You know Casper, the bed-in-a-box company with the cool ads? If you live in New York, they’re the best part of your subway ride. When I first saw the clever, chummy illustrations on my own commute into the office, I thought to myself, ‘there’s an agency that finally got to work on a cool project.’ Fast forward a couple of years when I’m sitting in the Brooklyn office of creative agency Red Antler with co-founder Simon Endres, who casually mentions that Red Antler “not only did the design and visual branding work for Casper, but [it] helps staff other companies” they invest in, like shoe brand AllBirds. Wait, what? Red Antler art directed the ads, created the campaign… and helps start-ups hire people? Yup, and more besides. Welcome to Investing for Designers 101.
If the mere thought of terms like life-cycle funds, working capital, and private equity make your eyes roll back in your head, welcome to the club.
But before you leave for a more fun-sounding club made for creative people who let “money people” handle their “business stuff,” you should know that more and more, terms like these are being dropped by actual designers, plus other legitimately fun people working at design companies. And it’s not because they’re trying to sound smart; it’s because these companies have more business on their books than what they show off on their websites—not because it’s secret or shady stuff, but simply because a studio’s investment portfolio is the decidedly less sexy side of its design work.
Don’t worry, this isn’t a story about investment portfolios. But it is a story about why design industry heavyweights like Red Antler, Mother, IA Collaborative, RGA, and BBH are placing some big bets on young, unpredictable start-ups, especially given the fact that it’s seemingly out of step with their mission (i.e. designing), it doesn’t boost their brand visibility (unlike, say, designing the Nike Super Bowl campaign), and they won’t see a return on their investment for years, even decades, to come.
“This is an investment strategy and a lot of people in this industry don’t have a background in that,” says Red Antler co-founder and CEO JB Osborne. “People will make a few bets and see it as a waste of time because it didn’t work out, but that’s not how this game works. You need to be making a lot of smart bets. We are part of the startup ecosystem, not the agency system—it’s a whole different mindset and set of relationships.”
Is it really worth it, and if so, how the hell does it even work?
It took me quite a bit of digging to get beyond the fluffy VC speak to a few key folks who went on the record and divulged the practical matters at hand, and what I discovered was both way more interesting and way more obvious than what I expected.
“It’s actually very simple,” says Chris Roan, a new partner of Untitled Worldwide (and rap music expert), and the former director of venture at Mother, where he describes his job as “seeking out investment opportunities and entrepreneurs with ideas for new businesses, and evaluating them across three criteria: can we make money, can we contribute something creatively here, and do we like the people?
“That part is a distant third—money making is number one.”
It’s worth noting that the designers at Mother I spoke with had little to no awareness of the ventures side. For them, the company’s motto (“Do great work. Have fun. Make a living.”) more accurately reflected their order of priorities.
Contrary to something I said earlier, investing in a startup might not boost a design company’s profile in an obvious way, like winning a flashy award or releasing images of a cool new project online, but according to Roan, “There is so much value for creative agencies to demonstrate a capacity to build and launch things. Fortune 100 companies, and all kinds of companies for that matter, see that and come to Mother as clients.” In the case of Mother, it’s worked with a very wide range, from Fortune 100s like Microsoft and Target to start-ups that show its capacity to “build and launch things,” like booze brand White Pike Whiskey, and a quirky on-demand pizza delivery service, Push for Pizza.
Still, when you think about a company like Mother, you probably think about its identity design work or advertising campaigns; you don’t think about its venture practice. But Mother isn’t the only design company turning its investment hobby into a legitimate part of its business.
To maintain their edge in the industry, plenty of “traditional” design companies are expanding into venture investment.
See, even though VC investing took a dip across the board after the 2008 economic crisis, it’s not only on the upswing now, it’s at a 15-year high. In fact, some experts speculate that it’s actually because of the crisis that more and more companies are opting to stay private longer, meaning we’ll likely see venture investment continue to rise, with the “majority of funding going to software and media/entertainment companies” like Snapchat, Airbnb, and Pinterest. And guess who has a big hand in developing those brands? Yep, designers and design companies who are joining the ranks of “nontraditional investors” jumping into the funding pool.
Depending on how you look at it, this either seems like an obvious next step for large design companies looking to diversify, or else an extremely ill-advised one. And that’s why we’ve seen such a mixed bag of both approaches and results.
The road to long-term investments, it seems, is paved with poorly placed bets and half-baked strategies.
To get a better understanding of what it takes to get to the end of that road in one piece, and with more in the bank than when you started, let’s get a better sense of how this stuff actually works. Some people may tell you it all starts with a great idea, but it really starts with meetings, lots and lots of meetings to hear lots and lots of pitches and ideas from entrepreneurs. You might hear pitches from 10 different startups all specializing in the exact same product or service. (What, you thought Casper was the only bed-in-a-box company seeking funding?) Your job is to do a ton of market research and pick the one that’s actually going to be the next big thing. You pitch it to your CFO and whoever else cuts the checks, and together you put together an offer that includes cash and, since you’re a design company, a package of design services. This might include everything from naming the entire startup or its products, to designing (or redesigning) the brand identity, developing the app, the ad campaign, etc. To calculate the overall value of your investment, you simply add the time and value of your design work + the cash outlay.
