Zalando, the giant German online retailer, has a €4.4 billion valuation. That’s due to its success in establishing itself in the minds of German shoe-buyers, a feat that is in no small part a result of its aggressive TV advertising campaigns.
Other online companies are also using the power of traditional advertising vehicles to boost branding and grow their companies. Take the case of London-based financial management start-up Nutmeg, which has run a campaign on London’s underground network. Why is a pure online player looking to the world of atoms to drive business?
Cost is a factor. The alternative is Google Adwords, says Nutmeg CMO Iqbal Gandham: “Google is really expensive, particularly in financial services. We are competing with the likes of Barclays and all the other companies that have extremely deep pockets. For them being number one in Google is important and it does not matter how much it costs per click. During tax year-end you can end up paying, I have heard, £80 per click.”
The other factor is start-ups are re-learning that old advertising cliche: repetition is reputation.In the eyes of consumers, having a television ad or an outdoor ad brings much more trust to an online company,” says Taavet Hinrikus, CEO of TransferWise, a London- and Tallinn-based fintech start-up.
Having met with success in using outdoor advertising in London, Hinrikus says the company is expanding into TV.
Hinrikus would do well to follow the example of Zalando, something of a poster-child for TV-driven success. According to spokesperson Boris Radke, the response to their first major campaign, in 2009, caught them by surprise.
“We hardly had enough shoes to give to the people after the reception we got from these commercials,” he says. “Our main focus was to buy as many shoes as possible anywhere in the world … and get them online as soon as possible because there was such a high demand. Nobody had predicted that at that time.”
The company worked closely with Germany’s ProSiebenSat.1 Media which, through its venture arm SevenVentures, has used innovative financing deals, offering mass-market consumer-facing start-ups air-time in exchange for equity or revenue-sharing schemes.
The idea is that TV ad campaigns drive so much traffic that start-ups grow far faster than they ordinarily would, thereby returning value to investors. Radke would not be drawn on what funding scheme Zalando had used.
SevenVentures Managing Director Sascha van Holt said the fund has worked with 60 companies, some on a revenue-share deal, but in other cases SevenVentures takes an equity stake in the company in return for a media package. “Our target stake is usually below 20%, and can be even single-digit percentages,” he says. Unlike traditional VCs, SevenVentures’s average holding period is under two years, he says.
“Exits include Tirendo [car tire e-commerce],” says Van Holt. “After three months we had revenues from scratch to in excess of €10 million. After 12 months we sold it to competitor Delticom.”
GMPVC German Media Pool is another venture company offering start-ups a media-for-equity deal. Managing Director Aljoscha Kaplan says that while TV has an important role to play, it is only a part of the mix. “The drawback to TV is that people forget that you are out there once the campaign has ended,” he says.
“You can generate sales quickly, but alone it’s not ideal for building brand, it’s not ideal for building long-term reach. For that you have to think about including other media.”
Kaplan says GMPVC, founded in 2010, has invested in 13 companies. It works in partnership with one of Germany’s TV stations, a radio network and WallDecaux, part of JCDecaux, one of the largest outdoor advertising companies.
“Outdoor You Can Reach An Entire Population”
It seems almost paradoxical that pure digital companies should be turning to something as old-fashioned as outdoor advertising, but, says Christophe Montague of Paris-based 5M Ventures, which has operated a media-for-equity program since 2012, outdoor advertising should not be over-looked. “Outdoor you can reach an entire population,” he says. Some people don’t watch TV anymore. Some people don’t read newspapers any-more. Some people don’t consume the Internet. Some people don’t listen to the radio. Outdoor can reach a real cross-section of the population.”
One of the drawbacks of offline advertising is the difficulty of measuring ROI, but, says TransferWise’s Hinrikus, while it is harder to track offline advertising, you can do it. The company has built a model that helps it gauge the effectiveness of a campaign. “It gives us a pretty good idea of what works, and what doesn’t. It’s never going to be 100% correct but it does give us a very clear picture.”
What is notable is how most of the media-for-equity companies are to be found in continental Europe. Comparable schemes exist in Sweden, Italy, Greece and Spain, but not in the U.S. and the UK. Why is that?
“Because there is no need,” says Kaplan. “I don’t think it exists in the U.S. because in the U.S., and to an extent in the UK, there is such an unbelievable amount of capital available for start-ups. The VCs would rather have a higher risk exposure than let someone else in.”