Flexing VC influence
adventuredotcom: As start-ups pour money into campaigns, people are
beginning to question what venture capitalists know about marketing
By Debra Aho Williamson, Advertising Age
November 1999
© Copyright 1999 Crain Communications Inc.
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It was time for intervention. The Internet company, like a lot of its
brethren, had recently launched a pricey ad campaign. But it wasn't working.
Something needed to be done, and fast. So the money guys--the venture
capitalists--stepped in. "In looking at the campaign bang for the campaign
buck, we became concerned that while the expenses were certainly on target,
the customer acquisition was behind schedule," says David Carlick, a partner
at Vantage Point Venture Partners, an early backer of the start-up. Earlier
this month, the partners asked Mr. Carlick to help out, before it was too
late.
LUCKY HIRING
Vantage Point is lucky; Mr. Carlick knows a thing or two about advertising
and marketing. He ran his own ad agency in Silicon Valley, led Poppe Tyson's
interactive efforts and then worked at two Internet start-ups before joining
Vantage Point earlier this year. But it isn't the first time and it
definitely won't be the last time that an ad campaign causes a moment of
angst for a venture capital group. There's growing concern in the ad
business and VC business that venture capitalists are ill-prepared to advise
Internet companies on advertising, even as the start-ups they are funding
plow record amounts of money into it.
What do VC's know about marketing?
"Absolutely nothing," says Phil Halperin, general partner of Weston Presidio
Capital, a VC that has funded a number of start-ups.
DISAPPOINTMENT IN THE OFFING
"There's going to be a lot of companies that will be disappointed with the
results of their promotional efforts" this quarter, Mr. Carlick adds.
"There's going to be a lot of unhappy campers at board meetings next year."
Since the start of the year, more than $6 billion in venture money has been
invested in Internet companies, according to PricewaterhouseCoopers.
Advertising Age estimates private dot-com companies, primarily funded by
VCs, are spending at an rate of $2.6 billion annually on advertising. Some
venture capitalists say as much as 80% of the funding they're giving to
Internet companies right now is going toward marketing. In years past,
venture capital companies hardly had to worry about things like an ad
campaign. Technology start-ups used venture money to build manufacturing
plants or to fund research and development. Companies didn't even think
about advertising until they had a product to market.
A RACE TO BE KNOWN
Now, Internet companies are spewing out multimillion-dollar campaigns even
before they get a Web site up and running on the theory that the biggest,
loudest campaign will win the most customers. One reason for all the noise
is it's a lot easier to get funding than it used to be. Not even a year ago,
Internet entrepreneurs had to beg for funding. Now VCs are flush with
investor cash, and they're funding Internet entrepreneurs as quickly as they
can. The dollar amounts are bigger, too. Companies that once would have been
happy to receive a few million in venture funding now routinely get up to 10
times that amount. The money is coming earlier--and faster--than ever
before, and much of it is going toward marketing and advertising.
GAMBLING WITH MARKETING MONEY
"Marketing can suck a lot of dollars very quickly," says venture capitalist
Jennifer Fonstad, director of Draper Fisher Jurvetson, adding, "It's very
risky, particularly if done poorly." There's a lot of evidence that young
dot-com companies are taking risks with their marketing dollars. They are
hiring agencies and making buys even before they get funding. Fashion
retailer Boo.com launched an estimated $25 million campaign this summer
before its site went live. London agency BMP DDB created the campaign.
Gloss.com, a cosmetics retailer, says it plans to spend $20 million on TV,
print, outdoor, radio and online ads through 2000, via Ground Zero, Marina
del Rey, Calif., but company founder and CEO Sarah Kugelman acknowledges
that she hasn't raised all the funds yet. "It's a very competitive time
right now," she says, in explaining why the ad budget is expected to be so
high. "It's important that we [solidify] our place in the market."
CLUELESS BUYING
Media executives say business development people at Internet companies are
buying print and radio advertising at prices well above the rate
card--simply because they don't know how the business works. Some media
companies are clamping down, insisting on payment upfront for some Internet
company ad buys. So are some agencies; Young & Rubicam's Media Edge unit is
demanding up-front payment from all dot-com clients at the time the
expenditure is going to be made. "Dot-coms don't realize that just because
they got that first capital infusion [doesn't mean] there will be a second
one. Advertising costs a lot of money," says Tom Handy, exec VP-chief
financial officer of Media Edge. Mr. Handy says he hasn't had any "major"
problems with Internet companies not paying their bills; it was a defensive
action taken earlier this year. He declined to say for what dot-com clients
Media Edge buys media.
SUPERBOWL BLOWOUT
Reports have circulated that Super Bowl XXXIV, that crowning emblem of
advertising excess, is nearly sold out of advertising, with at least 15
Internet companies buying air time. (The going rate for a :30 runs about $2
million.) That's leading some wags to suggest that football pools would be a
lot more fun if you had to pick which of the Internet companies will still
be around come Jan. 30. "In a world where money is pouring into the sector,
I have a hard time believing the [advertising] I see is going to work," says
William B. Perkins, a longtime ad agency executive who recently became
VP-marketing at Visto Corp., a venture-backed marketer of an Internet-based
data storage service. "It's very easy to spend a big sum of money and not
know what you get from it. That's dangerous. If you're not rigorous up
front, it's going to come back at you." The same could be said of venture
capital companies. VCs that used to spend months doing technical due
diligence before investing a dime in a company now commit funds based on gut
feeling. It's a bit like the guy who sells tuna at the Tokyo fish market,
opines Mr. Carlick. "What you're doing is looking for things that feel
right." Given the frenzied atmosphere and the growing importance of
advertising, it's becoming clear that venture capitalists will need to know
as much about the subject as they used to have to know about engineering.
