I recently had the pleasure of meeting Steve Farella, the co-founder and CEO of media agency Targetcast. Steve and his business partner, Audrey Siegel, founded the company right after the terrorist attacks in New York in 2001. Over the next ten years they built a major independent media shop. Steve and his team did it the hard way: by funding the company out of their own pockets, hustling to win new business and then implementing effective strategies on behalf of their clients. Over time, they built a great company with major clients that loved their work. Last month, Targetcast was rewarded for its efforts by being acquired by MDC partners, the acquisitive agency holding company that earlier this year also bought RJ Palmer.
Success stories like Targetcast make it seem like you’d be crazy not to try to start your own company. Indeed, there’s never been a better time to be an entrepreneur. The U.S. is being transformed into a startup nation with capital, talent and workspace available to entrepreneurs in most major cities.
However, before launching a startup, there are at least three questions that every entrepreneur in media and advertising should ask him[her]self:
Am I building a manpower business or a technology business? All agencies and consultancies are manpower-based, no matter how much technology they rely on to run their business. These kinds of startups are often self-funded until they get clients onboard to help them grow. At agencies, you “eat what you kill” and expand staffing only as existing client growth and new business allows.
While they are often a safer bet, venture capitalists are usually allergic to funding manpower-based businesses. VCs aren’t interested because these companies tend to grow more slowly, albeit more steadily, than the rocket ships like Facebook or Zynga. Also, a technology business can rapidly scale, whereas an agency must add more people with every new client win. Finally, technology startups -- if they survive -- tend to sell for higher multiples, often four to five times more than manpower-based businesses.
Do I want to run my business forever? If you are starting a business that you want to grow old with, then you probably do not want take funding from a venture capitalists. It’s important to keep in mind that taking VC money is not like taking a loan from a bank, friend or family member. With VCs, you are selling off a piece of your business and giving up a level of control before you know what it will become. There are plenty of examples of venture capitalists, unhappy with the growth or direction of an investment, replacing the CEO or the entire management team. As board members in the company, this is their right, of course.
Can I create massive value in a short time? Any venture-backed business must create major increases in value, even in the first couple of years in business. The minute you take venture capital, the clock is ticking. Can you create a valuable business before you run out of money? One rule of thumb that I use when starting a B2B ad tech or software company is that the business should increase in value, on average, at least $1 million per month during the first two years. Anything less than that may make for unpleasant board meetings and difficulty in raising additional capital.
Regardless of whether you start an agency or a venture-backed technology company, the challenges will be great. The key is to know what kind of business you are building from the outset so you will know how it can be financed.