, she adds, it is also changing. Take television, for example. Solanki may describe it as a marketing ‘carpet bomb’ and a medium that is still trusted, particularly in times of crisis, but viewership rates for linear TV are declining while marketing cash moves into new areas like connected TV and FAST (free ad-supporting television) channels. There are other new areas too.
“We are seeing a direct correlation between everything impacting the media industry and these media-for-equity investments”
Diana Florescu, MediaForGrowth
“One specific channel we get asked about a lot is influencer marketing,” Florescu. “There is also informed decision among fund managers to include more digital platforms. Basically, we are seeing a direct correlation between everything impacting the media industry and these media-for-equity investments.”
But, she says, there is huge room for growth for this model which is barely 20 years old.
“The industry is a $750bn market and media capital investment over the last 20 years is still less than 1% of the global market,” Florescu adds. “So, I think there will continue to be a lot of change, in terms of channels, models, the way these investments are structured and even what companies can raise.”
