Should Agencies Really Be Investing In Startups?

One Agency-Slash-Incubator Says Yes

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Should agencies be venture capitalists? If the current enthusiasm for agencies investing in new companies is any indication, the answer is resoundingly affirmative. Kirshenbaum Bond Senecal & Partners, Rockfish, and BBH are just a few of the many shops that have recently announced plans to invest in startups. Add Ignited, the agency we founded 12 years ago, to that list. Through Ignited Labs, our so-called tech incubator, we've invested in six companies in the last year, and we are looking for more.

But just because we're putting our own capital at risk does not mean every agency should do so. Far from it. Many of the recent businesses spawned from agencies appear to be playful diversions with little connection to the expertise of the agency. Done right, though, investing in new ideas, businesses, and the people who lead them is a smart way to sharpen the skills of your team, and stay ahead of the competition.

At Ignited, we've chosen to help shape the future by investing in early-marketing technology ideas instead of waiting around for someone else to invent this stuff. Thousands of startups aim to help marketers do a better job. Ad agencies have the advantage of talking to CMOs every day about their problems so that we can help create solutions for them. We can help create the future of advertising and marketing -- or fight to stay relevant as others innovate around us.

One way Ignited invests in new companies is by providing labor and marketing know-how in exchange for equity. In other cases, we provide capital. Sometimes we contribute both expertise and money. Our investments are limited to marketing technology, generally, and to companies in five specific categories: Facebook marketing applications, tablet computing platforms, next-generation research, next-generation video, and smart-phone applications powered by location based search.

We expect to make money on the companies we back, but we're not delusional about any of these ventures creating Facebook-sized fortunes. Success, for us, is measured by the amount of knowledge gained about next-generation technologies and research and in how we put these learnings to use in our agency. One recent success: After building the software platform for one of our investment companies, MASScanvas, we used what we learned and created the Travel Bucket List Contest on Facebook for our client Princess Cruises. The application has been the most successful Facebook program the company had done to date.

Where does our money come from? We're privately held. We're profitable. Our savings is our primary source. We set aside funds that would otherwise go toward new business for investments. How can we afford to do it? Consider that new business development -- for any agency -- is a huge drain on resources, and the odds of success are minimal. Fresh in our memory is the $750,000 we spent on a pitch for an auto manufacturer a few years back -- unsuccessfully. So we are pitching more selectively. And less frequently. Meanwhile, we meet with entrepreneurs every week. This builds our knowledge base and helps us find interesting new clients. So, by that logic, how can we afford not to invest?

It could be argued that investing takes away from our core business. Not if, as we believe, our core business is to find ways to help clients solve their problems. It is clear that marketing will experience more change in the next five years than it has in the previous 50. We've got to stay ahead of the curve. Earnings support our efforts, so we've got to have a healthy agency business first. We founded Ignited Labs with the support and backing of Ignited's management team. We find opportunities, and then focus our energy on ones that make sense. We're early stage investors, so the amounts invested aren't staggering -- no more so than the cost of a medium-sized pitch. To date, we've invested in six companies, including MASScanvas. Within the next six months we expect to break work for clients that will use some of the technology Ignited Labs has helped create.

If ad agencies are going to lead innovation, creativity and breakthrough thinking, they need to look -- and invest -- beyond their walls. Perhaps Ignited or another agency will hit on a technology or application or company that , like Facebook or Groupon or Google, will forever change how we approach marketing. At the very least, the effort will make ad agencies a sharper resource for marketers that look to us for leading-edge ideas and capabilities.

Eric Johnson is president and founder of Ignited, an LA-based agency and incubator that invests in start-ups that hold promise for brands. Johnson, former VP-marketing of Activision, will be judging start-ups and awarding investment capital as part of Ad Age 's Digital West event in San Francisco.
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