Young digital-media and -marketing firms that have captured millions in venture-capital dollars are turning to more-conservative but no less interested investors: ad-agency holding companies.
After decades of buying and merging on Madison Avenue, the likes of Interpublic Group of Cos., WPP, Publicis Groupe and MDC Partners are investing in technology and software companies.
As with any VC investment, financial ROI is a priority -- and, to that end, two standout examples are Interpublic's stake in Facebook and WPP's stake in Buddy Media. But these arrangements also offer competitive advantages, such as education about emerging sectors that influence marketing, as well as the ability to customize a company's product for the agency's clients.
Case in point: Interpublic's investment in Kiip, a mobile startup that lets marketers offer real-life rewards to gamers and other app users for reaching certain in-app milestones.
Interpublic CEO Michael Roth said all investments in startups must come with a strategic component. Interpublic took a less-than-$5-million stake in Facebook in 2006, a year after Mr. Roth joined, and ended up making more than $200 million when it sold its stake in parts in 2011 and 2012.
Mr. Roth said that when his staff came to him with the outlines of the original Facebook deal, which was mainly a monetary one, he sent them back with instructions to expand its parameters, which he said ended up including early looks at new ad products. "We're not a mutual fund," he said. "We need to structure deals whereby we can strategically use it for our clients."
When it comes down to it, these deals are about being able to offer agency clients something that a competitor can't. "If we can come up with an eye-opener where what we have access to is unique and can help our clients move the needle, then obviously our clients will keep working with us rather than the competition," Mr. Roth said.
IPG budgets $200 million a year for mergers, acquisitions and investments, though the investments component is only a small portion of the total.
WPP's $5 million investment in Buddy Media netted a $50 million profit when the social-marketing firm sold to Salesforce last year. Last summer, it named Tom Bedecarre president of WPP Ventures following the acquisition of AKQA.
MDC -- which is the smallest in its space with roughly 2% of the U.S. ad market -- is playing somewhat conservatively.
At a corporate level, MDC has invested about $10 million over the past two years in funds managed by outside entities, including Thrive Capital, the investment firm that has taken stakes in Instagram and Fab.com. MDC has also set aside about $10 million in total over the past two years for individual agencies to invest once they get corporate approval. "You have to be in this space if you want to be at the leading edge of where the world is going," said Miles Nadal, CEO of MDC Partners.
Part of that latter pool of money is being used by KBS+ Ventures, the venture arm of KBS&P run by Darren Herman. It has invested in startups such as Adaptly, PlaceIQ and Yieldbot.
Publicis Groupe has taken a different path. In March, it and French telecom giant Orange each allocated about $200 million to an investment firm called Iris Capital Management to create three separate investment funds. Each of the companies also took an equity stake in Iris Capital.
"Doing venture capital requires specific capabilities and, as such, we don't want to do it by ourselves," said Johann Dupont, Publicis' associate director-mergers and acquisitions.
Two of the funds invest in European companies: one in companies looking for seed investment; another for companies with a proven business concept seeking a second investment round. The third fund was created to invest in startup companies of either stage, but outside of Europe -- specifically in China, India, Israel and the U.S.
"In Europe and in France specifically, there is a huge private-equity market, but the venture capital market is actually quite small," Mr. Dupont said. "There's a gap between [angel investors] and growth capital."
Mr. Dupont said Publicis felt it could help coach entrepreneurs. "It's also in our interest to fund some companies that potentially are going to either be suppliers, partners, clients or targets for acquisition."
While Iris has the mandate to make investments as it sees fit, Publicis will be more active than most investment firm limited partners in that it will refer compelling startups to Iris and help introduce portfolio companies to the agency world where they make sense.
Mr. Dupont said the investments will happen over the next three to five years. Early investments include European retargeting firm myThings and San Francisco-based mobile ad startup MoPub.
Publicis' VivaKi is also beefing up its processes around interactions with the startup ecosystem, though it isn't making financial investments. Instead, VivaKi is building relationships with two companies or so across eight categories.
In return for knowledge, early looks at tech and building products for clients, "we plug them into our product suite, into our [internal startup database], and significantly reduce their cost of doing business in that Vivaki can help introduce them around the company," said Rishad Tobaccowala, VivaKi's chief strategy and innovation officer. As part of this initiative, it recently held a "speed dating" session at the Consumer Electronics Show among 16 startups, agency partners and clients.
These arrangements do not come without at least the appearance of conflicts of interest. Would an agency pass over a startup it or its holding company has invested in to work with a competitor? All of the executives interviewed stressed that they are transparent with clients about these relationships and that anything other than that would risk business.
Still, the possibility of conflicts is one reason that Omnicom, the most conservative holding company regarding digital acquisitions or investments over the past decade, rarely invests in startups.
Instead, it's forging partnerships, such as one with search-management firm Kenshoo and another with demand-side platform Turn. These deals allow it the flexibility to drop a partner or move to a competitor if things don't work out, according to Jonathan Nelson, CEO of Omnicom Digital.
"We're a services company primarily, and so that's where we're focused," he said. "Startups often don't deliver, or they fail, or they shoot the moon or get bought by a competitor. We've seen all variations of that."
And so when Mr. Nelson meets with young companies – which he said he does five to 10 times a week -- investment opportunities are not on his mind. "I go into those meetings with my partnering hat on and only occasionally walk out saying, 'Wow, this one is worth making an investment in.'"
So what does Wall Street think of these bets? It understands them, but with some conditions, according to Dan Salmon, equity research analyst at BMO Capital Markets.
Any money that a holding company is investing into a startup could have been, at least in theory, paid out to shareholders instead. So the holding company better be confident in its investment strategy. That's why in the best-case scenarios, according to Mr. Salmon, the holding company or its agencies employ a dedicated staff to oversee such investments.
"The key here is that all of them are recognizing that letting agency personnel have little hobbies on the side is not the best way to go about it," he said. "If you put capital at risk in creating products or investing in tech startups, you need to have dedicated people do it and have that be their job."