Dot-Com Start-Up Equity Increasingly Popular Currency

One increasingly popular variety of dot-com incubator has another name:
advertising agency.


It all began when dot-com start-ups, short on cash but long on potential,
started asking Web development firms to build their Web sites in exchange
for a piece of the emerging company. These interactive agencies, often just
hatchlings themselves, were willing to take the risks involved with an
early-stage investment and they got a piece of the action.


Now, as would-be Internet millionaires scramble to get into the dot-com
gold rush, equity in online start-ups has practically become legal tender,
with traditional advertising agencies of all stripes honoring the currency.


The latest frontier is that of media buying and planning, where Western
Trading, an affiliate of Western Initiative Media Worldwide and part of the
Interpublic Group of Companies, has gone so far as to set up a special
program, called eAdvantage to service dot-com clients.


Western Trading is following the lead of media companies like CBS and NBCi, which have both traded promotion on
their media properties in exchange for stakes in start-ups.


“We are partnering only with leading companies in e-commerce categories,
and we are prepared to show our confidence in these firms by accepting
swaps for equity,” says Robert Ingram, chairman and chief executive officer
of Western Trading.


One of the first companies working with the media buying firm is MortgageIt.com, an online mortgage
site that spun-off from IPI Financial Services. The company’s CEO, Doug
Naidus, touts the opportunity for start-ups to get special attention from
ad agencies, which are motivated by the desire to boost the value of their
investment.


“It’s a matter of availing yourself of an inventory that wouldn’t normally
be accessible to us,” says Naidus. “One of the challenges of the Internet
companies face now is the supply of quality media.”


Through the program, MortgageIt.com also gets access to another Interpublic
Group agency, Hill Holliday. The
start-up is paying for this service, but even traditional agencies are
trading ad services for equity these days, although not everyone is
speaking openly about it.


The San Francisco office of Young &
Rubicam
, as well as the newly-formed Y&R 2.1, have been known to take
on clients through these kinds of deals. Stein Rogan and Partners, who works with
the GO Network, Mail.com, FasTV.com, and cars.com, has taken equity in exchange for
services from one of its clients, and it’s in the process of negotiating
two similar deals.


It’s risky to do such deals, because the agency is taking a chance that the
investment will pay off. It has a stake, and therefore incentive to do a
great job, but there’s also a chance that events beyond the agency’s
control will cause the start-up to tank. Meanwhile, the agency is tying up
resources that could be used to bring in cash business.


Still, in an environment in which even staid accountants and consultants
like Grant Thornton are
restructuring, partly to enable them to accept equity for consulting, who
can blame traditional ad companies from wanting to get into the game?

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