A couple of times in New York, we have submitted a solid realistic proposal only to lose out to a company who offered a similar service for cheap or for free (which is fine, I am not unhappy about it, with digital growing there are plenty of clients to keep us busy). But I thought that I would write about it because while it may save some money in the short term, I was wondering if it is doing the client any favours in the medium to long term.

Ways they are helping clients

Especially in the mobile advertising market, VC funding has helped establish, grow and bed down their technology. We have seen the success of this with companies such as Quattro, Ringleader, Millenial and AdMob. None of these companies would have been able to scale up as successfully unfunded.

You can see why this has worked if you compare the USA to say Australia, where a less developed and more risk averse VC market has meant that they have fallen behind in this area. Ditto to an extent in Europe, although there are some good companies there, although not as many as in the USA.

I am all for the VC industry, in fact I think that they are the cornerstone of innovation and a growing digital economy. But raise money for the right reason. The right reason is to build and grow a sustainable profitable business where it isn’t possible to do it organically.

Ways that they aren’t

The first example is more common in earlier stage VC funded companies. The ones where a senior executive from a large multinational leaves to join a start up “because he is passionate about start-ups / high performing nimble teams, etc… (read: passionate about the payoff)”. These companies will often strike deals at a discount to get some clients and could also do a deal which allowed them to exploit some content on mobile in some other way (like the South Park underpants gnomes did)

The problem with this is that their executive teams are still over paid; largely due to no one accepting low salaries due to the funding available. Factor in the best tech guys that money can buy and your salary bill is bigger than it should be. I should mention that some of them are worth it (especially good tech guys). But many aren’t; their appointment more to do with facilitating a second round of funding rather than good company fundamentals, and insightful effective strategy.

In the current climate (with no IPOs happening and debt financing impossible), when the VC money runs out they are going bust because they can’t pay their salary bill. So the poisoned chalice for clients is that on the one hand they often get some good work done for quite cheap (as the tech guys in these companies are often good), but as I have seen a few times recently the company goes bust leaving the client wondering what to do next.

The second thing that isn’t helping is that companies are offering builds for free or for a large discount in exchange for an exclusive 2 year+ deal selling mobile advertising on it (the case with many publishers). I don’t have an issue with this model, in fact we have offered similar ones (you end up making your money back plus more on media sales commissions). The problem isn’t as much for the supplier as for the publisher. Do you really want to lose that big a chunk of your ad revenue (the commissions) for that long?

Ultimately long term these deals can’t work out for the supplier either, as the publisher quite understandably ditches the supplier and gets his own in house ad sales teams to do it. But for the VC funded supplier that doesn’t really matter, as the exit is usually 2 to 5 years (plenty of time to make short term money while making your numbers look good), so the focus is on how rich the executives will make themselves, rather than the long term future of the company.

The solution

The solution to this is realistically priced solutions from companies with good fundamentals that partner with clients for the long term. Don’t get me wrong, VC funded companies do do this, and there is nothing wrong with VC or any other funding, but it really needs to be used for building and growing a profitable business with good fundamentals…. and not for collecting underpants.