Equity for Media – “Something for nothing”?

Among the different venturing models I have come across over the past few years – the “Equity for Media” is one which I find very difficult to grasp. Although not common in USA, it seems to be prevalent (if not flourishing) in continental Europe. This post is not a rant against the concept as a whole, but more a consolidation of inputs from different entrepreneurs at various stages of the startup cycle. If anything, I can only hope that it serves as a mechanism to revamp the model in order to provide tangible benefits to all parties.

Let us cycle back to understand the model a bit. At its core, a VC firm (typically the venturing arm of a media firm) offers media exposure (TV, Radio, Print, Online etc) in return for equity. The “value” of this exposure is usually computed based on the cost of these slots. For e.g. the typical cost of a 30s TV segment, or a cost of a print banner in a news paper. So as a first glance one may argue – this does seem fair…. the firm is giving something in return of equity.

A few aspects of this barter are particularly interesting; the first is to do with the original intent of media/ VC firms. Media as a whole (especially traditional media) has received a battering over the past decade as more and more users flock to the internet as the primary means of content consumption. In this new landscape many of the legacy players find themselves at the short end of the stick. Faced with a declining user base, and consequently fleeing advertisers many traditional media firms now have advertising slots which need to be filled.

The second aspect is the age old question of marketing – and one which is increasingly relevant in the mordern day context; How much marketing spend leads to actual sales, and second – how do you ensure stickiness/ visibility when the marketing campaign ends. Just looking at adjacent markets it is amply evident that although there may be a spike during the initial phase, unless virally or otherwise sustained (by yet another campaign), consumer interest quickly dies down.

These two aspects make it quite complex for a startup to engage in such a deal; perhaps best illustrated through an example
Lets say that a TV media house invests in a startup through an Equity for Media arrangement, providing TV slots in return for some stock. Now, would they offer prime slots to the startup? Remember, prime slots are still a revenue generator – so they would be giving up immediate hard cash for future, and riskier gains. The startup would of course prefer these slots. This would be their best way of reaching the largest audience. A likely outcome – the startup would be slotted outside primetime.
Now what happens when the campaign ends? users are usually fickle, and unless constantly reminded of the firm – usage, purchases etc all decline…. and this reversal of fortunes can be quite a steep one. What would the startup now do – it doesn’t have cash from an investment, or should it give up even more equity for media.
The third challenge is the causality factor – and this is a tricky one to quantify. The startup would most likely be engaged on multiple fronts to increase exposure/ sales etc. How easy would it be to identify that the cause of their increased sales etc was the TV advertisement rather than a Google Adwords campaign? I know here marketeers would indicate elements such as feedback, user input etc – but from my own personal experience, the input is voluntary and can be widely inaccurate.
Last but not least is the simple truth, that with investment in the form of hard cash the startup has the flexibility to deploy its resources in a myriad of ways, rather than only having one avenue, that of media exposure

Hence we had an odd situation: a media house on the decline, trying to leverage assets which exist – but are underutlized. As one founder curtly put it – there isn’t any additional effort on their side, while what startups need (and prefer) is cash. Cash – where the startup can decide how best to leverage rather than being forced into the B grade ad slot because thats the only option which is available. This ends up feeling like a loose loose situation for both parties.

For the media house – although they may have an equity stake in the startup, but pushing it in the sub-prime slots the startup does not get the traction it needs, and correspondingly risk of failure is higher. Not sure having equity is something that is worthless is valuable to anyone..
For the startup – it may deter future investors who are interested in funding the investment, and it is harder for the small firm to actually quantify and validate such a deal.

A potential solution may lie somewhere in between. Such an arrangement is perhaps viable if it were to be long-term and based upon tangible gains. In simple words it would be deployed in a tiered approach with some level of vesting (on the part of the media firm). No equity would be granted for gains below a particular threshold, and there can be a maximum cap as well. In between there could be a linear arrangement based upon defined KPI’s. In addition, this would have to be sustained over a longer period of time to eliminate any temporary “blips”. This does put an additional burden and risk on the media house, but is something that they would have to bear in order to compete with more traditional investment vehicles.

My advice to startups – unless such parameters are considered in your discussions, think hard of alternative options before going for such a deal; if possible, avoid them! You may end up giving up something… in return for nothing.