VENTURE CAPITALISTS: A venture capitalist is coming for your firm - The venture capitalist hordes are lurking on the fringes of PR. What impact will the coming invasion have on the industry? Ed Strauss reports

In mid-August, a story flashed across the wires about Yazam, a venture capital company that had purchased two Philadelphia-based PR agencies, Gregory Communications and Financial Communications Associates, and merged them into one - Gregory FCA. Despite the fact that finance and public relations have been intertwined since the legendary Ivy Lee pioneered spin control nearly 100 years ago, this was the first time an investment company had purchased a PR subsidiary.

In mid-August, a story flashed across the wires about Yazam, a venture capital company that had purchased two Philadelphia-based PR agencies, Gregory Communications and Financial Communications Associates, and merged them into one - Gregory FCA. Despite the fact that finance and public relations have been intertwined since the legendary Ivy Lee pioneered spin control nearly 100 years ago, this was the first time an investment company had purchased a PR subsidiary.

In mid-August, a story flashed across the wires about Yazam, a venture capital company that had purchased two Philadelphia-based PR agencies, Gregory Communications and Financial Communications Associates, and merged them into one - Gregory FCA. Despite the fact that finance and public relations have been intertwined since the legendary Ivy Lee pioneered spin control nearly 100 years ago, this was the first time an investment company had purchased a PR subsidiary.

Methods have changed since the days when Lee masterminded the public rehabilitation of his most famous client, John D. Rockefeller Sr., by having him hand dimes to passersby and label his adversary, the 82-year-old labor organizer, Mother Jones, a 'prostitute.' But the basic model of the PR process is fundamentally unchanged.

This cannot be said, however, of the process of capitalization for new businesses. Neither the standards of the new economy (where an unprofitable company like Amazon.com is considered an unqualified success), nor the idiosyncratic process of funding start-ups would be immediately comprehensible to a turn-of-the-century financier, even one as astute as Rockefeller.

The landmark purchase of a PR firm by an investment company is a direct result of this current hi-tech venture capital environment, an environment whose fitful nature creates an enormous demand for PR along with presenting formidable obstacles to its proper implementation.

The methods used to fund e-business and even the definitions of the many subgroups (seeding companies, incubators, angels, venture catalysts, etc.) are constantly evolving. Yazam, which describes itself as a 'global business accelerator' is a part of that evolution. For like the similarly premised Garage.com. and 1stVenture.com it offers what might best be described as a retailing of the VC experience. What once took place only among an elite few in the conference rooms of Silicon Valley is now offered to everyone over the Web - the opportunity to submit a business plan for seed money or invest in a start-up.

Included in the bargain is access to a variety of business services that would-be entrepreneurs might find useful. However, attention to public relations varies quite a bit. While Garage.com skips over PR on its site and 1stVenture.com provides potential clients a page of PR links, Yazam dangles this hook in front of those who visit its site: 'Yazam uses its wide connections with members of the media to help its portfolio companies obtain favorable reports in the press and to create a buzz when they are ready for launch.'

Yazam, which set up shop in 1999, may have originated the idea of a VC purchasing a PR agency, but the idea of combining the two functions is not new. It began in 1998, when Al Shugart - the founder and former CEO of Seagate, the leading hard drive manufacturer - founded Al Shugart International (ASI).



A model for practicing VC/PR

ASI, whose motto is 'growing ideas into companies,' offers PR services, a 'start-up/early stage venture capital fund' and does business consulting.

Shugart, who says he eschews contracts in favor of 'handshakes' when concluding deals, describes his general approach as 'mothering' - a process where ASI does what it can to move a seedling to the next stage of development.

Start-ups in which ASI invest receive PR services in exchange for equity, while other clients work on a cash basis. Interestingly, Shugart does not see his combination of VC and PR as the start of a trend. 'You have to be good at two things (for it to work),' he points out, 'and not many people are.'

If ASI is something of an anomaly it does highlight what Fred Hoar, chairman of Miller/Shandwick Technologies characterizes as the 'tectonic shift' that has taken place in Silicon Valley 'toward VC involvement with PR' - a trend that shows no signs of abating. And the degree of control VCs have been exerting over start-ups has reached new heights since the NASDAQ's spring swoon. They're now demanding that business plans offer some rational framework for running in the black before the next millennium. Similarly, PR agencies are now reluctant to 'go out in a major way before there's a product ready to be shipped,' says Karen Hodskins, Senior VP of Citigate Cunningham.

This change in climate has come none too soon for some Silicon Alley PR practitioners. When investors can reap huge profits by simply cashing out their investment at the next stage of the funding process rather than waiting for an actual product launch, there can be considerable pressure to turn bull into buzz.

And many PR practitioners have become frustrated with what Lou Hoffman, president of The Hoffman Agency, calls the 'smoke and mirrors' of publicizing something that does not yet exist. According to Hoffman, doing PR for a start-up before there's a product launch on the horizon is often an exercise in futility, because the product or service 'will change every other week.'



The upside for start-ups

On the other hand, there's no doubt that early-stage PR can have legitimate benefits. In the past, PR involvement has proved instrumental in reaching the next level of funding, attracting executive talent and partners, as well as contributing to the branding and positioning process. But in the current environment, where demand for PR far exceeds supply, there's little reason for established firms to take a chance on a start-up that may 'blow up in six months,' says Abe Jones, managing director of Admedia Partners.

Thus, smaller agencies specializing in early-stage start-ups have opened up to pick up the slack, and some established agencies have affiliates that specialize in the start-up stage. Yazam president Phillip Garfinkle agrees it's difficult to get 'class-A public relations, but not yet being a class-A firm.'

Gregory FCA will continue to operate autonomously, but Yazam clients will get preferential treatment, according to Tony Difazio, EVP of Gregory FCA. He describes the acquisition as a 'win-win situation which will enable us to grow our name globally' without the management shakeups or dilution of brand name that might have occurred had Gregory FCA been acquired by a larger PR agency.

However beneficial this relationship may be, reports of other VCs seeking out PR agencies or vice versa have not surfaced. One disincentive to a rash of VC/PR acquisitions is the inherent conflict of interest in such a setup. A VC is unlikely to be too enthusiastic about a start-up purchasing services from a competitor's PR agency. But there is a general consensus that 'some type of vertical integration is inevitable,' says Hoar, because of the pressures facing the venture capital community.

Whether this will take the form of preferred partner networks, partial ownership of agencies, wholesale acquisition, in-house PR departments or the creation of one-stop marketing/VC shops is debatable, as is whether such arrangements will ultimately prove beneficial. 'I see the frustrations that VCs have not being able to control the PR function,' Hoffman says.

'But do they really want to be in the PR business?'

Watch this space.





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