Magazine article Marketing

Why Dot.coms Trade Equity for Expertise

Magazine article Marketing

Why Dot.coms Trade Equity for Expertise

Article excerpt

When Internet start-ups hand over shares to ad agencies to build their brands, which of the two gets the better deal? Paul Whitfield finds out

In the fast-moving world of dot.coms, forming and building a relationship with an ad agency to build your online brand among consumers is becoming a crucial requirement for success.

It's part of the reason that UK internet start-ups, whose value is often greater on paper than in the bank, are following a US trend of offering equity to ad agencies in return for much-needed marketing support.

Securing a top agency can add millions to an internet company's value when it is floated. For the ad agencies, an equity deal offers either firm foundations for long-term relationships with the brands of the future, or the lure of short-term financial gain.

Last Week, St Luke's became the first UK ad agency to confirm its financial involvement in a dot.com (Marketing, January 20). The deal, which saw the agency take a 1% stake in online communities company, Smartgroups.com, is one of a multitude of such agreements.

The fact that marketing is at the crest of the new media wave is no surprise." The correlation between brand success and market value [of a dot.com] is stronger than anywhere else," says Nick Hurrell, joint chief executive of M&C Saatchi.

Hurrell adds: "I am sure that there are many [equity stakes] out there. We have three with stakes running between 1% and 5%.

Incentive for success

Part of the reason for this quick uptake is that equity holdings fit well within agency fee structures. Hurrell says: "Our profits have been based for a while on incentive payments and this new model is another way of paying an incentive for success."

And the idea hasn't stopped at the agencies. Nick Milligan, sales director at Channel 5, says. We are involved in a couple of equity deals and get about ten a week knocking on the door."

The contra deal seems to be a perfect marriage. Derek Ralston, managing director at brand consultancy, Mountain View, which helped launch online company askzebra.com (Marketing, December 9), says: "The dot.coms we see typically don't have all their investment in place. To achieve that, they have to convince people of the value of the brand and that takes a marketing plan. But they need finance to put that plan in place. Contra deals get around that chicken and egg problem. …

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