Media groups are increasingly investing in consumer-focused startups by offering them advertising rather than capital — so-called “media-for-equity” deals. But this relatively new approach to corporate venturing has several different models and requires a specialist team to do it well.
There are several benefits for both startups and corporate in trading advertising for a stake in the company.
For consumer startups it is a good way for them to test out different types of media – TV, radio, podcast, print – to see which medium produces the most value. “It is a good model to dip your toes into types of media offerings. Usually, the startup doesn’t start buying a bunch of TV ads immediately, so it is a good way to get some exposure,” says Leif Abraham, cofounder and co-CEO of Public.com, a startup consumer investing platform, on a recent GCV webinar, Media for equity – Why it can work for your startups.
Media for equity helps consumer startups save on marketing costs. In the US, up to 50% of a consumer startup’s capital is spent on marketing. Companies can keep hold of this potential large outlay by selling equity in return for advertising.
“You can preserve your capital to hire more people, grow the business, invest in the technology. Your capital goes much farther than just carving a part of it out and using it for media,” says Arjun Kapur, managing director of Forecast Labs, the media for equity arm of US media company NBCUniversal. Forecast Labs is the sister company of Comcast Ventures, the corporate venturing arm of Comcast, which owns NBCUniversal.
These kinds of deals also benefit media companies by diversifying their revenue stream. Vinay Solanki, head of Channel 4 Ventures, the investment arm of the UK publicly owned broadcaster, considers the group’s portfolio of more than 30 media-for-equity assets as strategic to the parent company. These types of holdings, he says, “build capital value which is diversified outside of core income streams”.
Media-for-equity deals can also act as a channel for media groups to make contact with potential future customers. “It is a great way of bringing new clients into the fold and to start to have relationships with them,” says Niko Waesche, partner and cofounder of German Media Pool, an independent media-for-equity fund. “Startups might start with media for equity and then later migrate to become regular clients of the media group.”
Despite growing popularity, however, there is no standardised approach for the media for equity model. But here are some pointers of best practices for those looking to try it.
Measure the performance of the advertising you are providing the startup
It is important to track the impact of the media that the startups receive in return for equity in their companies. If startups are giving up ownership in the business, they need to understand the real value of the advertising.
Kapur, of Forecast Labs, says his firm creates TV adverts for startups and tests which ones work for them, removing the ones that aren’t bringing results. The demonstable performance of the ads then forms the basis of how much equity they will take.
“It’s all outcomes based. We know what lifetime value that customer is going to drive and what revenue that customer is going to drive. We know what enterprise value increase will happen for the business,” says Kapur.
Abraham, of Public.com, says the media industry needs to do a better job of measuring the performance of its media. It can be hard to measure performance for certain types of media, such as podcasts, he says. There is often a gap in expectation between the startups and the traditional media companies over the level of data on performance that technology companies expect.
Build a diverse portfolio
It has taken Solanki’s team at Channel 4 Ventures eight years to build up more than 30 assets in its portfolio. “The first milestone is to get to a sensible set of investments that feels like they’re behaving in a diversified way,” says Solanki. “When you get past 20 or 25 as per standard portfolio theory, you’re in a good place, in theory.”
Just like regular corporate investors, heads of media-for-equity teams need to communicate continually to the parent about how the model works. “It is important part of the job, because ultimately, you need to articulate what this is to people who are not working on this day to day,” says Solanki.
You need a specialist investment team
Media-for-equity deals do, however, require a few specific skills that are different to cash equity investing.
“The knowledge of the terms, notes and convertibles are all part of the way in which you get these deals,” says Solanki. “The market for media investing is very nuanced relative to vanilla cash investing. It is quite a skilled, consultative sales process where you have to really understand the pain points of a company,” he says.
At the same time, says Kapur, companies need to view media-for-equity deals with the same rigour as any investment.
“You have to almost park the idea that you are doing media for equity and think of it as you’re building a venture group,” says Kapur. “That requires experts that think like investors, have a good network and can source deals. And just because a company might be relevant for TV advertising doesn’t mean it would make a good investment.”
Stay close to the CFO
Where a media-for-equity investment team should sit within the corporation is up for debate but having close reporting lines to the finance department is helpful. Waesche at German Media Pool finds that media-for-equity units that his company deals with are typically close to the CFO or strategic heads of their organisations.
Kapur says media for equity teams should be close to both finance and corporate development. Managing equity markups and the accounting of the portfolio requires heavy financial involvement, he says. “It’s not just investment professionals but the finance and accounting folks that are very important to it, and the strategic view.”
These were just some of the many insights from the webinar. Watch the full discussion below:
This webinar is part of GCV’s The Next Wave series of webinars. We run a webinar on the second Wednesday of every month, alternating between advice for CVC practitioners and deep dives into specific investment areas. Our next webinar will be: . Register here to secure your place.