Of course it’s not simple at all. It’s risky and it’s a lot of work—this isn’t some stock market side hustle, which means companies that are serious about it have to first make a serious investment in investing. The predominant best practice is to simply allocate a set dollar amount or percentage of revenue to invest, either in follow-on investments or new deals. Red Antler has found a sweet spot with how it looks at investing in startups: some are pre-launch companies that are raising a few million dollars and are seeking guidance from Red Antler for anywhere from a few months to a year. They just pulled this off with Brandless, a new take on “unbranded” consumer packaged goods. This investment strategy also includes early-stage startups who aren’t working with outside vendors yet, and can take advantage of the broad range of capabilities Red Antler has to offer—from naming and marketing to industrial and product design, all in-house.
The key is to get in early. The way the investing relationship is structured depends on how early an early-stage company is, but the general rule seems to be that the greener the company, the more the relationships are structured with equity, and the more impact your design company has in shaping—and adding valuation to—that business. If Red Antler works with a client like HBO, for example, equity isn’t even on the table. It’s a pretty cut-and-dry exchange of money for services rendered.
This is counter to how Endres sees Red Antler. If they were only a design services vendor, “That would be heartbreaking,” he says. Osborne agrees. Getting in early and helping to shape a company gives you the chance to go well beyond the logo design:
“I look at this like we’re betting on ourselves. The edge we have is that we have a hand in what goes out into the world; and if we take a risk in something we want as much influence on it as we can.”
Right now Red Antler has about 80 partnerships, which sounds like a lot, but for many of these it functions as a sounding board while the startups work towards building their own internal capability. There are exceptions, of course. With Casper, Red Antler was there since the early days, about three and a half years ago at this point. Red Antler created Casper’s launch campaign and has stayed involved during its growth, but the time dedicated on regular basis isn’t always consistent.
Managing that relationship can be tricky. First off, as a designer, you’re dealing with an entrepreneur who needs your services on an ongoing basis, and you have to establish boundaries to protect your resources or else you end up giving away lots of services and sending down the value of your initial investment. “Set a value to your staffers’ design services,” Roan advises. “You can’t become the in-house, go-to designers, at least not indefintely. The goal is to get the startup to launch and to help them scale so they can then go out and raise money to hire people, staff up, and do some of those services themselves.”
Then watch out. “When these business take off the growth is super fast,” says Osborne. “We help them assess as they go.”
“We don’t get a check until a company goes public or gets acquired; it’s a long game, like three to seven years, but sometimes never.”
That’s the big unspoken secret: no one is getting rich quick here. You could invest your company’s resources in a startup for years and years, and if that company fails, that’s it. But it does happen. Push for Pizza was acquired earlier this year, though what the buyers intend to do with it is still TBD. While no one would go on the record about this, I spoke to a number of people who described design companies with head-smackingly haphazard portfolios and scattershot, shortsighted venture “strategies.” This is the long game. In fact, at Mother the nickname for its ventures business is The Agency 401k.
Mother may have learned that the hard way. The flip side of building and launching things is actually running them. As any business owner will attest, the launch is easy compared to growing and sustaining a company. When Mother created White Pike Whiskey, it realized it was a creative agency that had now somehow found itself in the whiskey business. And when it launched Push for Pizza, it had to create a dial-and-smile call center at the NYC office, where sales people busily phoned “literally every pizzeria to get them on the platform because they had to build an API [application programming interface],” says Roan. “It’s very risky and it puts you in a place where you’re committed all the way through. You ask yourself, ‘Do I stick with this or do I cut my losses and chalk it up to experience?’ With any venture, the model is similar to VC or private equity: you bet on a ton of things and only some work out. It requires a significant cash outlay and investment of resources.”
“This is a shiny object for agencies who want to say they’re entrepreneurs, but they don’t want to do it day to day. When you evaluate a potential agency investor, ask ‘Who has actually shipped a product?’”
Obsorne would agree. “Bigger agencies with more traditional clients want to get into the startup game to provide fun opportunities for their staff and get involved in new businesses, but launching young businesses holistically is not an add-on as a value system for a big agency; it’s just not part of their vibe.”
There are other investing models that have come in and out of vogue. Take the incubator model, which sounds like a solid idea on the face of it. You take a fledgling young business into your fold, coach them into becoming a going concern, and then take a stake in their business when they start to turn a profit. Like a VC model, you have to place a lot of bets to make this pay off, and if you’re a design company, there are only so many bets you can realistically place.
But what if you let your current staffers present you with their own business ideas? In fact, why don’t you give them four hours a week of “creative time” in which to develop them? Then, if anything happens to rise to the top, well that’s just gravy isn’t it? It sounds really nice in theory, but in reality you can’t grow a real ventures business by hobby-horsing fractions of people’s free time. And even if an employee does develop a million-dollar idea between noon and 4 p.m. on Fridays, there has to be a financial incentive for them to hand it over to the company instead of developing it on their own—an obvious fact that still hasn’t dawned on many major companies.
“You have to buy in to give a shit. Without financial incentive it won’t get done,” says Roan.
When you consider everything a design company has to offer a young business, do startups with design agency collaboration stand a better chance of success vs. startups working with traditional investors? “I’m not sure having a creative partner boosts your chances,” says Roan. “There are so many other factors, so many things that could contribute to a downfall. The indicators of early success are less about creative capacity and more about connections and networks, and this is where creative agencies can be valuable because if you’re launching a business that will require a lot of consumer love and that needs lots of creative work out in the world for marketing, then having that partner is vital—but it still doesn’t guarantee success.”
Of course, if you’re in this line of business, you’re probably in it because there’s no guarantee or proven strategy. Where’s the fun in that?