MARKETING SKILLS 'INEVITABLE'
"It will become more incumbent upon them to develop more marketing
functional expertise," says Kirk Walden, national director-venture capital
research at PricewaterhouseCoopers. "I have to conclude it is inevitable,
because the numbers are just too big." That isn't to say VCs are clueless
about marketing. But although they recognize the need for it, Mr. Walden
says, "their ability to evaluate various [marketing] alternatives is not
nearly as well-defined." Ultimately, observers say, VCs will need to provide
the same kind of fiduciary oversight of their Internet companies' marketing
choices that they would of technology or staffing. "The good VC guys care
about where the money is going. Others are not as careful," says Brian
Hurley, principal of agency Grant, Scott & Hurley, San Francisco, which does
work for venture-backed clients Tavolo, an online gourmet food store, and
Della.com, a gift registry.
STEPPING UP EXPERTISE
Some VCs are taking steps in that direction. At Draper Fisher Jurvetson,
partners host informal meetings to bring together marketing executives from
their portfolio companies. At one meeting in June, eight start-up executives
discussed radio advertising. "Understanding how to effectively spend
marketing money is important," says Draper Fisher's Ms. Fonstad. "Figuring
out what the right metrics are is a challenge." A few venture capital firms
have gone the route of Vantage Point, bringing on a partner with significant
advertising expertise. Sequoia Capital signed Mark Kvamme, co-founder of
tech agency CKS Group, as a partner in July.
Walden Group brought on Rich LeFurgy as a general partner earlier this year.
Mr. LeFurgy is chairman of the Internet Advertising Bureau and a former
executive at Starwave, Walt Disney Co. and N.W. Ayer & Partners. None of
the three admen-turned-VCs joined up to become marketing consultants. They
were brought on to look for investments in new companies. But consulting on
Internet investments is a growing portion of their job. "I'm the partner
people come to when it comes to marketing," says Mr. Kvamme.
SOUNDING-BOARD ROLE
At Walden Group, Mr. LeFurgy acts as a sounding board for start-ups'
marketing plans. Mr. LeFurgy laughs when asked what VCs know about
advertising. "The truth is, not very much," he says. VCs are expected to
help with the financials, lining up bankers and partners, but VCs that
provide advertising, marketing and sales assistance are a more direct form
of help, he says. Management, however, isn't always expecting that, he says,
"so `helping' while providing a sense of ownership is the trick.' " That
hasn't stopped VCs from getting involved in one aspect of advertising:
choosing an agency. "Agencies have benefited from the venture capitalists
more than [agencies] are benefiting from the dot-com companies," says
Courtney Buechert, managing director with Leagas Delaney, San Francisco. He
and other agency executives say much of their dot-com business comes from
referrals from VCs and that VCs can wield a heavy hand when it comes to
advertising. Few VCs will say they're out of their element when it comes to
advertising, but they do acknowledge they're working without a net. "The
noise level is so high," says Jeff Brody, founding partner of Redpoint
Ventures, referring to the amount of dot-com advertising going on. "What
worked even six months ago or even a quarter ago has changed."
LIMITED DUE DILIGENCE POSSIBLE
"There isn't a lot of due diligence you can do," he adds. Mr. Brody, a
venture capitalist who backed WebTV Networks, is clearly focused on the
bottom line. "The single biggest expenditure for some of these companies is
marketing," he says. Mr. Brody adds it's easier to "turn on and off"
spending on marketing than it is to control such expenses as payroll. The
stakes--and the budgets--are higher than they were in the days of WebTV,
however. Back in 1994, Mr. Brody sat in on company meetings where it debated
whether to fund a single TV spot--scary stuff for this admitted "technology
guy." Now, he says he's got five to seven Web companies in his portfolio
that have fourth-quarter ad budgets "bigger than the whole-year budget was
at WebTV." Redpoint has created relationships with several consultancies and
market researchers that can help with marketing functions, Mr. Brody says.
He admits there's a need for VCs to develop more marketing expertise, but he
stops short of saying that function should be brought in-house, as VCs have
done with recruiting experts.
E-SATURATION A PROBLEM
"Will we feel the need over time? Possibly," Mr. Brody says. "We're not
feeling we're out of our depth right now." Some VCs are counseling their
companies to stay out of the ad fray entirely, a strategy that may end up
looking rather smart come Jan. 1. "E-saturation is happening all over right
now," says Sequoia's Mr. Kvamme. "No one knows what's going to happen [next
quarter]. . . . The idea of the broad e-commerce [company] getting eyeballs
through traditional media is on the wane." That's what a lot of dot-com
companies and their financiers may start to realize as the fourth quarter
goes on. Figuring out what to do next will be critical to the survival of
many companies, and that's where VCs can provide assistance. But there's
another, more basic reason VCs should want to get more ad-savvy: Start-ups
need help and they're looking for it in the companies they choose to fund
them. "One of the people we're looking at now as a VC specifically has
retail and branding experience," says Jeff Bonforte, CEO of I-drive, a
marketer of Internet-based data storage systems that is currently seeking a
second round of funding (its first- round backers include Draper Fisher).
"When they do an evaluation of us, it just feels different" because of that
branding experience. Says Mr. LeFurgy of Walden Group: "It's going to become
imperative for VCs to understand advertising and what the implications are."
"Venture firms are going to have to get better at the things that matter."
Contributing: Alice Z. Cuneo