Innovation, entrepreneurship and venture capital are almost synonyms of the Silicon Valley. Over the last years, this way of thinking is gaining more and more attention in Europe. Not only famous examples from the West Coast like Facebook, Twitter and Uber started dominating our life. Also European start-ups like Spotify, Zalando or Skype changed our habits. Especially Zalando, which has chosen a new way of aggressive TV marketing to gain our attention. Most of us asked ourselves, how can a new venture finance such an aggressive marketing campaign?
The solution used by Zalando to invade TV screens? Media for equity (M4E)! You may have never heard of it, and this post you’ll get more familiar with this interesting way to grow your startup!
What is M4E?
Media4Equity is an alternative way of investment into a startup company. The model is mainly similar to a classical cash venture investment, except the “investment-currency”! An M4E investor, often media companies, uses ad-inventory and space to pay its equity stake. In case of the Media4Equity investment, the startup has the opportunity to use one (or more) media brands to place its marketing campaign. Usual channels for M4E are TV, digital, print, radio, out-of-home and cinema. Typically, expensive vehicles (if you think about TV or radio) that most startups do not really consider in their marketing plan.
The value of the media is driven by the listed prices of the ad-space (gross value) minus a discount (net value). There is no general rule for discounts, because of the dependence on the channels, ad-format, prices in the overall-market, and so on. But you can typically count on a discount of 50 to 75%.
According to our knowledge, one of the pioneers in this field was Ströher Media. A couple of years later, Pro7Sat1 started also with Media4Equity investments through its venture arm, SevenVentures. This last one made the famous Zalando deal! SevenVentures is mostly active in the DACH (Germandy, Austria and Switzerland) area, like Grunner+Jahr, German Media Pool or MairDuMont. In Switzerland, in addition to Ringier, we saw some deals from the NZZ group, 3+, Goldbach and Tamedia.
What is the legal framework of Media4Equity?
Currently, two main models of Media4Equity investment exist:
- Direct investments from a media house or through its own venture arm (like SevenVentures, Grunner+Jahr or Ringier Digital Ventures).
- Specific media funds, where different media companies combine their media inventory (like German Media Pool or Aggregate Media).
Next to the usual investment- and shareholders-agreement, a special media service agreement needs to be filed. This contract regulates the media channels, gross value of the media, discounts and the timelines of the contract. In Germany, the law allows a contribution “in kind” of the media. This model is no more allowed in Switzerland, however. That’s the reason why an offset payment is usually used and needed. In other words, the media company delivers the media and has afterwards a loan in the start-up company. This loan will typically be converted later into shares, based on the negotiated valuation. The Swiss way of Media4Equity looks a bit more complicated… but the implementation works really well!
How to find the right channel(s)?
Media4Equity is mainly qualified for startups, which target a larger group of users/buyers (typically B2C) and look for a rapid increase in reach and branding. However, according to our experience, not every product or service fits to each ad-channel. Therefore, it is important to find the right one(s). Every startup company should look for help from a media planning team (from the M4E investor or from an independent one) and have a deep discussion to understand their own target audience. Afterwards, a target audience / ad-channel fit can be produced. Nevertheless, it is extremely important to test and measure the success of each ad-channels or ad-format. It is easier to measure digital or TV ads, as the market provides state-of-the-art tools for it (for instance, Google analytics, or specific solutions). Measuring print, radio or out-of-home campaigns is much more difficult. The most common way is to question the customer during the check-out process (“How did you hear about us?”)
The key for success: planning and improving!
Usually, founder teams are not familiar with the media industry. That’s why it is key to guide and support them through the planning and implementation process of a media campaign. It is not “simply” to produce a banner or a TV-spot – the road to success is much harder. A campaign needs to be planned carefully (seasonality, day-time, etc.) and improved through the flight. Thy typical trap for startups is to deal only with remaining free-space of the media house (the unsold inventory of media space). It’s cheaper, but never as effective as regularly booked space (because they can typically not be at the right time of the day).
Furthermore, the ad-material (spots, banners) has also a big impact on the success of the campaign. A/B testing with different visuals (online, radio, print) is the usual practice to find good ad-material. However described, every campaign is reducing its efficiency and effectiveness after a certain time. Simply because the possible target audience gets aware of the product or the service. New visuals, spots or claims extend the efficiency and effectiveness of the campaign. But as always, there is no guarantee or a fixed rule, as each case is different. Zalando or Trivago are still doing TV ads, but with new spots and messages!
Homework for the startup
The ultimate aim of every startup is to grow and sell their product or service. Media4Equity is a possible and promising approach to reach that goal, as long as it is done correctly. Nevertheless, a M4E deal cannot guarantee the conversion of a visitor to a buyer. To support this process, it’s important to have a good coherence between ad-campaign and the landing page of the startup (as for every online marketing campaign). Targeting the right audience is an important factor, but improving the conversion process is THE major task of the company. Always. Not only when it comes down to M4E!
After 15 months of working with Media4Equity, we believe strongly in the concept. No matter how convinced we are about it, we know a startup needs also cash to work on technology and pay salaries. But M4E could definitely be a good leverage!