I have been fortunate to witness a lot of turning points in the Millennial world: the advent of computers, penetration of the Internet, digitisation of networking (social media), consumption through e-commerce, and now the funding of start-ups.

In India, scores of venture capitalist (VC) funds, incubators/accelerators, angel networks, and family offices have joined the bandwagon to evaluate upcoming start-ups, “catch them young” (i.e. invest in them to take equity), and earn multiple times in returns on exit. They do this with an elaborate process of valuation and due diligence, not to mention their arduous search of a stellar founder itself.

For media companies willing to invest in differentiated products and companies, there is an opportunity for exponential growth.
For media companies willing to invest in differentiated products and companies, there is an opportunity for exponential growth.

The concept of investing is simply an exchange of a currency in lieu of an asset that appreciates faster than the currency itself. This currency can be fiat (say, a U.S. dollar or Indian rupee) or any other good or service useful for doing business. In a rudimentary manner, one can draw a parallel to the “barter system” where merchants value on-the-fly the goods they need and exchange with their own — a perfect symbiosis and a win-win trade.

If we extend this to the start-up world, fledgling companies require media — at times a 360-degree approach (inventory across print, television, radio, digital, and out-of-home) — to educate consumers, build their brand, and take on incumbents on their home turfs. But alas, media doesn’t come cheap. In their quest to get the right blend of media, the start-ups may end up burning their (or their investors’) cash. If they get the blend right, their “hockey stick” growth, in double-digit figures, compensates for the burn … but only if the blend is right.

On the other side of the spectrum are the traditional (print) media companies sitting with huge (and expensive) inventory. The inventory has seasonality and sub-optimal occupancy. Owing to the B2B nature of the business, management cannot risk lowering yields (prices) for marginal clients lest they spoil their relations with the rewarding high-yield clients. Traditional advertisers, having made their respective brands and markets, reduce their media spends and systematically exit expensive print ads. This double whammy of “poor pay masters” start-ups and exiting incumbents lead to paltry single-digit growth.

In a nutshell, the start-ups need media to grow but they cannot pay in cash. The publishers need start-ups to sow seeds of their future growth but they need payments today. So can start-ups pay otherwise?

In the millennia of VC funding, the answer is hell yes!

Just like the start-ups shop for cash from VC funds by diluting their equity, they can shop for media by diluting their equity and have the media company as an investor instead of a vendor. From the media company’s point of view, it has a future advertiser on board. And, if the media delivers and builds the brand for the start-up, the returns from the equity can far outperform returns from a rudimentary sale of the inventory in cash (even after adjusting for the time value of money).

Apart from the returns, a partnership at the early stage of the company fosters a long-term relationship with the founders themselves, bypassing the third parties that have the tendency to rule the roost.

This partnership, in the investment parlance, is called an ad-to-equity model. Several media companies in India have a play in it now. Amoung them, the Times Group has mastered it in the last decade. Its investment arm, Brand Capital, has stakes in more than 850 start-ups with an asset under management (AUM) at US$4 billion, making it a clear leader not only among media companies but in the VC ecosystem as well.

The Brand Capital team walks in as not only a media investor, but also as a strategic advisor on marketing needs of the start-ups. This ranges from having a media agency on board to even celebrity endorsements.

It can be argued that start-ups can divert their VC funds in buying media instead of having one more stakeholder in their cap tables. After all, cash is a more fungible asset. While it is true the alternative exists, the start-ups must look at what else, apart from the cash, the funds bring to the table.

What if the media investor acts as a marketing arm for the start-up, and the hard-earned cash can be deployed in working capital management, operations, human resources, and business expansion? It also diversifies the founders’ risk by having two stakeholders on board, and it lends credibility in successive funding rounds.

This way the media capital in a true sense augments the growth capital from VCs and facilitates a symbiotic relationship between the young companies and the media behemoths.