Venture capital funding is on the rise and has once again created a vibrant market for tech PR firms. David Ward discovers what's different this time around.
The recent purchase of YouTube for $1.6 billion proves that you can still go from bare-bones startup to unimagined riches in only a few years. It also signals to the world what tech-centric PR firms have known for some time now: There is a new entrepreneurial boom going on that is both similar to - and completely different from - the dot-com explosion of the 1990s.
This new generation of startups has a new banner, Web 2.0, and a new exit strategy, acquisition, rather than IPO. But the big change this time around is funding. During the 1990s, new ventures were given more money than they knew what to do with, and the result was PR budgets that quickly ran to $40,000 to $50,000 a month.
But now, Blanc & Otus CEO Mark Hampton says, "The venture capitalists are being a lot tighter with cash. The average startup now has low-to-mid single-digit millions, and that has to carry through a significant period of time, so they have a lot less money to spend on marketing."
Melanie Wilhoite, GM of Edelman's Seattle office, concurs. She notes that a lot of startups simply don't have enough money to interest the largest PR firms. "Typically, budgets are in the $10,000 to $15,000 range, and what they're looking for is basic block-and-tackle PR rather than high-level strategic planning," she says.
With the payoffs not nearly as large, PR firms are less likely to be tempted by such big budgets and are therefore more likely to consider more carefully whether a client is the right fit. "I would say we take two out of 10 startups we talk to," notes Elizabeth Shea, principal with the SheaHedges Group. "We've learned over the years that there is such a thing as... bad client[s] who are either not ready or don't have their management in place or have no viability for their product or service."
"Our evaluation process is similar to [that of] VCs, in that we pay a lot of attention to the management team and [their] track record," adds OutCast Communications VP Tim Smith. "We also consider it a big plus if there's a big VC supporting them because they can do more due diligence on the financial side than we can."
What startups obviously bring to any agency is new revenue. And, of course, there's also the chance that your embryonic client could be the next Google.
But there are other real advantages to having startups in the client mix. "Part of the reason that we like startups is that it keeps the thinking across whole teams very fresh," says Atomic PR CEO Andy Getsey. He adds that he prefers for about 30% of his firm's portfolio to be startups. "We configure our terms so that we're always handling a startup, one or two midsize ventures, and then a public company," he explains. "That way there are always innovative ideas being brought from the startup to the more established clients and more disciplined thinking being brought from the established clients to the startup."
Since startups tend to be smaller, they also give young communications professionals the chance to work directly with top management to literally build a brand from scratch. "You want to hire and train and keep the very best people, and to do that, you have to have an environment that's energized," says Hampton. "You can do exciting work with big clients, but with a startup, you really get to create something."
That's one reason why communications pros can get so emotionally wrapped up in the success or failure of their startup clients. And PR firms are willing to forge even closer ties with a fledgling venture by taking equity in lieu of a retainer. "We still sometimes take stock in companies," explains LaunchSquad founder Jason Mandell. "We want to be literally and figuratively invested in the success of the company, but we also do it because clients sometimes want to conserve cash."
But Text 100 VP David McCulloch notes that an equity play can distort the client-agency relationship. "It adds too much uncertainty to the team that's servicing that account," he says.
Currently, there appears to be plenty of startup work to go around, much of it involving veteran entrepreneurs. That means that there are a number of pre-existing relationships that present an extra element in the competition for business.
"It's still competitive, but it's competitive in different ways," explains Corey duBrowa, Waggener Edstrom Worldwide's president for account services. "It's not as straightforward as [finding out what RFPs are out there]. There's a fair amount of startup business conducted by people we've had relationships with in the past."
LaunchSquad's Mandell says there are real advantages to dealing with startup veterans: "They have a better understanding of what PR can bring to a company and a more deliberate pragmatism as to how you build a startup."
The stakes for PR firms seem to be higher, as well, with many startups depending on PR to shoulder a huge portion of the marketing load. "PR might be the only outward-facing thing they do because they may not have an ad budget," says Getsey.
Susan Butenhoff, CEO of Access Communications, adds that doing PR for startups has gotten a lot harder, as many journalists were burned in the dot-com bust. "You need more creative thinking about what's going to cut through the clutter and appeal to cynical journalists," she says. "You also need a more cerebral investment at senior levels."
Despite the enthusiasm, there's no doubt that some of the current startups will fail and the new tech boom will eventually cool again. McCulloch says a lot of this is simply due to the cyclical nature of technological innovation, and even as some categories expand, others are bound to contract.
Still, he adds: "The reason for optimism is that it seems like a much more informed tech boom this time around. Everyone just seems a bit wiser now."
A client's-eye view
Like many current startups, StumbleUpon.com had been around for several years before attracting investors early this year in the wave of new Web 2.0 companies. "We took our first serious money in our angel round, and right after that, we decided PR was going to be important to us," explains marketing VP David Feller.
Described as a way to "channel-surf the Web," StumbleUpon initially went with a PR firm based on a recommendation, but that didn't work out. So Feller stepped in and formalized the process, eventually coming up with a list of about 10 potential firms. "Some ruled us out because of conflicts with other clients, so we ended up interviewing about five," he explains.
"Price was a huge factor for us, but we also wanted someone who gets us, and during the interviews, several firms spent all their time talking about themselves instead of how they could build StumbleUpon," Feller says.
In the end, StumbleUpon went with OutCast Communications, and Feller says that so far, it's working well. "We're spending more money with them than anything else we're doing right now," he says, adding that that's one reason why open and honest dialogue is crucial even before a PR firm and startup begin working together. "Both sides have to be comfortable, so everything should be discussed beforehand, from the company's finances to what happens after the first six to 12 months."