Agency Evolution Depends on Investing in Startups

Five Lessons from Working with Entrepreneurs and Startups

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The ANA recently published a study showing that more than a third of brand marketers work with startups for content development and social-media marketing. One pundit characterized the findings as "another indication of ad agencies' waning dominance."

With margins as thin as fishing line, and the constant challenges facing our industry from technology and alternate business models, advertising agencies need to act fast.

Either we diversify our offerings or perish. Simple as that.

However, there are other -- if not new – options. Agencies can become true financial partners with current or prospective clients. And they can build and even invest in the startups that are usurping them.

Publicis Groupe CEO Maurice Levy seemed to be thinking along those lines when he announced last month that the holding company would fund 90 startups "to help young entrepreneurs achieve their goals." (It will also reap a piece of the pie from the ones that take off.)

To this news I say, "Welcome to the party, Maurice. What took you so long?"

Putting some capital into startups makes good business sense because it can fuel product innovation for the agency or clients and open new lines of revenue. Who wouldn't want to get in on the ground floor of the next Uber or Netflix?

In the 51 years since my father founded this agency, our business model early on became one in which financial partnerships with clients happened naturally because it just made sense.

Ever since, our agency staffers have gained deeper understanding of client challenges, which consequently has led to more effective account service and creative thinking about how to solve business problems.

There have been some wild successes and a couple of missteps, but overall, the invaluable insights gained from having a financial stake in a client's business has shaped our company culture and what it means to be a single-minded entrepreneur that takes calculated (but certainly not guaranteed) risks.

By the late 1990s our agency had become one of the largest franchise owners of Blockbuster video, also a client, which had bricks-and-mortar stores on practically every corner. We owned 100 of them. The business was quite profitable, and not only in monetary terms.

Since then we've launched and sold our own homegrown retail concept and invested in other promising startups. In the process we learned a lot about real estate, store design and retail operations, not to mention how to put the power of customer data to work.

Investments can produce higher margins -- the necessary element that enables agencies to develop bench strength, new ways of doing things and new products, all culminating in even more great ideas. With your own money at stake, the time and energy spent are much more valuable than what billable hours reflect.

Here are some of the learnings gleaned from working with entrepreneurs and startups that apply to the evolving agency model:

1. Transparency is essential. Business partners must be completely open with one another. Each side must share numbers, successes and failures. It's not easy to do in a purely client-agency relationship. Our industry is set up to hide the cards a little bit. But in a business partnership all the cards must be on the table for the benefit of all.

2. Adapt to changes. We learned how to scale up and down at a moment's notice according to the market needs.

3. The customer comes first. Many entrepreneurs don't live extravagant lifestyles while they're building businesses. They invest profits back into the company for the benefit of the customer. The clients we have worked with -- Sam Walton (Walmart), Ray Kroc (McDonald's) and Henry Block (H&R Block) -- all put the customers' needs first, long before their brands became household names.

4. Focus on the horizon. The kind of partnerships I'm describing bend toward the long arc of success, not immediate payoffs, which is why this business model may be more suited to independent agencies. It'll be interesting to see how Publicis Groupe fares with its 90 startups.

5. Hire people who would prosper in the Wild West. It's important to hire people who understand the balance between risk and reward. We look at those who have startup experience and have learned from both successes and mistakes.

The agency business model continues to experience dramatic change, which in turn continues to shrink margins. Every agency tries to differentiate itself, but most keep things exactly the same. Often new business competition becomes a price deal. Everyone knows the commodity game is not good for any industry, yet few have figured a way out of this web.

As the ANA study's findings show, clients are looking to agencies to help them solve business problems. What better way for us to do that than putting some of our money where our mouth is?

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