Are agencies still playing venture capitalist, or has the game changed? We asked Studio Freight co-founder Clayton Fuller how and why the agency-equity conversation is evolving.
Back in 2017, AIGA’s Eye on Design published a piece, asking, “Why are all these designers trying to become venture capitalists?”
It questioned why there had been such an upswing in creative agencies taking equity in brands; and this wasn’t just anyone – some of the biggest names in the creative industry were putting venture capital into startups, in what felt like a surge of excitement and a new direction for agencies. But almost a decade later and the story has moved on.
WHAT CHANGED
“For a while there, it was a magical time. There was an abundance of capital, companies were trying to move and grow fast, and there was an investor mindset of ‘yes, just get the best, whatever it takes to move forward’,” says Clayton Fuller, partner and managing director at Studio Freight – which has worked with Netflix, Brex, First Round and Dragonfly, and invested in companies including Easol, Lunchbox and Orderful.
“Securing the time and expertise of the best agencies wasn’t as simple as just paying for their services; they had limited availability and a lot of inbound options. Part of getting to the table and competing for their resources was equity.
“Part of the playbook became finding an established agency player, giving them a piece of your company and leaning on them to help you follow your roadmap somewhere. But in the last few years, at a macro level, things really fell apart with that approach.”
Despite enormous enthusiasm, many companies IPO-ed and discovered that growth at all costs wasn’t a sustainable model or couldn’t bridge the gap to profitability later on.
And as a result, many agencies became acquainted with the unpredictable nature of investment. In a LinkedIn post, Peter Kang, co-founder of Barrel Holdings, admitted that things hadn’t always worked out as expected. “Some are still in play, and maybe we’ll see upside in a few years,” he wrote, adding that one of their most successful deals was ironically the one that seemed least likely to generate a return.
“The opportunity has to be really compelling, so much so that we’d want to write a check first before offering our services.”
Peter Kang, co-founder, Barrel Holdings
“These days, we’re much stricter with how we approach these types of deals,” he said. “The opportunity has to be really compelling, so much so that we’d want to write a check first before offering our services.”
The sentiment was echoed by a chorus of commenters, many of whom had similar experiences, or had flat-out decided that equity wasn’t the way forward for them.
MORE UNCERTAINTY, MORE SCRUTINY
The context is that there’s a greater sense of hesitancy in general. Founders are more wary about sharing equity, agencies are more wary of investing, and marketers are more wary about spending money.
“We live in a time where reality is constantly shifting,” agrees Fuller, “and I’ve noticed that, in general, fear is under every rock – there’s more sensitivity to spending and more scrutiny around project timelines.
"This general sense of uncertainty is manifesting in a lot of different ways, including more timidity around equity as a result.”
"You have to fail a couple of times, and you’re not going to out-Warren Buffett Warren Buffett on your first try. You need reps.”
Clayton Fuller, partner, Studio Freight
Despite all this, Fuller says the agency-equity conversation shouldn’t be abandoned; although it does need to evolve.
“I think it’s safe to assume some companies had the wrong expectations of their agency partners and some agencies were overly optimistic – and they got burned pretty bad. But that’s what it takes to learn something now – you have to fail a couple of times, and you’re not going to out-Warren Buffett Warren Buffett on your first try. You need reps.”
EQUITY NEVER TRUMPS CASH
First and foremost, he believes equity should never be a complete replacement for cash, and that the agency is always first and foremost compensated for the service they provide. It keeps both sides healthy and honest.
“With equity, maybe you’ll get a payment in the future; like five or ten years in the future,” he explains. “But your cost basis today, as an agency operator, means you’re still paying your employees, and yourself, to work on that project. There’s a very real cost associated with doing great work. You’re jeopardising the ability to follow through if you’re not properly funding it.”
Equity arrangements can also go awry if the brand believes their business success hinges on the agency’s capabilities. Not only does this stress both sides out, but it can be a red flag that a startup operator isn’t savvy in terms of understanding how to allocate resources.
And they also need to be set up in the right way. While employees can expect their equity to vest over four years, with a one-year cliff, Fuller believes agencies’ equity should match the value delivery schedule – meaning if an agency has delivered 50% of a project, the equity should vest half way.
“Think about it like this,” he explains, “if it was a cash deal, you’d get the final check on delivery, not have that cash withheld for months, or potentially rescinded, even though the work has been done. Project-based equity agreements are like typical venture capital investments, but the investment is creative capital in the form of deliverables instead of money.”
POSITIVE SIGNALS
There’s also a major responsibility on the agency’s side. Fuller says agencies need to be all-in, heart and soul, with any brand they’re thinking about taking equity in. Their path to success should feel obvious, the founders should be remarkable, the market should make sense and people would ideally be obsessing about the product. “If you’re squinting your eyes, trying to convince yourself there might be something there, it’s probably not a good fit,” he says.
“If you can make a case for yourself that’s apart from just the maybe-money, the right investments are successful by default.”
Clayton Fuller, partner, Studio Freight
“If part of the agency-equity model is that you’re going to help them become successful, how can you do that if you’re not energised about what they’re building, or don’t understand it? You’d be doing them a disservice to raise your hand for that responsibility.”
And while the possibility of 100x-ing your investment is the dream outcome, Fuller suggests agencies think of investments in broader and more realistic terms, seeing them as opportunities to build long-term relationships and be part of a brand’s journey. By investing capital, agencies are contributing to a company’s success as well as ‘betting’ on their own capabilities.
“Even if an investment won’t eventually boost the P&L, I’ve formed a wonderful relationship with the founders, I’ve learned a tonne, and I’ve increased our surface area for future opportunities,” says Fuller. “If you can make a case for yourself that’s apart from just the maybe-money, the right investments are successful by default.”
THE RIGHT FIT
The other thing that’s massively helped Studio Freight, says Fuller, is understanding their sweet spot. They’ve spent years establishing themselves as the go-to agency for building uniquely expressive brands in new or complex categories like crypto, B2B, AI and frontier-tech – which means Studio Freight is often negotiating equity with companies lacking a huge pool of people who can help support their brand.
“You want to be really known for something,” he explains. “What are you uniquely great at? If you’re the foremost expert in excavating treasure from sunken ships, and somebody finds a ship of gold, they’re going to come to you. That’s what we’re trying to do. When these opportunities come across, it’s because they’ve got gold at the bottom of the ocean and we’re the ones that can help them get it.”
And lastly, while less agencies seem to be taking equity – or less are talking about it – it’s clear that the conversation is progressing at pace. As Fuller points out: “Paths to ownership are getting more and more creative. Just look at the last five years, and how many employees now have compensation packages. Janitors are getting equity in tech companies when they join. It’s almost become the expectation that if you’re part of something, you have some upside in it.”
AUFI has helped a huge range of early stage and established brands find their perfect agency partner. If you’re looking for an agency, get in touch.
Images shown: Lunchbox, Easol, Bad Boys, Republic branding by Studio Freight
